2009 (5) TMI 608 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of loss on sale and purchase of shares as speculative loss.
2. Treatment of loss on devaluation of shares as notional loss.
3. Treatment of gain on disposal of Indira Vikas Patra (IVPs) as interest income instead of capital gain.

Detailed Analysis:

1. Treatment of Loss on Sale and Purchase of Shares as Speculative Loss:

The appellant contended that the loss incurred from the trading of shares should be considered as a normal business loss since the assessee was regularly engaged in the business of trading shares. The CIT(A) and the Assessing Officer treated the loss as speculative because the assessee did not receive actual delivery of the shares, and the transactions were executed through a broker. The Tribunal upheld the CIT(A)'s decision, stating that the transactions were speculative in nature as defined by the Income-tax provisions. The lack of actual delivery and the nature of the transactions supported this conclusion. Therefore, the loss incurred in such speculative transactions cannot be adjusted against the normal business profits.

2. Treatment of Loss on Devaluation of Shares as Notional Loss:

The appellant argued that the devaluation of shares held in stock should be treated as a business loss, as the shares were valued at the lower of cost or market value. The CIT(A) sustained the addition, stating that no notional loss could be allowed without actual sale. The Tribunal found that the shares held as stock-in-trade were different from those held as investments. The case was remanded to the CIT(A) for verification of whether the shares held in stock were different from those held as investments. If verified, the necessary relief would be granted.

3. Treatment of Gain on Disposal of Indira Vikas Patra (IVPs) as Interest Income:

The appellant claimed that the gain from the sale of IVPs should be treated as a capital gain since IVPs were held as investments. The CIT(A) treated the gain as interest income, following a CBDT circular that treated the difference between the issue price and redemption price of Deep Discount Bonds as interest income. The Tribunal noted that IVPs are capital assets as per section 2(14) of the Income-tax Act and that the provisions of the CBDT circular dated 15-2-2002 were not applicable retrospectively. The Tribunal held that the gain from the transfer of IVPs should be treated as capital gain and directed the lower authorities to work out the capital gain on the transfer of IVPs held as investments.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the CIT(A)'s decision on treating the loss from share trading as speculative loss. However, the issue of devaluation of shares was remanded for verification, and the gain from the sale of IVPs was directed to be treated as capital gain instead of interest income.