TMI Blog2011 (6) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... he profit from speculation business. 2. The ld. CIT(A) has erred in law and on facts in holding that the long term loss on sale of debentures amounting to ₹ 35,84,558/- was outside the purview of explanation to section 73 of the IT Act, without appreciating that the said loss from debentures of ₹ 35,84,558/- was correctly deducted by the AO from the gains of speculation business of ₹ 2,37,17,593/- and the net gain of ₹ 2,01,33,635/- was rightly taxed as speculation business income. 3. The ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 17,49,754/- made by the AO on account of disallowance u/s 14A of the Act in respect of expenditure being interest paid on borrowings without properly appreciating the facts of the case and the material brought on record by the AO. 3.2 In doing so, the ld. CIT(A) has erred in law and on facts in not appreciating that the said expenditure of ₹ 17,49,754/- was relatable to the dividend income on shares which was exempt from tax as the borrowings on which the said interest has been paid, were utilized for the purpose of investment in shares and therefore the said disallowance was righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t agree and held that whole income shown by the assessee in purchase and sale of shares has to be treated as income from speculation. However, he allowed the set off of long term capital loss on sale of debentures at ₹ 35,84,588/- and finally treated the sum of ₹ 2,01,33,035/- as speculation profit as per explanation to section 73. 6. The ld. CIT(A) allowed the claim of the assessee on two grounds firstly he held that explanation to section 73 is attracted only where assessee suffers a loss in sale and purchase of shares. In other words explanation to section 73 could not be applied where assessee has earned profit on sale and purchase of shares. The second reasoning advanced by the ld. CIT(A) was that assessee has been holding the shares sold during the year as investment. This was apparent from the balance sheet of the assessee for the immediately preceding year also. Once shares are held as investment any gain or loss suffered on their sale can only be taxed under the head capital gain and not under the head business . For this he relied on the decision of the Tribunal in the case of Kruti Marketing Ltd. vs. ACIT 118 Taxman 194 (Ahd)(Mag). 7. Before us, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arisen from that business during the course of the assessment year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous assessment year. For the assessment year 2003-04, the assessee showed a profit on the sale of shares and securities held as stock-in-trade, offered it as a profit of speculation business, set it off against speculation loss brought forward from the assessment years 1996-97 to 1998-99 and showed the balance as speculation income. The Assessing Officer did not treat the income which arose from the sale of shares as income from a speculation business on the ground that the assessee had settled its transactions of sale and purchase of shares through physical delivery, and refused to allow set-off of the income from the sale of shares against the loss on account of speculation business, brought forward from the assessment years 1996-97 to 1998-99. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. The Tribunal held that the profit from the sale of shares fell within the purview of the Explanation to section 73 and was to be set off against brought forward losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by applying explanation to section 73. The learned Counsel for the assessee also relied upon the decision of ITAT Kochin Bench in the case of Harrisons Malayalam Ltd. Vs ACIT 32 SOT 497 in which it was held that in the facts and circumstances of the case, the loss is very much in the nature of capital loss, therefore, there is no justification in treating the same as speculation loss. The learned DR however, submitted that section 73 as per assessee talks of the loss but it covers profit of business also. However, we do not agree with the contention of the learned DR because the provisions of section 73 of the IT Act are applicable to losses in speculation business and the explanation is also relevant to the same. But, in the case of the assessee on sale of shares the assessee has declared income. The AO without passing any speaking order merely applied the explanation to section 73 of the IT Act in order to disallow the claim of the assessee which is not warranted under the law. The learned CIT(A) on proper appreciation of the facts on record, rightly held that explanation to section 73 is not applicable to the case of the assessee because it has not suffered any low on sale an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d interest on securities , income from house property , capital gains and income from other sources (4) its principal business is not of banking or granting of loans or advances. 11. If these conditions are satisfied then such company is carrying on speculation business to the extent to which the business consists of the purchases and sale of shares. It is also clear from the explanation that this explanation does not apply to an investment or a company whose principal business is banking or money lending. Since assessee has claimed that it is not trading in shares, but only making investment in shares it would fall in the excluded category. In any case the issue is covered by the decision of this Co-ordinate Bench in the case of ACIT vs. Shree Gautam Ship Breaking Industries Ltd. (supra) wherein it is held that if shares are held as capital asset loss arising from the sale of these shares cannot be treated as speculation loss by applying explanation to section 73. There is no enquiry or finding by the AO in the present case that what the assessee has shown as investment in shares is in fact trading in shares. No material is brought on record to hold against what is decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d speculation business by the explanation to section 73. 14. Similarly, Hon. Madhya Pradesh High Court in the case of CIT vs. Intermetal Trade Ltd. (2006) 285 ITR 536 (MP) held that the fiction created by explanation to section 73 applies only to company and cannot be extended to individual, firms or HUFs. 15. The second reason is that assessee is holding debenture as investment and is not held to be trading in debentures. The reasons advanced by us in respect of ground No.1 are also applicable to debentures meaning thereby that debentures are not held as stock-in-trade but only held as investment and, therefore, explanation to section 73 would not be applicable. This ground of Revenue is accordingly rejected. 16. The third issue relates to disallowance out of interest u/s 14A. The AO noted that assessee has earned dividend income from mutual fund at ₹ 17,49,754/- and income from shares at ₹ 21,000/-. The assessee had paid interest on the borrowed funds which are invested in dividend income which are exempt. Therefore, part of the interest expenditure needed to be disallowed. He accordingly disallowed the interest expenditure to the extent of dividend income at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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