2016 (6) TMI 1123 - HC - Income Tax

Treatment to business loss suffered as speculation loss - application of provisions of Explanation to Section 73 of the Act - Held that - Taking into account the facts on record and the question which have been posed for consideration of this Court as to whether the business loss suffered by the appellant is to be treated as speculation loss by applying the provisions of Explanation to Section 73 of the Act and will govern under Section 73 or Section 43 (5) of the Income Tax Act, this Court has considered the various decisions of different High Courts cited by the learned Counsel for the revenue. In this regard, the decision in case of R.P.G. Industries Ltd. (2011 (3) TMI 656 - CALCUTTA HIGH COURT ) is relevant and has rightly been relied upon by the learned Counsel for the revenue. This Court is of the opinion that the explanation to Section 73 will have a bearing on the issue since the company is dealing with the purchase and sale of the shares and even considering the loss on different valuation of the shares, it will govern under the definition of the speculation loss, as also the assessee is doing the trading of the shares, which has been rightly held by the A.O. and confirmed by the Tribunal and it cannot get settle as business income with the other trading. Thus, this Court is in agreement with the view taken in the case of R.P.G Industries Ltd., (supra) that the loss suffered by a company in share transactions is to be treated as a speculative loss within the meaning of Section 73 of the Act. On consideration of the entire materials on record including the decision cited, as well as, order passed by the AO and the Tribunal, we hold that the learned Tribunal took the correct view of the law and we accordingly answer the question formulated in this appeal in favour of the Department and against the assessee.

Summary

Issues Involved:
1. Whether the Income Tax Tribunal was right in law in treating the business loss suffered by the appellant as speculation loss by applying the provisions of Explanation to Section 73 of the Act.
2. Whether the Income Tax Tribunal was right in law in holding that even valuation loss can be treated as speculation loss within the meaning of provisions of Explanation to Section 73 of the Act.

Issue-wise Detailed Analysis:

1. Treatment of Business Loss as Speculation Loss:

The appellant contended that the loss from share transactions should be classified as business loss, not speculation loss. The appellant emphasized that the opening stock of shares was nil, and the profit and loss account reflected the transactions accurately. The appellant relied on the decision in *Commissioner of Income-tax v. Darshan Securities (P.) Ltd.*, arguing that the provisions of Explanation to Section 73 should not apply to their share transactions. The appellant further argued that the Tribunal misinterpreted the provision of Explanation to Section 73, citing the Bombay High Court's interpretation which mandates a computation of gross total income to determine if the explanation applies.

Conversely, the revenue argued that the transactions fall under Explanation to Section 73, deeming them speculative. The revenue cited multiple judgments, including *Prasad Agents (P) Ltd. v. Income Tax Officer*, *Commissioner of Income Tax v. Lokmat Newspapers P. Ltd.*, and *R.P.G. Industries Ltd. v. Commissioner of Income Tax & Anr.*, to support their stance that losses from share transactions should be classified as speculative losses. The revenue emphasized that even if the transactions involved actual delivery of shares, the Explanation to Section 73 creates a deeming fiction that treats such transactions as speculative for the purpose of Section 73.

2. Valuation Loss as Speculation Loss:

The appellant argued that the valuation loss should not be treated as speculation loss. They cited the Bombay High Court's decision in *Darshan Securities (P.) Ltd.*, which stated that the explanation to Section 73 should not reverse the application order of Section 73(1). The appellant maintained that the gross income should be considered, aligning with the aforementioned decision, and thus, the valuation loss should be treated as business loss.

The revenue countered that the valuation loss is speculative, referencing *Prasad Agents (P) Ltd.*, which held that losses from the book value of shares should be considered for speculative business. They also cited *Commissioner of Income Tax v. Lokmat Newspapers P. Ltd.*, which emphasized that the explanation to Section 73 applies to both profit and loss arising from share transactions, regardless of actual delivery. The revenue argued that the Tribunal correctly classified the valuation loss as speculative, aligning with the legislative intent of Section 73.

Judgment:

The High Court upheld the Tribunal's decision, agreeing with the revenue's interpretation. The Court emphasized that the Explanation to Section 73 creates a deeming fiction, treating share transactions as speculative for the purpose of Section 73, even if they involve actual delivery. The Court referenced *R.P.G. Industries Ltd.*, stating that the legislative intent is to classify losses from share transactions as speculative for companies engaged in such activities. The Court concluded that the Tribunal correctly treated the business loss and valuation loss as speculation loss, answering the questions in favor of the revenue and dismissing the appeal.

Conclusion:

The judgment affirmed that losses from share transactions, including valuation losses, should be treated as speculation losses under the Explanation to Section 73 of the Income Tax Act, aligning with the legislative intent and judicial precedents. The appeal was dismissed, with no order as to costs.