Share trading loss deemed speculation loss under Explanation to Section 73, even with delivery-based trades and sole activity

HC held that Explanation to s.73 of the Income-tax Act creates a legal fiction deeming the business of purchase and sale of shares by certain companies as "speculation business" for the limited purpose of s.73, irrespective of actual delivery and the definition of speculative transaction under s.43(5). The Explanation applies to companies other than investment, banking or money-lending companies and covers even cases where share trading is the sole business activity. Accordingly, the loss from share trading incurred by the assessee-company was to be treated as speculation loss, not a normal business loss, and could be set off only against speculation profits. Both questions were answered in the negative, in favour of the Revenue.

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Issues Involved:
1. Applicability of the Explanation to section 73 of the Income-tax Act, 1961.
2. Entitlement of the assessee to claim deduction of the loss under the head 'Business'.

Summary:

Issue 1: Applicability of the Explanation to section 73 of the Income-tax Act, 1961

The Tribunal had to determine whether the Explanation to section 73 applied to the assessee, whose sole business was share-dealing. The Tribunal concluded that the Explanation to section 73, which treats certain share transactions as speculative, does not apply when the entire business of the company is in share-dealing. The Tribunal found that the assessee's activity did not constitute a money-lending business but was merely a temporary investment of surplus funds. The High Court, however, disagreed with the Tribunal's interpretation, stating that the phrase "any part of the business" includes the whole business. Thus, if the entire business activity of a company consists of purchase and sale of shares, the Explanation to section 73 applies, treating the business as speculative.

Issue 2: Entitlement of the assessee to claim deduction of the loss under the head 'Business'

The Tribunal had allowed the assessee to claim a deduction of the loss of Rs. 1,56,087 under the head 'Business', vacating the finding that the loss was speculative. The High Court noted that the Tribunal's finding that the assessee was not engaged in money-lending business was not challenged. However, the High Court emphasized that the Explanation to section 73 introduces a legal fiction that applies to companies whose business consists of the purchase and sale of shares, treating such business as speculative. Therefore, the loss from share-dealing should be treated as speculation loss and not as a business loss.

Conclusion:

Both questions were answered in the negative and in favor of the Revenue. The High Court held that the Explanation to section 73 applies to a company whose entire business activity consists of purchase and sale of shares, treating such business as speculative. Consequently, the assessee's claim for deduction of the loss under the head 'Business' was not allowed. There was no order as to costs.

Separate Judgment:

BHAGABATI PRASAD BANERJEE J. agreed with the judgment.

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