2013 (7) TMI 334 - HC - Income Tax

Losses from company share trades are speculative under s.73(4); limited s.43(5) definition doesn't allow carry forward

HC held that losses from derivative transactions cannot be carried forward as non-speculative; the Explanation to s.73(4) treats share purchase/sale by a ... Eligibility for carry forward of losses from derivative transactions - Speculative transactions - Applicability of Explanation to Section 73 - Held that:- In terms of the Explanation to Section 73 (4) in the case of a company, business of purchase and sale of shares is deemed to be speculation business - Assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43(5); yet the definition – to the extent it excludes such transactions from the mischief of the expression “speculative transactions” is confined in its application cannot be overlooked. Since the expression “derivatives” is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute - Stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Tribunal erred in law in holding that the assessee was entitled to carry forward its losses - Following decisions of The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr. [1960 (5) TMI 25 - SUPREME COURT] and Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd.[2008 (10) TMI 594 - MADRAS HIGH COURT] - Decided in favour of the revenue. Issues: Whether the Explanation to Section 73 of the Income-tax Act, 1961 applies to the assessee's losses on derivative transactions such that those losses are to be treated as speculative losses and therefore not entitled to carry forward under Section 73.Analysis: Section 73 disallows carry forward of losses computed in respect of speculation business and its Explanation treats purchase and sale of shares by a company (subject to specified exclusions) as speculation business to the extent of such activity. Section 43(5) contains a definition of 'speculative transaction' for the limited purpose of Sections 28 to 41 and, by amendment, excludes certain categories of derivative trades (including eligible transactions on recognised stock exchanges) from being treated as speculative transactions for that confined purpose. The conflict between the limited definitional exclusion in Section 43(5) and the wider deeming provision in the Explanation to Section 73 requires contextual construction of statutory definitions. Where the underlying assets of the derivative transactions are stocks and shares that are captured by the Explanation to Section 73, the limited exclusion in Section 43(5) (which operates only for computation provisions in Sections 2841) does not override the deeming provision of Section 73 for purposes of carry forward of losses. The consequence is that derivatives based on shares fall within the mischief of the Explanation to Section 73 and are to be treated as speculation business to the extent indicated therein.Conclusion: The Explanation to Section 73 applies to the losses on the derivative transactions in question; those losses are to be treated as speculative losses and are not entitled to carry forward under Section 73. This conclusion is in favour of Revenue and against the assessee.