2012 (11) TMI 815 - AT - Income Tax

Tribunal confirms speculative loss on shares, orders reevaluation of bad debts claim

The Tribunal dismissed the assessee's appeals (ITA Nos. 1384 to 1386/Hyd/2011), confirming that the loss from the purchase and sale of shares should be ... Loss on Purchase and Sale of Shares - Business loss vs Speculation loss - held that:- The transaction of purchase and sale of shares would be held as speculative business only if the company was hit by the explanation to section 73 of the Act. The implication of the explanation is that if a company incurs a speculation loss in a manner deemed in the explanation such loss shall not be set off except against profit and gains, if any, of another speculation business But, the explanation has provided two exceptions. The first exception is available in the case of a company whose gross total income consists mainly of income which is chargeable under the head “interest on securities”, “income from house property”, “capital gain” and “income from other sources”. The second exception is in the case of a company whose principal business is business of banking or granting loans and advances. As seen from the facts of the present case, though the assessee made a plea that the it is carrying on multiple business as principal business, but the facts do not support the plea of the assessee. - held as speculation loss - Decided against the assessee. Claim of bad debts in respect of certain sales made to foreign companies - held that:- Debt arising in the course of business activity is to be considered as bad debt if it is written off in the books of account as per the provisions of section 36(2)(iii) of the Act. In the present case the assessee submitted that it had obtained permission from RBI. The assessee is directed to adduce necessary evidence as the assessee has failed on earlier occasion to furnish necessary evidence. - matter remanded back. Issues Involved:1. Treatment of loss arising from the purchase and sale of shares.2. Allowance of bad debts claimed by the assessee.Detailed Analysis:Issue 1: Treatment of Loss Arising from the Purchase and Sale of SharesBackground:The primary issue in the three appeals by the assessee (ITA Nos. 1384 to 1386/Hyd/2011) concerns whether the loss from the purchase and sale of shares should be treated as a speculation loss under the explanation to section 73 of the Income-tax Act, 1961, or as a business loss. The facts of the case are similar across the assessment years 1997-98 to 1999-2000.Tribunal's Previous Decision:Previously, the Tribunal remitted the issue back to the Assessing Officer (AO) to consider it afresh, particularly focusing on whether the assessee's principal business falls under the exceptions provided in the explanation to section 73.Assessing Officer's Findings:Upon re-examination, the AO concluded that the assessee's principal business did not fall under any exception and treated the loss as a speculation loss. This decision was upheld by the CIT(A), who noted that the assessee's principal business was the manufacture and sale of chemicals and drugs, not advancing loans.Assessee's Argument:The assessee argued that its principal business included investment and financing, citing the merger of Standard Equity Fund Ltd. and the deployment of funds in investment activities. The assessee contended that more than one principal business could exist, as per the Tribunal's earlier order.Tribunal's Analysis:The Tribunal reviewed the arguments and evidence, including the deployment of funds and the assessee's business activities. It concluded that the assessee's principal business was indeed manufacturing and dealing in chemicals and drugs, not advancing loans. The Tribunal emphasized that the explanation to section 73 applies, deeming the loss from share transactions as speculative. The assessee's contention of having multiple principal businesses was found to lack merit.Conclusion:The Tribunal dismissed the appeals, confirming that the loss from the purchase and sale of shares should be treated as a speculative loss under section 73.Issue 2: Allowance of Bad Debts Claimed by the AssesseeBackground:In the Revenue's appeal (ITA No. 1289/Hyd/2011), the issue was the allowance of bad debts amounting to Rs. 15,95,43,000 and advances written off at Rs. 89,69,003, which the CIT(A) had allowed based on the Tribunal's earlier order and the Special Bench's decision in the case of Oman International Bank SAOG.Revenue's Argument:The Revenue argued that the debts did not arise from banking or money-lending business and that the write-off violated FEMA regulations, thus disqualifying them as bad debts.Assessee's Argument:The assessee claimed the bad debts were related to sales made to foreign companies and had obtained RBI approval for the write-off. The assessee cited section 36(2)(iii) of the Act, which allows deduction of debts written off as irrecoverable.Tribunal's Analysis:The Tribunal noted that a debt arising in the course of business activity could be considered a bad debt if written off in the books of account. The Tribunal referred to an RBI letter approving the reduction in invoice value, subject to conditions. The Tribunal directed the AO to re-examine the issue in light of the RBI letter and ensure the conditions were met. The assessee was instructed to provide necessary evidence.Conclusion:The Tribunal allowed the Revenue's appeal for statistical purposes, directing a fresh examination of the bad debts claim by the AO.Final Judgment:- The assessee's appeals (ITA Nos. 1384 to 1386/Hyd/2011) were dismissed.- The Revenue's appeal (ITA No. 1289/Hyd/2011) was allowed for statistical purposes, with directions for a fresh examination of the bad debts claim.