2016 (5) TMI 219 - AT - Income Tax

Appellate Tribunal rules on Income Tax Act appeal, key focus on speculative loss disallowance

Paradise Merchants Pvt. Ltd. Versus ITO, Wad 14 (1), New Delhi

The Appellate Tribunal partially allowed the appeal filed by the assessee, primarily focusing on the disallowance of speculative loss under section 73 of ... Disallowance of speculative loss invoking the provisions of section 73 - Held that:- In case of a company whose gross total income consists mainly of income from interest on securities, income from house property, capital gains and income from other sources, the loss from purchase and sale of shares of other companies, shall not be deemed to be carrying on a speculation business. In other words if the gross total income of the assessee comprises of any or all the heads of income, then the assessee will fall within the exception carved out in the explanation to section 73 and it could not be deemed to be carrying on a speculative business for the purposes of section 73 (1) of the act. It is an admitted fact that the assessee is having income from interest, dividend income and income from capital gains from sale of long-term investment. Applying the law to the facts of the present case before us, the assessee’s case falls within the purview of exception carved out in the explanation to section 73 of the act and consequently the assessee shall not be deemed to be carrying on with the speculative business for the purposes of section 73 (1) of the act. - Decided in favour of assessee Issues:1. Disallowance of speculative loss under section 73 of the Income Tax Act.2. Treatment of brokerage income in relation to purchase/sale of shares.3. Consideration of loss in derivative transactions.4. Valuation of shares on the closing date.5. Disallowance under section 14A of the Act.Issue 1: Disallowance of Speculative Loss under Section 73:The Appellate Tribunal addressed the disallowance of a claimed loss as speculative under section 73 of the Income Tax Act. The Assessing Officer disallowed the loss based on the explanation to section 73(1), treating the main business of the assessee as share sub-brokerage and electricity generation. The Tribunal analyzed the provisions of the Act and the nature of the assessee's income, which mainly comprised income from interest, dividends, and capital gains from long-term investments. The Tribunal concluded that the assessee did not fall under the category of carrying on speculative business as per the explanation to section 73, based on the gross total income components. Several judgments were cited to support this interpretation, leading to the allowance of this ground of appeal.Issue 2: Treatment of Brokerage Income:The Tribunal considered the nature of brokerage income in relation to the purchase/sale of shares. The assessee argued that brokerage income should be set off against the loss incurred in share transactions. However, the Tribunal focused on the specific components of the gross total income and the provisions of the Act to determine the treatment of brokerage income. Ultimately, the Tribunal's decision on the disallowance of speculative loss impacted the consideration of brokerage income in the overall assessment.Issue 3: Consideration of Loss in Derivative Transactions:The Tribunal examined a specific portion of the total loss claimed by the assessee, which pertained to derivative transactions. The assessee contended that this loss should not be considered speculative under a particular provision of the Act. However, the Tribunal's analysis of the relevant law and the nature of the loss led to a determination that this specific loss was not to be treated as speculative, aligning with the assessee's argument.Issue 4: Valuation of Shares on Closing Date:A portion of the total loss claimed by the assessee was attributed to the valuation of shares on the closing date of the year. The Tribunal reviewed this aspect of the case within the broader context of the disallowance of speculative loss and other income components. While acknowledging the valuation impact on the total loss, the Tribunal's decision on the primary issue influenced the assessment of this specific aspect.Issue 5: Disallowance under Section 14A of the Act:The Tribunal briefly addressed a disallowance under section 14A of the Act, where the amount in question was not pressed by the appellant due to its smallness. Consequently, this issue was dismissed without detailed adjudication, considering the minimal financial significance involved.In conclusion, the Appellate Tribunal partially allowed the appeal filed by the assessee, primarily focusing on the disallowance of speculative loss under section 73 of the Income Tax Act. The detailed analysis of various income components, legal provisions, and relevant judgments formed the basis for the Tribunal's decision, impacting the treatment of brokerage income, derivative transactions, and the valuation of shares within the overall assessment.