1988 (10) TMI 62 - AT - Income Tax

Summary

Issues Involved:
1. Whether the loss on the sale of shares should be classified as 'Short Term Capital Loss' or 'Speculation Loss'.
2. Whether the transactions in question constitute speculative transactions under Section 43(5) of the Income Tax Act.
3. Applicability of Section 73(1) regarding the treatment of speculative business.

Detailed Analysis:

1. Classification of Loss on Sale of Shares:
The main grievance of the assessee was the AAC's decision to classify the 'Short Term Capital Loss' on the sale of shares as 'Speculation Loss', resulting in the disallowance of Rs. 17,850. The assessee argued that a solitary transaction leading to speculation loss should not be considered speculative in nature and should be allowed as a Short Term Capital Loss.

2. Speculative Transactions Under Section 43(5):
The assessee had income from securities, house property, and share dealing, and was also a partner in a firm dealing in shares. The ITO disallowed the claimed loss of Rs. 17,850, treating it as a speculative activity due to the lack of evidence of actual delivery of shares. The AAC upheld the ITO's decision, noting that the transactions were speculative since there was no evidence of actual purchase for investment purposes and the transactions were conducted through the firm where the assessee was a partner.

3. Applicability of Section 73(1):
The assessee's counsel argued that the transactions did not fall under speculative transactions as defined by Section 43(5) and that even if one transaction was speculative, it did not amount to speculative business under Section 73(1). The counsel cited decisions from the Bombay High Court and Andhra Pradesh High Court to support the argument that isolated transactions should not be treated as speculative business.

Judgment Analysis:

1. Transactions with DMR Trading & Investment Ltd. and Ridhi Holdings & Traders Ltd.:
The tribunal found that the acquisition of 500 shares each in these companies was not speculative. The shares were acquired through proper application and payment by cheque, followed by allotment. Hence, these transactions did not involve speculative activities as defined by Section 43(5).

2. Transaction with Gujarat State Fertilisers Co. Ltd.:
For the 100 shares of Gujarat State Fertilisers Co. Ltd., the tribunal noted the lack of evidence for actual delivery. However, referencing the Bombay High Court's decision in CIT vs. Indian Commercial Co. Pvt. Ltd., the tribunal concluded that an isolated transaction does not constitute speculative business. Thus, even if this transaction was speculative, it did not amount to speculative business, and Section 73(1) was not applicable.

Conclusion:
The tribunal held that the AAC failed to appreciate the legal position and was incorrect in disallowing the set-off of the short-term capital loss. The tribunal set aside the AAC's order and directed the ITO to allow the set-off of the short-term capital loss of Rs. 17,850 as claimed by the assessee. The appeal of the assessee was thereby allowed.