NBFC share-trading loss was not speculation loss; strict construction of Section 73 allowed set-off against business income.

A company registered with the RBI as a non-banking financial company, and whose principal business was granting loans and advances, was held outside the scope of the Explanation to Section 73 of the Income-tax Act. The share-trading loss was therefore not treated as speculation loss, because the deeming fiction in that provision had to be strictly construed on the facts found. The loss was allowed to be set off against business income, and the Revenue's reliance on other authorities was rejected as factually distinguishable.

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Issues: Whether the loss arising from purchase and sale of shares was to be treated as speculation loss under the Explanation to Section 73 of the Income-tax Act, 1961, or as business loss eligible for set-off against business income in the case of a non-banking financial company.

Analysis: The determining factor was the principal business of the assessee. The record showed that the assessee was registered with the Reserve Bank of India as a non-banking financial company, and Chapter III-B of the Reserve Bank of India Act, 1934 had overriding significance in that context. On that basis, the assessee was to be regarded as a company whose principal business was granting loans and advances. The deeming provision in the Explanation to Section 73 had to be construed strictly and, on the facts found, could not be invoked to characterise the share-trading loss as speculation loss. The authorities relied upon by the Revenue were held to be factually distinguishable.

Conclusion: The Explanation to Section 73 was not applicable, and the share-trading loss was rightly allowed to be set off against business income. The Revenue's ground failed.

Ratio Decidendi: Where a company is registered and functioning as an NBFC whose principal business is granting loans and advances, the Explanation to Section 73 does not apply to treat its share-trading loss as speculation loss; the deeming fiction must be strictly construed.

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