2003 (8) TMI 169 - AT - Income Tax

Income from share trading loss - treated as speculation business income instead of normal business income - Disallowed miscellaneous expenses being penalty charges - HELD THAT - As per our considered view while arriving at the total profit on account of the said share dealing business one has to take into account not only the profit or loss on sale and purchase of shares but also brokerage earned on the purchase and sale of shares. As the brokerage income is inextricably related with the said share transaction business the net profit of which works out to (Rs. 49.19 lakhs minus Rs. 3.97 lakhs) Rs. 45.20 lakhs. Thus there is no merit in the action of the AO in treating the loss of Rs. 3.97 lakhs in isolation by disregarding income earned by the assessee by way of brokerage in the said share trading business itself. Thus we are of the considered view that the AO was not justified in attracting Explanation to s. 73 and holding that loss of Rs. 3.97 lakhs was deemed to be speculation loss. In the result ground No. 1 of the Revenue appeal is dismissed. Miscellaneous expenses being penalty charges are concerned we have noticed from the details that the same have been paid to National Stock Exchange for delay in payment of the dues and for various other obligations arising out of carrying on business activities. We therefore agree with the learned CIT(A) that the penalty charges cannot be said to be for infringement of any law but has been paid by the assessee to compensate for delay in payment of the dues to the National Stock Exchange and for various other obligations. We therefore agree with the learned CIT(A) that the disallowance is therefore not justified and he has rightly directed the AO to delete Rs. 13, 967 from the total income. In the result the Departmental appeal is dismissed.

Summary

Issues:
1. Whether share trading loss should be treated as speculation loss or allowed to be set off from the income of the assessee.
2. Whether disallowance of penalty charges as miscellaneous expenses is justified.

Issue 1:
The Revenue appealed against the order of the CIT(A) directing the AO to allow share trading loss to be set off from the income of the assessee and not treating it as speculation loss. The controversy arose when the AO invoked provisions of Explanation to s. 73 of the IT Act, 1961, treating a business loss of Rs. 3,97,126 as speculative loss. The Revenue contended that the loss on share trading exceeded the total income under different heads, justifying its treatment as speculation loss. However, the assessee, a registered broker, argued that the loss in shares is part of the share brokering business and should be treated as outgoing from brokerage income. The ITAT agreed with the CIT(A) that the share trading loss is to be set off from the income of the assessee and not treated as speculation loss, as the income declared under the head 'brokerage' is directly related to the business of purchase and sale of shares.

Issue 2:
Regarding the disallowance of Rs. 13,967 from miscellaneous expenses as penalty charges, the ITAT found that the charges were paid to the National Stock Exchange for delay in payment of dues and other business obligations, not for infringement of any law. The ITAT agreed with the CIT(A) that the penalty charges were not justified as a disallowance and directed the AO to delete the amount from the total income. Consequently, the Departmental appeal was dismissed.

In conclusion, the ITAT held that the share trading loss should not be treated as speculation loss but allowed to be set off from the income of the assessee. Additionally, the disallowance of penalty charges as miscellaneous expenses was deemed unjustified and was directed to be deleted from the total income.