Section 73 deeming fiction treats company share-trading loss as speculation loss despite actual delivery.

The Explanation to Section 73 deems a company's loss from purchase and sale of shares of other companies as speculation loss, even where the shares are actually delivered. That statutory fiction operates for Section 73 and cannot be ignored merely because Section 43(5) defines speculative transactions by reference to settlement otherwise than by delivery. The provision therefore treats the covered share-trading loss as speculation business loss, with the consequence that set-off and carry forward under Sections 70, 71 and 72 are denied to that extent. The discussion emphasises that the legislative intent of the deeming rule must be given effect.

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Issues: Whether the Explanation to Section 73 of the Income-tax Act, 1961 deems loss from purchase and sale of shares by a company to be speculation business loss even where the transactions involve actual delivery of shares, so as to deny set-off and carry forward under Sections 70, 71 and 72.

Analysis: The statutory scheme distinguishes ordinary business loss from speculation loss. Section 43(5) defines speculative transaction by reference to settlement otherwise than by actual delivery, but the Explanation to Section 73 creates a specific legal fiction for companies whose business includes purchase and sale of shares of other companies. That fiction applies notwithstanding actual delivery of shares and operates for the purposes of Section 73. The Court held that the Explanation cannot be ignored, because doing so would make it ineffective. The authorities relied upon by the assessee on the scope of an Explanation and legal fictions were distinguished on the ground that, on the facts and language of this provision, the legislative intent was clear and the deeming provision was intended to treat the covered share-dealing loss as speculation loss.

Conclusion: The Explanation to Section 73 applies to the assessee company and the share-trading loss was correctly treated as speculation loss. The question was answered in favour of the Revenue and against the assessee.

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