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2017 (5) TMI 917 - ITAT DELHI

2017 (5) TMI 917 - ITAT DELHI - TMI - Short term capital loss on sale of shares - disallowance of claim as sham transaction - speculation loss - Held that:- The transaction of purchases and sales of shares entered in to by the assessee cannot be held to be sham. We have also perused the orders of the ld CIT (A) where in the transaction is held to be speculative in nature and therefore it has been held that these transactions are not sham. Hence, we reject the reasons assigned by the ld AO. - .....

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sition to hold that to the impugned transactions provision of explanation to section 73 applies. Therefore, we also cannot uphold the order of the ld CIT (A). In the result we allow ground no 2 of the appeal of the assessee accordingly holding that revenue has failed to establish that transactions are sham and merely book entries and further the explanation to section 73 does not apply to the facts of the case thereby directing the ld AO to allow the short term capital loss to be carried forward .....

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y the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in directing the Assessing Officer to rework the disallowance of ₹ 4,40,6637- on account of expenses incurred in earning dividend income earned by the Appellant Company in view of the provisions of Section 14A of the Income-tax Act, 1961 read together with Rule 8 .....

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he Appellant Company as a short term capital loss 2. The first ground of appeal is against the disallowance of ₹ 440663/- on account of expenses incurred for earning tax free income u/s 14A of the Act and the second ground of the appeal is with respect to disallowance of loss of ₹ 48890050/- claimed by the assessee is a short term capital loss. Ground No 1 of the appeal of the asessee is not pressed and hence it is dismissed. 3. Ground no 2 is against the disallowance of short term c .....

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loss of ₹ 48890050/- with respect to purchase and sale of share of two companies namely Supreme Placement Services Pvt Ltd and Dependable Transport Pvt. Ltd. The Ld AO disallowed the above claim by holding that the transaction of short-term capital loss as sham as it has been carried out to lower the business profits of the company. Consequently, the income of the assessee was assessed u/s 143(3) of the act vide order dated 27.12.2016 of ₹ 16413200/- against the return income of  .....

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he company's profits of business. The assessee, vide its reply dated 27.12.2010, has submitted as under besides the details of transactions already filed: "(b) In connection with the above it is submitted that while it is a fact that the said transactions were a result of an off-market sale, it would not be correct to treat the same as sham transactions entered into just with a motive to lower the profits of the business. (c) The assessee Company had invested in the said two companies v .....

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forecasts in the business segments, of the said two companies investments therein would be profitable venture for it and the prospect of future capital appreciation was high, (d) However it soon became apparent that the claims of the said companies were not based on a realistic assessment of their capabilities and business prospects and as such locking up substantial capital therein would not lead to commensurate profits either m the medium or even the long term. As such the same were sold off .....

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all the parties concerned whereby the legitimacy of the transactions is conclusively proved. In the instant case the entire transaction is duly supported and documented by all the parties thereto and also supported by the fact of consideration having been passed between the buyer and seller companies. In these circumstances it is clear that the same can by no stretch of imagination be considered as a sham, transaction. As such it is clear that no cause exists to treat the said transactions as sh .....

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and Pradhan, Om Vihar, Phase-V, Uttam Nagar, New Delhi. 405000 43.09 2 Dependable Transport Pvt. Ltd. RL-30, Ganga Ram Vatika, Tilak Nagar, New Delhi 210000 22.34 3 Supreme Placement Services Pvt. Ltd. E-60, Near Anand Pradhan, Om Vihar, Phase-V, Uttam Nagar, New Delhi. 325000 34.57 Total 940000 100,00 Shareholding of assessee company i.e. M/s Stylish Construction Pvt. Ltd, in the following company's : S.NO. Name Address No. of shares Percentage of equity shares held 1 Dependable Transport P .....

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tify the transactions have been submitted. (b) Secondly, the assessee has itself accepted that the investments made in the said companies were not based on realistic estimates and that the companies were not fit for making investments. (c) Thirdly, the transactions have been made off the market as is also accepted by the assessee company. (d) Also, the transactions duly recorded, documented within the close held group of companies and routed through banking channels cannot lead to be genuine tra .....

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f the said companies were not based on realistic assessment of the capabilities and business prospect. This submission of the assessee cannot be accepted by any stretch of imagination as the assessee himself is a stake holder in the two companies and had a fairly good idea and perfect knowledge of the financial affairs of the two companies. Being a substantial shareholder in the above two companies, the assessee had the first hand knowledge of the general affairs of these two companies. The asse .....

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short term capital] gain has been arrived. 4.6 All the above facts of the case lead to the conclusion that the transactions were made merely for entry purposes and as such the transactions are sham and have been carried out to lower the business profit of the company. Therefore the Short Term Capital Loss of ₹ 4,88,90,050/- claimed by the assessee is disallowed and the Long Term Capital Gain of ₹ 3,25,11,441/ and Short Term Capital gain of ₹ 1,58,43,649/ is treated as taxable .....

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B. Short Term Capital Gain as discussed above ₹ 15843649/- C. Long Term Capital Gain as Discussed above Less Exemption u/s 10(38) ₹ 3,25,11,441 Total Income ₹ 3.25.11.441 NIL R/o. Rs.1,64,13,172 ₹ 1,64,13,200 4. The assessee being aggrieved with the order of the ld AO preferred appeal before the ld CIT (A). Ld CIT(A) vide order dated 28.02.2013 held that assessee is engaged in the business activity of supply manpower therefore, the provision of section 73 and its explanat .....

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ng the year assessee had disclosed capital loss in following companies:- M/s Supreme Placement Services Pvt. Ltd ₹ 3,49,40,050/- M/s Dependable Transport Pvt. Ltd ₹ 39.50.000/ -Rs. 4,88,90,050/- The details of the transactions in the purchase and sale of shares of M/s Supreme Placement Services Pvt. Ltd. and M/s Dependable Transport Pvt. Ltd, resulting in the above loss are as follows:- s. No, Name of the Scrip Date of purchase No of shares Cost Price (Rs.) Date of Sale No of shares .....

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ted in the said two companies viz M/s Supreme Placement Services Pvt. Ltd and M/s Dependable Transport Pvt Ltd on the basis of their future business plans and prospects. Further the assessee in his submission has stated that the sale is through normal banking channels supported by duly executed and valid transfer deeds in accordance with the process of law. The transactions are duly entered into the books of accounts of all the parties concerned whereby the legitimacy of the transactions is conc .....

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rds of both the assessee Company and the investee companies. " The assessee was asked vide order shed entry dated 11 Feb 2013 why section 73 is not applicable in this case and the assessee had replied vide their submission dated 25/02/2013 it is reproduced below:- "The explanation to section 73 of the Income-tax Act, 1961 to the loss on shares reads as follow:- " Where any part of the business of a company (other than a company whose gross total income consists mainly of income wh .....

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ists of the purchase and sale of such shares. " As per the above explanation, where any part of the business of a company (whether private or public) consists of the purchase and sale of shares of other companies, such company shall 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. This Explanation shall not apply to the following companies: a) Investment companies i.e. a company whose gross total income .....

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activities. (Detail is given at page 4 of this order). This is shows that it is not Capital Gain but supply of Man power is his pre-dominant business activities hence Sec. 73 is applicable and as a result carry forward of Short Term Capital Loss is dismissed. In result the appeal is partly allowed. 5. Therefore, assessee aggrieved by the above said orders has preferred appeal before us. The ld AR submitted that the assessee has earned short-term capital loss of ₹ 48890050/- during the year .....

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r submitted that these shares were sold by the assessee on 18.01.2008 to Dependable Transport Co. Ltd. He further submitted that the assessee has purchased further the shares of Dependable Pvt. Ltd in two lots. One of 125000 shares of Ultra Modern Developer and Builder P Ltd and 30000 from Prominent Agency Pvt. Ltd. On 18.01.2008 these shares were sold to Supreme Placement Services Pvt. Ltd. He further submitted that all these purchase and sale of shares are carried out by the assessee on paymen .....

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d also short term capital gain of ₹ 15843649/- and further profit of sale of non trade investment of ₹ 1865841/-. He therefore, submitted that the assessee has incurred net short term capital loss of ₹ 32859820/- which was carry forward by the assessee for set off in subsequent years. The main argument was that the ld AO has held that this is a sham loss. He submitted that merely there is cross holding of shares or transaction of shares in the companies and where the investment .....

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are sold at loss it cannot be said to be a sham transaction. 6. With respect to the order of the ld CIT(A) he submitted that the ld CIT(A) has accepted the claim of the assessee that transaction is not sham but has applied explanation to section 73 of the Act holding that it is speculative loss. He submitted that ld CIT (A) has already held that transactions are not sham. He submitted that acceptance of the transaction of the ld CIT(A) holding it to be a speculative loss proves that order of the .....

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n and other short term capital gain of ₹ 15843649/- on shares and ₹ 186581 on non trade investments which are charged under the head capital gains‟, therefore the main income of the assessee is not business. Hence, according to him, explanation section 73 does not apply. He further relied on the decision in DCIT Vs. Jindal Export 101 ITD 129 and ACIT Vs. Viraj Investment 210 Taxmann 418. 7. The ld DR relied upon the orders of the lower authorities and vehemently contested that .....

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e been carried out to lower the business profits of the company. We have examined the facts and the reasons given by the Ld. assessing officer for holding so. Assessee has purchased and sold those shares after taking the delivery and getting them transferred in the name of the assessee. To demonstrate this assessee has submitted the share transfer forms as well as the share certificates of those companies registered in the name of the company. Assessee has submitted the names of the parties from .....

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s also not proved incorrect that shares have been transferred in the name of the appellant. Ld AO has also not questioned the prices at which the shares are transacted. The investee companies being the shareholders of the assessee Company and assessee holding shares in them is of no consequence in absence of challenge to the transaction itself. The consideration of shares has not gone to the coffers of those companies from transacting parties but to the purchaser and sellers. Further off market .....

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er :- 3. The Assessing Officer noted that the shares of Rustom Mills and Industries Ltd., which the assessee sold were pledged with the IDBI Bank. The original share certificates were also lying with the said Bank. The assessee had also handed over duly executed transfer forms to IDBI. The Assessing Officer, therefore, called upon the assessee to clarify how under such circumstances the assessee could sell the shares. The Assessing Officer further noted that the purchaser company, viz. Bijal Inv .....

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company was also aware that shares were pledged with IDBI and therefore delivery of shares was not possible. On the basis of these factors, the Assessing Officer asked the assessee to justify the claim of long term capital loss on sale of such shares. 4. In response to such queries, the assessee contended before the Assessing Officer that law does not require that the transfer of share can happen only upon delivery of shares. The shares form a capital asset and for the purpose of computing the c .....

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th IDBI who had lien over such shares. The shares therefore could not have been validly transferred. He was of the opinion that full transaction was intended for creating loss to the assessee so that its capital gains resulting from sale of shares of Rustom Spinners can be set off. 5. The assessee carried the matter in appeal. The Commissioner (Appeals), by his order dated 23.3.98, dismissed the appeal. He was of the opinion that sale of shares can be completed only when the share certificates a .....

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contention had common Directors. He was of the opinion that looking to the impediments attached to such shares, the same would hardly have any market value. He was, therefore, of the opinion that the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11 would apply. 6. The assessee carried the matter further in appeal before the Tribunal. The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities. Tr .....

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amounting to ₹ 37,602/- out of the sale consideration. He authorized defendant Nos.1 and 2 to deliver the share certificates and the blank transfer forms on the debt being discharged. When defendant Nos. 1 and 2 failed to hand over the share certificates together with blank transfer deeds signed by R and other related documents, the 1st plaintiff instituted suit seeking declaration that he had title over the shares and they belonged to him and for consequential directions. In this backgro .....

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o deal with such goods until he secures the cooperation of the third party. The Tribunal was of the opinion that the assessee had the right to transfer the shares because legal title vested in the assessee. 8. Before us, learned counsel Shri M.R.Bhatt for the Revenue vehemently contended that this was a clear case of colourable device created for tax avoidance. He submitted that the assessee and the purchaser company were part of the same group. In fact, the assessee, the purchaser Company and R .....

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purchaser Company agreed to purchase such shares at the market value would show that the entire transaction was not a genuine transaction. 9. Counsel drew our attention to section 108 of the Companies Act, 1956 to contend that such transfer could not have been registered without following the mandatory requirements contained in sub-section (1) of section 108 of the Companies Act. In this respect, counsel relied on the decision of the Apex Court in the case of Mannalal Khetam v. Kedar Nath [1977 .....

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Ltd. (supra) to contend that transaction itself should be ignored as being a colourable device to avoid tax. Counsel drew our attention to some of the observations made in a recent decision in the case of Vodafone International Holdings B.V. v. UOI [2012] 341 ITR 1/ 204 Taxman 408 /71 taxmann.com 202 (SC) reported in wherein the ratio of the decision in the case of McDowell & Co. Ltd. (supra) came up for consideration in view of the later decision of the Apex Court in the case of UOI v. Aza .....

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ed that there was an attempt to avoid tax. 12. Counsel submitted that what section 108 of the Companies Act prohibits is registration of transfer of shares by the company without following certain mandatory requirements and not transfer of shares themselves by the owner of the shares. In this respect, counsel relied upon the decision of the Madras High Court in the case of A.M.P. Arunachalam (supra). Counsel pointed out that the assessee had entered into an agreement dated 24.3.93 with the purch .....

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al asset in question, transfer at least for the purpose of the Income Tax Act would be complete. 13. Counsel submitted that the ratio of the decision of the Apex court in the case of McDowell & Co. Ltd. (supra) stands substantially diluted by virtue of subsequent decision in the case of Azadi Bachao Andolan (supra). 13.1 Counsel also relied on a decision in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14 (SC) wherein the Apex Court observed as under- "11. In its g .....

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r into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. Therefore when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital he reduces his exclusive rights in the asset to shared rights in it with the other partners of the f .....

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capital loss of ₹ 8,38,790/-. During the same period, the assessee also sold certain shares of Rustom Spinners Ltd. and showed long term capital gain of ₹ 1,46,792 and short term capital gain of ₹ 7,41,563/-. It is also not in dispute that the shares of Rustom Mills and Industries Ltd. were pledged by the assessee with IDBI Bank. The original share certificates along with the transfer form duly signed by the assessee were in possession of the IDBI Bank. The assessee had also u .....

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as under: "(47) "transfer: in relation to a capital asset, includes - (i) the sale exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (v) any transaction involving the allowing of the possession of any immovable .....

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or the purpose of sub-clauses (v) and (vi) "immovable property" shall have the same meaning as in clause (d) of section 269UA." It may be that by virtue of pledging of shares with IDBI, having handed over the original share certificates to such financial institution along with the duly signed transfer forms, in so far as the assessee's relation with IDBI is concerned, there would be a serious question of validity of such transaction. We are, however, in the present proceedings .....

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on (1) of section 108 provides that a company shall not register a transfer of shares in or debentures of, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and further fulfilling the procedural requirements specified therein has been delivered to the company along with the certificate relating to the shares or debentures along with the letter of allotment of shares or debentures. Therefore, it would not be di .....

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having received the full sale price of the shares, section 2(47) of the Act apply. In our opinion, the assessee did transfer whatever rights it had in the shares to the purchaser company. If such transfer is not recognized by the IDBI and there are other legal implications of breach of undertaking given to IDBI, such issue would have to be thrashed out between the concerned parties. Insofar as income tax proceedings are concerned, we are of the opinion that by virtue of section 2(47) of the Act, .....

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because such shares were sold during the previous year when the assessee had also sold some shares at profit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be effected with a group company. As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suff .....

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sessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI .....

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voidance of tax cannot include every case of reduction of tax liability of an assessee. The assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability. In such a case, there would be no avoidance of tax, For example, a case where the assessee makes a gift of shares to his son. By reason of gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee woul .....

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e which would fall within the parameters of the decision in the case of McDowell & Ltd (supra). Therefore, in view of above facts and circumstances, respectfully following the decision of honourable Gujarat High court we hold that the transaction of purchases and sales of shares entered in to by the assessee cannot be held to be sham. We have also perused the orders of the ld CIT (A) where in the transaction is held to be speculative in nature and therefore it has been held that these transa .....

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siness carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business shall, subject to the other provisions of this Chapter, be carried forward to the following assessmen .....

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business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than [2053][four assessment years] immediately succeeding the assessment year for which the loss was first computed. [ Explanation.-Where any part of the business of a company ( [other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other .....

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iness consists of the purchases and sales of the shares of other company the such business shall be deemed to be speculative business. Hence, loss or profit arising therefore under the head‟ Business Income‟ shall be dealt with accordingly. On looking at the computation of the total income of the assessee, business income of the assessee is ₹ 128860/-. The capital Gain shown by the assessee is Long-term capital gain of ₹ 32511441/- , short term capital gain of ₹ 158 .....

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anting of loans and advances.' 11. Therefore, in the present case, the gross total income of the assessee company is mainly of capital gain and therefore the explanation does not apply to the assessee. The statement of the assessee while contesting disallowance relied up on by the ld CIT (A) is of no consequence. Only facts to be seen are the composition of gross total income of the assessee. Further, in para no 4.6 of the assessment order the above loss has been not allowed to be carried fo .....

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n the scheme in the main provision to situations where part of business is from speculative transactions. To that extent the assessee will be deemed to be carrying on speculative business - Aravali Engineers (P.) Ltd. v. CIT [2011] 335 ITR 508/200 Taxman 81 (Mag.)/11 taxmann.com 291 (Punj. & Har.). As there is no business of purchases and sales of the shares, explanation to section 73 does not apply to assessee. Hon Madras High court in [2016] 68 taxmann.com 3 (Madras) Rajapalayam Mills Ltd. .....

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of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appell .....

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there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition of business, under Section 2(13) of the Income Tax Act, 1961, there is no point in contending that the assessee is engaged in the business much less in a speculative business. Therefore, the Assessing Officer ought to have allowed the loss, as short term capital loss and set off against the .....

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