2008 (12) TMI 435 - AT - Income Tax

Tribunal rules sale of shares as capital loss, not business loss

The Tribunal upheld the decision that the loss on the sale of shares was a capital loss, not a business loss, disallowing its set-off against other ... Business loss/deductions, Losses - In speculation business Issues Involved:1. Whether the loss on sale of shares is to be treated as capital loss or as business loss.2. Even if the loss is treated as a business loss, whether the same is to be treated as a loss from speculative business within the meaning of Explanation to section 73 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Treatment of Loss on Sale of Shares: Capital Loss vs. Business LossThe assessee had debited a sum of Rs. 1,61,28,946 as a loss on the sale of investment in the P&L account for the assessment year 2004-05. The Assessing Officer (AO) treated this loss as a capital loss, not a business loss, and disallowed its set-off against other income. The AO noted that the loss on investment would be long-term capital loss and should be carried forward to be set-off against long-term capital gains only.Upon appeal, the CIT(A) upheld the AO's decision, treating the loss from shares as a capital loss. The CIT(A) noted that the shares were purchased in different financial years (prior to 31-3-1991, 1991-92, and 1994-95) and were held as investments, not as stock-in-trade. The shares were shown as investments in the balance sheet, and the company had made a provision for diminution in market value under the head investment, not claimed as business loss. The treatment in the P&L account further established that the shares were held as investments. Therefore, the CIT(A) concluded that the loss on the sale of shares was a capital loss.The Tribunal agreed with the CIT(A), noting that the assessee had shown the shares as investments and not as stock-in-trade. It is well settled that an assessee can hold certain shares as stock-in-trade and others as investments. The Tribunal upheld the CIT(A)'s order, holding the loss on sale of shares as a capital loss.2. Applicability of Explanation to Section 73: Speculative LossWithout prejudice to the finding that the loss on sale of shares is a capital loss, the CIT(A) also held that even if the loss is treated as a business loss, it would be a speculative loss under the Explanation to section 73 of the Act. The Explanation deems a company to be carrying on a speculation business if any part of its business consists of the purchase and sale of shares of other companies, except for companies mainly earning income from interest, house property, capital gains, or other sources, or companies whose principal business is banking or granting loans and advances.The CIT(A) found that the assessee did not fall into the excluded categories. The principal business of the assessee was not granting loans and advances but investment in shares. The application of funds indicated that the principal business was investment in shares. Therefore, the transaction fell within the ambit of Explanation to section 73, making the loss on sale of shares a speculative loss, not allowed to be set off against business income.The Tribunal upheld this view, referencing the decision of the Hon'ble Calcutta High Court in the case of CIT v. Arvind Investment Ltd., which held that Explanation to section 73 applies even if the entire business consists of the purchase and sale of shares. The Tribunal also cited similar decisions by ITAT Bombay Benches, affirming that the Explanation applies to companies whose entire business activity is the purchase and sale of shares.Conclusion:The Tribunal dismissed the appeal, upholding the CIT(A)'s order that the loss on the sale of shares was a capital loss. Even if considered a business loss, it would be treated as a speculative loss under Explanation to section 73, not allowed to be set off against other business income.