Speculation loss under Explanation to Section 73(1) not attracted where shares arise on conversion/allotment, permitting set off against other income.

The note analyses whether a loss on sale of shares allotted on conversion of partly convertible debentures qualifies as a speculation loss under the Explanation to Section 73(1) of the Income tax Act. It applies the principle that shares created by allotment or conversion are not 'purchased' for the purpose of the deeming clause, distinguishing creation/allotment from transfer or acquisition from third parties. Applying that reasoning, the loss is not within the scope of the speculation deeming provision and therefore may be set off against the assessee's other income.

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Issues: Whether the loss of Rs. 37,47,304/- arising on sale of shares allotted on conversion of partly convertible debentures is a speculation loss under the Explanation to Section 73(1) of the Income-tax Act, 1961 and therefore not allowable to be set off against other income.

Analysis: The Explanation to Section 73(1) deems a company to be carrying on a speculation business to the extent any part of its business consists in the purchase and sale of shares of other companies, subject to specified exceptions. The factual matrix shows the shares were allotted to the assessee on conversion of partly convertible debentures by creation from the issuing company's capital rather than by purchase or transfer from third parties. Prior Gujarat High Court authority reversing the Tribunal's reliance on AMP Spinning and Weaving Mills (Special Bench) holds that allotment or creation of shares on application/allotment does not amount to purchase for the purposes of the deeming provision, distinguishing creation from transfer; that reasoning applies where shares come into existence on allotment or conversion and are not acquired by purchase. Applying that principle, the transaction in issue cannot be treated as purchase and sale of shares within the meaning of the Explanation to Section 73(1).

Conclusion: The loss of Rs. 37,47,304/- is not a speculation loss under the Explanation to Section 73(1) of the Income-tax Act, 1961 and therefore may be set off against the assessee's other income; decision is in favour of the assessee and against the revenue.

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