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2016 (6) TMI 1123 - GUJARAT HIGH COURT

2016 (6) TMI 1123 - GUJARAT HIGH COURT - TMI - Treatment to business loss suffered as speculation loss - application of provisions of Explanation to Section 73 of the Act - Held that:- Taking into account the facts on record and the question which have been posed for consideration of this Court as to whether the business loss suffered by the appellant is to be treated as speculation loss by applying the provisions of Explanation to Section 73 of the Act and will govern under Section 73 or Sectio .....

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of the shares and even considering the loss on different valuation of the shares, it will govern under the definition of the speculation loss, as also the assessee is doing the trading of the shares, which has been rightly held by the A.O. and confirmed by the Tribunal and it cannot get settle as business income with the other trading. Thus, this Court is in agreement with the view taken in the case of R.P.G Industries Ltd., (supra) that the loss suffered by a company in share transactions is to .....

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arance: MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 MR NITIN K MEHTA, ADVOCATE for the Opponent(s) No. 1 JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) By way of this appeal, the appellantassessee has challenged the order of the ITAT made in ITA No.1791/Ahd/2000 dated 20/01/2006, whereby allowing the appeal filed by the revenue, the ITAT has reversed the order passed by the CIT(A) and uphold the order of the A.O. and rejected the claim of the assessee claiming loss in valuation of .....

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holding that even valuation loss can be treated as speculation loss within the meaning of provisions of Explanation to Section 73 of the Act? 3. Learned Counsel for the appellant has contended that the assessee has not disclosed any opening stock of the share and he has relied upon the profit and loss account as per the audited accounts of the assessee which reads as under: Expenditure Income Opening Stock NIL Sales 1850 Purchases of Shares 11989650 Commission 4000000 Administrative Expenses 356 .....

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O., has wrongly held that loss arising from the appellant s transaction from shares is not the business loss but speculation loss and therefore the total income determined at ₹ 39,73,505/is not correct. 3.3 Learned Counsel for the appellant has taken us to the order passed by the CIT (A), more particularly, paragraph No.4 and contended that provisions of Explanation to Section 73 shall not be applicable to the share transactions of the appellant and therefore the claim of the appellant of .....

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on which reads thus: 8. In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross .....

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the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation .....

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ereafter that sub section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order .....

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s only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation. 3.5 Learned Counsel for the appellant has further contended that, if the gross income is taking into consideration, then it will squarely cover by the decision of the Hon ble Bombay High Court in case of Darshan Securities (P.) Ltd. (supra) and therefore the appeal of the assessee is required to be allowed a .....

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l in its order. 4.1 Learned Counsel for the revenue has taken us to paragraph No.12 of the order passed by the Tribunal and contended that the assessee had incurred loss on account of valuation of shares and therefore the entire loss is to be held as speculative loss. 4.2 In support of his submission, learned Counsel for the revenue has relied upon the decision in case of Prasad Agents (P) Ltd. Vs. Income Tax Officer (2011) 333 ITR 0275 and has relied upon paragraph No.10 which reads thus: 10. I .....

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doubt that the explanation to Section 73 cannot be read to mean only when there is a purchase and sale of shares in the course of the financial year. The explanation will cover both shares which are stock in trade and shares which are traded in the course of the financial year for the purpose of considering the loss and profit for that year. The Tribunal, in our opinion, has correctly answered the issue by holding that the loss of profit on account of valuation amounts to revenue losses or reve .....

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ions of Section 73, because a business cannot be a speculation business unless there is a speculative transaction and a speculative transaction is defined by the former as one, not involving an actual delivery of shares. Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative transaction and the assessee who is engaged in a business involving the actual delivery of shares, cannot be regarded as being engaged in speculation busines .....

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urposes of subsections (1) and (2) of Section 73 in respect of which a set off can be granted. To accept the submission of the Revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the explanation to Section 73, which is not contemplated by Parliament. Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by t .....

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business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the explanation to Section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of Section 73, any loss computed in respect of that speculation business, can be set off only against the profi .....

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no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have 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 .....

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f the said decision which reads as under: Sec, 73 of the Act deals With loss in speculation business. It provides as follows: 73. Losses in speculation business.- ( 1) Any loss, Computed in respect Of a speculation business carried on by the assessee, shall not be set off except against profits and gains, " any, of another speculation business." S. Subs. (2) of s. 73 lays down that where any loss in respect of a speculation business has not been wholly set off under subs. (1), so much .....

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any (other than an investment company, as defined in cl. (ii) of s. 109, or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares." 6. The section Will apply where any part of the busines .....

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company had a business of buying and selling the shares. The shares are treated as stock-intrade. The closing stock of tho shares have been valued Just as any other stock- intrade IS valued by a company. There were small lots of sale of shares in this year. But that Will not make any difference to the main question, which is, whether the company was engaged in the business of sale and purchase of shares. If it is found that any part of the business of the company con5ists in the purchase and sal .....

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shares were valued as stock-in-trade and the loss was disclosed, as a result of the valuation of the shares, goes to show that the business of share purchase and sale of shares was carried on by the company. To the extent such business was carried on, the business of the assessee-company must be treated as speculation business. 7. In that View of the matter, the question is answered in the negative and in favour of the Revenue. There Will be no order as to costs. 4.5 Learned Counsel for the rev .....

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e Act except the case of speculation business as provided in Section 43(5) of the Act. In the case before us, undisputedly the loss suffered by the assessee resulted from a transaction of share where there was actual delivery of share scripts and therefore, the same could not be a speculative transaction as provided in the definition. However, by the added Explanation to Section 73, a legal fiction has been created by which 14 among the assessees who is a company, as indicated in the said Explan .....

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the explanation added should be totally ignored and thus, the only interpretation of the added Explanation is that a limited class of 18 assessees would come under the said provisions although in accordance with the other provisions of the Act those are not doing speculation business. *** 27. In the case before us, we have already pointed out that by virtue of the legal fiction created by the added Explanation to Section 73 of the Act, even the transactions which are not speculative transaction .....

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ther speculation business and if the assessee is a company indicated in the explanation to Section 73, for such an assessee, there shall be a different definition of Speculation business than the one applicable to other types of the assessee. In our view, 29 there is nothing illegal for the legislature to enact two different definitions of Speculation business applicable to the two different categories of the assessee in a taxing statute. Thus, the factors which weighed with the Supreme Court in .....

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the Explanation to s.73 have to be contrasted with the provisions of s.54 (5), which defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, including any stock and share, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Explanation to s.73 treats any purchase and/or sale of shares by certain companies to be speculative for the purpose of s.73 only. For the purpose .....

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al is just and proper and therefore, the findings arrived at by the Tribunal and A.O. may not be disturbed and answer may be given in favour of the revenue. 5. We have heard learned Counsel appearing for the respective parties. 6. At the outset it is required to be noted that taking into account the facts on record and the question which have been posed for consideration of this Court as to whether the business loss suffered by the appellant is to be treated as speculation loss by applying the p .....

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