2005 (11) TMI 438 - AT - Income Tax

Tribunal Upholds Classification of Share Trading Loss as Speculation Loss

The Tribunal upheld the Assessing Officer's decision to classify the loss from trading in shares as speculation loss under the Explanation to Section 73 ... - Issues Involved:1. Applicability of Explanation to Section 732. Classification of Loss as Speculation Loss3. Determination of Principal Business4. Allocation of Interest Expenditure5. Interpretation of Legislative Intent and Judicial PrecedentsIssue-wise Detailed Analysis:1. Applicability of Explanation to Section 73:The primary issue revolves around whether the Explanation to Section 73 of the Income-tax Act applies to the assessee's case. The Explanation deems certain businesses involving the purchase and sale of shares as speculation businesses. The assessee contends that since it solely deals in shares of one company, the Explanation should not apply. However, the Tribunal rejects this argument, emphasizing that the Explanation applies even if the business consists solely of trading in shares of a single company. The Tribunal supports its stance by referring to Section 13 of the General Clauses Act, which states that words in the singular shall include the plural and vice versa. Therefore, the term 'companies' in the Explanation includes the singular 'company.'2. Classification of Loss as Speculation Loss:The assessee argues that the loss incurred from trading in shares should not be classified as speculation loss. The Tribunal, however, upholds the Assessing Officer's decision to treat the loss as speculation loss. The Tribunal refers to the decision in CIT v. Arvind Investments Ltd., which states that if the entire business activity of a company consists of the purchase and sale of shares, then the entire business will be treated as speculation business. Additionally, the Tribunal notes that the Explanation to Section 73 introduces a legal fiction, treating certain transactions in shares as speculative for the purpose of Section 73, regardless of actual delivery or transfer of shares.3. Determination of Principal Business:The assessee claims to be an investment company, arguing that its principal business is not trading in shares but earning dividend income. The Tribunal examines the composition of the assessee's gross total income, which includes dividend income of Rs. 13,73,200 and business income/loss of Rs. 20,38,420. The Tribunal concludes that the loss due to trading in shares has a greater figure than the dividend income, thus invoking the Explanation to Section 73. The Tribunal follows the decisions of the Calcutta High Court in Eastern Aviation and Industries Ltd. and Aryasthan Corporation Ltd., which state that for the purpose of the Explanation, absolute figures should be considered, and losses should be treated as negative income.4. Allocation of Interest Expenditure:The assessee contends that the interest expenditure incurred should be allocated towards earning dividend income, thereby reducing the income chargeable under 'Income from other sources' and consequently reducing the loss under 'Profits and gains of business.' The Tribunal rejects this argument, stating that the entire interest expenditure is allowable under Section 36(1)(iii) as the shares are held as stock-in-trade. The Tribunal emphasizes that the onus lies on the assessee to establish that the interest is attributable to dividend income and allowable under Section 57(iii), which the assessee has failed to do.5. Interpretation of Legislative Intent and Judicial Precedents:The Tribunal addresses the assessee's argument regarding the legislative intent behind the Explanation to Section 73. The assessee argues that the Explanation is intended to curb manipulative practices to reduce taxable income. The Tribunal refers to Circular No. 204 and the decision in Aman Portfolio P. Ltd. v. Deputy CIT, which was overruled by the Division Bench in Deputy CIT v. Frontline Capital Services Ltd. The Tribunal concludes that it is not necessary for the Assessing Officer to establish manipulative intent to invoke the Explanation to Section 73. The Tribunal also emphasizes the need to follow the decisions of higher courts, even if they are non-jurisdictional, unless there is a contrary decision from another competent High Court.Conclusion:The Tribunal dismisses the appeal, confirming the order of the Commissioner of Income-tax (Appeals) that the loss from trading in shares is to be treated as speculation loss under the Explanation to Section 73. The Tribunal's decision is based on a detailed analysis of the legal provisions, judicial precedents, and the facts of the case.