2006 (2) TMI 498 - AT - Income Tax

Summary

Issues Involved:

1. Allowability of finance charges amounting to Rs. 31,75,440 and assessment as loss from speculation transactions.
2. Computation of income under the head "Capital gains" from the purchase and sale of bonds.
3. Computation of interest income exempt under section 10(15)(iv)(h) of the Income-tax Act.

Detailed Analysis:

1. Allowability of Finance Charges and Speculation Loss:

1.1 The first issue in the assessee's appeal concerns the allowability of finance charges amounting to Rs. 31,75,440 and their assessment as loss from speculation transactions. The Assessing Officer (AO) observed that the assessee-company was engaged in both speculative and non-speculative trading in shares and securities. The finance charges represented the loss arising from three sets of sale-purchase transactions of bonds.

1.2 The AO asked the assessee to show cause why these finance charges should not be treated as speculation loss. The assessee contended that the amount was paid to a stock broker as finance charges for raising funds to pay for its purchase and sale of shares. The transactions were claimed to be ready forward transactions, settled by paying the finance charges, and not speculative in nature. The AO rejected this contention, stating that the bonds were not delivered on the date of sale and the transactions were settled otherwise than by actual delivery, thus falling under the definition of speculative transactions as per section 43(5) of the Income-tax Act.

2. In appeal, the assessee submitted evidence to the CIT(A) showing that the bonds were delivered on the date of purchase and remained with the broker until repurchased. The CIT(A) rejected the assessee's contention and held that the speculation loss was Rs. 36,60,660, not Rs. 31,75,440 as held by the AO. The CIT(A) directed the AO to recompute the speculation loss and include the business profit from the sale of bonds in the assessed income.

3. Before the Tribunal, the assessee reiterated that the transactions were for payment of finance charges and not speculative. The Tribunal analyzed the facts and legal background, referring to section 43(5) and various case laws. It concluded that the transactions were not speculative as they were ultimately settled by delivery. The Tribunal directed the AO to allow the finance charges amounting to Rs. 31,75,440 and set aside the CIT(A)'s conclusion of a higher speculation loss.

2. Computation of Income under "Capital Gains":

4. The next issue is the computation of income under "Capital gains" from the purchase and sale of bonds. The AO adopted the cost of acquisition of the bonds at Rs. 6,13,20,000, excluding broken period interest, and computed capital gains of Rs. 18,84,000 instead of a loss of Rs. 1,28,074 as claimed by the assessee. The assessee relied on the Supreme Court decision in Vijaya Bank Ltd. v. Addl. CIT, arguing that the entire price paid for the securities was capital outlay.

5. The CIT(A) held that the total amount paid for the bonds should be considered capital payment, irrespective of how the transaction was represented. The CIT(A) upheld the AO's computation but noted that the assessee had earned interest of Rs. 27 lakhs from the bonds, compensating for the claimed loss. The Tribunal upheld the CIT(A)'s decision, agreeing that the loss should be ignored as it was compensated by the interest received.

3. Computation of Interest Income Exempt under Section 10(15)(iv)(h):

6. The final issue is the computation of interest income exempt under section 10(15)(iv)(h). The AO computed the exempt interest income at Rs. 6,87,946 after deducting broken period interest paid on purchase of bonds. The CIT(A) observed that, based on the Supreme Court decision in Vijaya Bank Ltd., the interest income should be computed at Rs. 25,71,926 after adjusting Rs. 1,28,074 towards the loss from the sale of bonds. The Tribunal upheld the CIT(A)'s computation of interest income.

Conclusion:

The Tribunal directed the AO to allow the finance charges as revenue expenditure, upheld the CIT(A)'s computation of capital gains, and agreed with the CIT(A)'s computation of exempt interest income. Both cross-appeals were disposed of accordingly.