2006 (4) TMI 459 - AT - Income Tax

Set off of speculation loss on share transaction - delivery of share has not been taken against the profit on non-speculative shares trading (delivery basis) - HELD THAT - The provisions of the Explanation to section 73 have to be contrasted with the provision of section 43(5) which defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity including any stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Explanation to section 73 treats any purchase and/or sale of shares by certain companies to be speculative for the purpose of section 73 only. For the purpose of setting off and carrying forward of loss the buying and selling of shares by certain companies are regarded by the statute as speculation business even though the transaction of purchase and sale was followed up by delivery of scrips and as such cannot be treated as speculative transaction as defined in section 43(5). The phrase in the Explanation to section 73 to the extent to which the business consisted of purchase and sale of such shares also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies then the entire business will be treated as speculation business. But if apart from purchase and sale of shares the company has other business activities then those other activities will not be treated as speculation business. Similar issue has been decided by the Calcutta High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS ARVIND INVESTMENTS LIMITED 1990 (3) TMI 5 - CALCUTTA HIGH COURT . It has been held in this case that the Explanation to section 73 shall apply even to the case of a company whose only source of income is trading in shares - the Calcutta High Court decision is squarely applicable to the facts of the present case. Judicial propriety demands that a judgment rendered by the High Court must be followed in preference to the order of the Tribunal. The order of the learned Commissioner of Income-tax (Appeals) on this issue is confirmed - appeal of Revenue dismissed.

Summary

Issues:
Interpretation of Explanation to section 73 for setting off speculation loss against profit from speculation business.

Analysis:
The case involved a departmental appeal arising from the Commissioner of Incometax (Appeals)-IV, Mumbai's order. The primary issue was the interpretation of the Explanation to section 73 concerning the set-off of speculation loss against profit from speculation business. The assessee, a private limited company engaged in share trading, claimed that the profit from trading in shares should be treated as profit from speculation business, allowing the set-off of speculation loss. The Assessing Officer disagreed, arguing that the Explanation did not apply as the company's sole business activity was trading in shares. The Commissioner of Income-tax (Appeals) ruled in favor of the assessee, directing the set-off of speculation loss against the profit and carrying forward any balance loss.

The Departmental Representative contended that the Explanation to section 73 was not applicable since the company's only business activity was share trading, citing precedents. The Tribunal referred to previous cases, including Swamini Leasing and Investment P. Ltd., where it was held that the Explanation applies only when there are multiple sources of income. The Tribunal distinguished another case, Aakrosh Investment and Leasing P. Ltd., where the treatment of dividend income from shares as business income was discussed but was not relevant to the current issue.

The Tribunal also considered the Calcutta High Court decision in CIT v. Arvind Investments Ltd., which held that the Explanation to section 73 applies even if a company's sole income source is trading in shares. The Court emphasized that the entire business activity of dealing in shares should be treated as speculation business. The Tribunal, following the High Court's decision, confirmed the Commissioner's order, dismissing the departmental appeal.

In conclusion, the Tribunal upheld the Commissioner's decision regarding the set-off of speculation loss against profit from speculation business, in line with the interpretation of the Explanation to section 73 as per relevant judicial precedents and High Court rulings.