2006 (8) TMI 444 - AT - Income Tax

Tribunal allows set-off of genuine share loss against interest income, finding transactions legitimate.

The Tribunal allowed the appeal in part, reversing lower authorities' decisions and permitting the set-off of a genuine loss of Rs. 10,93,465 from share ... Losses - Carry forward and set-off of business loss Issues Involved:1. Validity of initiation of reassessment proceedings under section 148 of the Act.2. Validity of the assessment order on the ground of violation of the principle of natural justice.3. Disallowance of loss of Rs. 10,93,465 on account of share transactions.4. Applicability of Explanation to section 73 of the Act regarding speculative loss.Detailed Analysis:1. Validity of initiation of reassessment proceedings under section 148 of the Act:The assessee did not press ground Nos. 1 to 3 of the appeal, disputing the validity of the initiation of reassessment proceedings and the validity of the assessment order on the ground of violation of the principle of natural justice. Consequently, these grounds were rejected as not pressed.2. Disallowance of loss of Rs. 10,93,465 on account of share transactions:The assessee, a Public Limited Company, declared a net income of Rs. 9,45,100, which included an income from interest of Rs. 22,92,844 and a loss from the sale of shares amounting to Rs. 10,93,465. The Assessing Officer initiated proceedings under section 148 of the Act, suspecting the loss on shares as a colorable device to reduce taxable income. The CIT(A) confirmed the action of the Assessing Officer and held the share transactions as not genuine, further stating that the loss was speculative under section 73 of the Act.The Tribunal examined the transactions and found that the assessee had engaged in genuine share transactions through the broker, M/s. N.K. Gupta & Associates, a member of the Sikkim Stock Exchange. The Tribunal noted that the assessee had taken delivery of shares and got them transferred in its name, as confirmed by the respective companies. The Department could not provide evidence to dispute the existence of the Sikkim Stock Exchange or the broker. The Tribunal concluded that the loss of Rs. 10,93,465 was genuine and incurred in the assessment year under consideration.3. Applicability of Explanation to section 73 of the Act regarding speculative loss:The Tribunal considered whether the loss on share transactions was speculative under Explanation to section 73 of the Act. The Explanation prohibits setting off of share losses by a company unless the company's gross total income mainly consists of income chargeable under other heads or if the principal business of the company is banking or granting loans and advances. The Tribunal observed that the assessee's principal business was granting loans and advances, as evidenced by loans and advances amounting to 79.39% of its capital. Therefore, the assessee fell under the exception provided in Explanation to section 73, and the loss was not speculative. The Tribunal held that the assessee was justified in setting off the share loss against the interest income.Conclusion:The Tribunal allowed the appeal in part, reversing the orders of the lower authorities and allowing the setting off of the loss of Rs. 10,93,465 incurred in share transactions against the interest income shown by the assessee. Ground No. 5 of the appeal was rejected as it related to ground No. 3, which was not pressed.