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 ... Explanation to section 73 - speculation business - purchase and sale of shares deemed speculation - construction of 'any part' to include whole - set off and carry forward of business lossesExplanation to section 73 - purchase and sale of shares deemed speculation - construction of 'any part' to include whole - Whether the Explanation to section 73 applies where a company's entire business consists of purchase and sale of shares - HELD THAT: - The Court examined the wording of the Explanation to section 73 and contrasted it with the definition of 'speculative transaction' in section 43(5) and the scheme of chapters dealing with set off and carry forward of losses. The Explanation introduces a legal fiction applicable only to companies (excluding investment companies, banks and companies whose principal business is lending) and states that where 'any part of the business of a company' consists in purchase and sale of shares, the company shall be deemed to be carrying on speculation business to that extent. The Court applied established rules of construction showing that the word 'any' (and 'any part') may import wide generality and include the whole, citing authorities on distributive construction. The Court rejected the contention that 'any part' must be read as restricting application to companies carrying on multiple businesses; the phrase 'to the extent to which the business consists of the purchase and sale of such shares' simply indicates that only the share-dealing activity is to be treated as speculation business and does not imply that the Explanation is inapplicable where the whole business is share-dealing. The Departmental circular relied upon did not alter the plain meaning of the Explanation. Consequently, where a company's business consists of purchase and sale of shares (and it is not within the excluded categories), the Explanation applies and the share-dealing activity is to be treated as speculation business.The Explanation to section 73 applies even where the entire business of the company is purchase and sale of shares; 'any part' may include the whole and the share-dealing activity is to be treated as speculation business.Speculation business - set off and carry forward of business losses - Explanation to section 73 - Whether the loss disclosed by the assessee from share-dealings is allowable as business loss rather than being a speculation loss under the Explanation to section 73 - HELD THAT: - Sections 70-72 prescribe rules for set off and carry forward of business losses, while section 73 restricts treatment of losses from speculation business (they may be set off only against speculation profits and subject to special carry forward rules). The Explanation deems share-dealing by certain companies to be speculation business for the purposes of section 73. Applying that legal fiction to the facts as found by the Tribunal (and not impugned on perversity), the Court held that losses arising from the company's share-dealings fall within section 73 and thus qualify as speculation losses. The Tribunal's factual finding that the company's sole business was share-dealing was not challenged; accordingly the loss cannot be treated as an ordinary business loss for general set off and carry forward under sections 70-72 but must be governed by section 73.The loss from share-dealings is a speculation loss under the Explanation to section 73 and is not allowable as an ordinary business loss for general set off and carry forward purposes.Final Conclusion: Both referred questions answered against the assessee and in favour of the Revenue: the Explanation to section 73 applies to share-dealing even if the entirety of the company's business is share-dealing, and the loss disclosed from such share-dealings is a speculation loss governed by section 73. 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.