1990 (3) TMI 5 - HC - Income Tax

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 ... Disallowance of the loss and treated the same as a loss incurred in speculation business on the basis of the amendment by way of Explanation to section 73 of the Income-tax Act, 1961 - Entitlement to claim deduction of the loss under the head 'Business' - speculation loss - HELD THAT:- The question raised by the Tribunal cannot be answered without referring to the actual wording employed in the Explanation to section 73 of the Income-tax Act. The provisions of the Explanation to section 73 have to be contrasted with the provisions of section 43(5), which defines 'speculative transaction' to mean a transaction in which a contract for the purchase or sale of any commodity, including any stock and share, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Explanation to section 73 treats any purchase and/or sale of shares by certain companies to be speculative for the purpose of section 73 only. For the purpose of setting off and carrying forward of loss, buying and selling of shares of certain companies are regarded by the statute as speculation business, even though the transaction of purchase and sale was followed by delivery of scrips and as such cannot be treated as 'speculative transaction' as defined in section 43(5) of the Income-tax Act. The Explanation to section 73 introduces a legal fiction. The section applies only to a company. It does not apply to individuals, firms, Hindu undivided families or associations of persons. The Explanation also does not apply to an investment company or a company whose principal business is banking or money-lending. If the business of a company which does not fall within the excluded categories consists of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business for the purpose of section 73 to the extent to which the business consists of the purchase and sale of such shares. The phrase 'to the extent to which the business consisted of purchase and sale of such shares' also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not be treated as speculation business. The object as stated in the circular is to curb the device to manipulate and reduce the taxable income of a company under the management of a controlling group of persons. Therefore, the circular does not leave any room for doubt that the Explanation will apply to the business of purchase and sale of shares of certain companies. Nowhere in the circular has any indication been given that where the only business of a company consists of purchase and sale of shares, the Explanation will not apply. Both the questions are answered in the negative and in favour of the Revenue. 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, 1961The 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.