2010 (10) TMI 222 - HC - Income Tax

Set off and carry forward of speculation loss - Held that the assessee admittedly is a company and does not fall within the excepted category of the companies as mentioned in the said explanation. Therefore, the benefit of setting off and also carry forward of losses in speculation business as mentioned in sub-section 1 and sub-section 2 of the section 73 is permissible in respect of other companies which are not excepted companies as against the other head of speculation. - In other words by virtue of the legal fiction mentioned in explanation the appellant company will not be entitled to benefit of setting off or carry forward except as against the other speculation business. Manipulation of business income - The departmental Circular cannot be always a guide for interpretation and it can be guide when there is an ambiguity and if the Court without any difficulty come to a conclusion that the provision of the Statute is workable and can be applied the Court need not look into any material - it is settled position of the law the interpretation of the fiscal statute should be literal and no liberal nor hypothetical interpretation is permissible - Decided against the assessee

Issues Involved:
1. Interpretation of the Explanation to Section 73 of the Income Tax Act.
2. Applicability of Section 43(5) in defining speculative transactions.
3. Treatment of loss arising from the decrease in the value of shares held as stock in trade under Explanation to Section 73.

Issue-wise Detailed Analysis:

1. Interpretation of the Explanation to Section 73 of the Income Tax Act:

The core question was whether the statutory fiction introduced by the Explanation to Section 73, which treats losses from the business of purchasing and selling shares as speculation losses, is confined only to Section 73 or can be extended to other provisions of the Act. The court held that the statutory fiction created by the Explanation to Section 73 is limited to its purpose and should not be extended beyond its intended scope. The Explanation aims to curb manipulation by treating certain share transactions as speculative for tax purposes, even if they involve actual delivery. The court emphasized that the Explanation should be interpreted in light of its objective to prevent tax evasion through artificial loss creation.

2. Applicability of Section 43(5) in defining speculative transactions:

The court examined whether transactions involving the physical delivery of shares fall under the definition of speculative transactions as per Section 43(5). It was argued that since the transactions were executed with actual delivery, they should not be considered speculative. However, the court clarified that for companies not excluded by the Explanation to Section 73, such transactions are deemed speculative regardless of actual delivery. The court reiterated that the Explanation to Section 73 creates a legal fiction specifically for companies, thereby overriding the general definition of speculative transactions in Section 43(5).

3. Treatment of loss arising from the decrease in the value of shares held as stock in trade under Explanation to Section 73:

The court addressed whether the loss from the decrease in the value of shares held as stock in trade should be treated as a speculation loss. It was concluded that for companies falling within the scope of the Explanation to Section 73, such losses are indeed treated as speculation losses. This treatment is consistent with the Explanation's objective to prevent manipulation of taxable income through share transactions. The court dismissed the argument that the Explanation should not apply to transactions involving actual delivery, affirming that the statutory fiction applies to all relevant transactions for the specified companies.

Conclusion:

The court upheld the decisions of the revenue authorities and the Tribunal, confirming that the losses from share transactions by the assessee company were to be treated as speculation losses under the Explanation to Section 73. The appeal was dismissed, and the court emphasized that the statutory provisions should be interpreted literally, without extending the legal fiction beyond its intended purpose. The court also noted that departmental circulars cannot override clear statutory provisions.

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