2005 (10) TMI 435 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of share trading loss as speculation loss under section 73.
2. Disallowance of compensation payment claimed in the assessment year 1996-97.

Issue-wise Detailed Analysis:

1. Confirmation of Share Trading Loss as Speculation Loss:

The assessee objected to the confirmation of a share trading loss of Rs. 10,61,038 as speculation loss, arguing that section 73 was not applicable. The Assessing Officer (AO) had treated the loss as speculation loss under the Explanation to section 73, which was upheld by the CIT(A). The Tribunal noted that the assessee-company was primarily an investment company with significant investments in shares, as evidenced by its balance sheet and profit & loss accounts from previous years. The Tribunal observed that the assessee had consistently shown purchases of shares under 'investment' and not as stock-in-trade, and the AO had accepted this treatment in previous and subsequent assessments. The Tribunal concluded that the Explanation to section 73, which applies to companies engaged in trading shares, was not applicable to the assessee as it was an investment company. Consequently, the Tribunal directed the AO to accept the assessee's claim of the loss as a business loss and not a speculation loss.

2. Disallowance of Compensation Payment:

The assessee also objected to the disallowance of a compensation payment of Rs. 1,10,87,000 claimed in the assessment year 1996-97, which the AO and CIT(A) held pertained to the assessment year 1995-96. The Tribunal found that the compensation payment was related to the cancellation of a Memorandum of Understanding (MOU) for the sale of office premises and was inextricably linked to the sale of two flats, the profits from which were taxed in the assessment year 1996-97. The Tribunal noted that the compensation payment and the sale of flats were part of an integrated arrangement and could not be separated. The Tribunal also found that the compensation payment was a business loss, as the office premises were business assets, and the flats were held as stock-in-trade. The Tribunal further noted that the AO had not provided the assessee with an opportunity to cross-examine the party who allegedly denied the transaction, which violated principles of natural justice. Consequently, the Tribunal directed the AO to allow the compensation payment as a business loss in the assessment year 1996-97.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal, holding that the share trading loss should be treated as a business loss and not a speculation loss under section 73, and that the compensation payment of Rs. 1,10,87,000 should be allowed as a business loss in the assessment year 1996-97.