2003 (1) TMI 69 - HC - Income Tax

Whether Tribunal was justified in directing the Assessing Officer to compute the total income of the assessee without applying the provisions of Explanation to section 73 when the loss in share trading exceeded the income from other sources and the loss was a loss from speculative business contrary to the finding of the Income-tax Appellate Tribunal that the loss is not a speculative loss ? - in our view, both the Commissioner (Appeals) and the learned Tribunal proceeded on an erroneous view of the proposition of law in respect of section 73 which in sub-section (1) makes it clear that speculation loss cannot be set off except against a speculative profit permissible of being carried forward for being set off in the subsequent years stretching to a period of eight years and not otherwise, unless the test of the Explanation is satisfied, which, in our opinion, is not being satisfied in the present case. - Therefore, the reference is answered in the negative, in favour of the Department.

Summary

Issues:
Whether the Income-tax Appellate Tribunal was justified in directing the Assessing Officer to compute the total income without applying the provisions of Explanation to section 73 when the loss in share trading exceeded income from other sources, and the loss was from speculative business contrary to the Tribunal's finding that it was not speculative.

Analysis:
The Assessing Officer disallowed the benefit of Explanation to section 73 to the assessee for the assessment year 1989-90, stating that share dealing was speculative business under section 73(1) of the Income-tax Act, 1961. However, the Commissioner (Appeals) and the Tribunal reversed this decision, allowing the benefit of the Explanation to section 73 based on the assessee's main income sources being interest on securities and income from house properties, which exceeded income from other sources. The Tribunal permitted setting off the business loss without treating it as a speculative loss after considering the income figures provided in the order.

The Tribunal's decision to allow the benefit of the Explanation to section 73 was based on the concept that an assessee must meet specific criteria before being entitled to such benefit. The provision restricts speculation loss adjustment with speculation profit only, and the gross total income must primarily consist of income chargeable under specified heads for such adjustment to be permissible. Loss is considered negative profit, and the gross total income is calculated before deductions under Chapter VI-A are made. Previous court decisions have clarified that losses are included in the definitions of income, profits, and gains.

In this case, the share dealing loss was treated as negative profit, leading to the conclusion that the main income source was the share trading business. The business income computed after setting off the share trading loss did not represent actual business income as it was determined after applying the benefit of the Explanation to section 73. The judgment highlights that section 73(1) specifies that speculation loss can only be set off against speculative profit carry-forwardable for up to eight years unless the criteria of the Explanation are met, which was deemed unsatisfied in this instance.

Therefore, the judgment answered the reference in the negative, favoring the Department, with no costs awarded. All parties were instructed to act on a signed copy of the order, and the concurring judge agreed with the decision.