2010 (10) TMI 503 - AT - Income Tax

Speculation loss - the assessee in the present case is a company which is engaged in the business of trading and investment in shares - The return of income for the year under consideration was filed by it on 30.10.2001 declaring a loss of Rs. 14,22,97,586 under the head PGBP - AO held that Explanation to section 73 is a deeming provision whereby even though the business activity of trading of shares involved taking delivery of shares, the business was deemed to be a speculation business - Ground No. 1 of the assessee s appeal is accordingly dismissed According to the A.O., the loans and advances given by the assessee company for non-business purpose, interest paid on such borrowed funds to the extent utilized for non-business purpose was liable to be disallowed - Ground No. 2 of the assessee s appeal is accordingly treated as allowed Ground No. 3 relating to disallowance of assessee s claim for loss of Rs. 5,30,013 on account of shortage of shares has not been pressed by the ld. Counsel for the assessee at the time of hearing before us - Appeal of the assessee is partly allowed

Issues Involved:
1. Treatment of loss in trading of shares as speculation loss under Explanation to section 73.
2. Disallowance of interest expenditure amounting to Rs. 1,60,26,141.
3. Disallowance of claim for loss of Rs. 5,30,013 on account of shortage of shares.

Issue-wise Detailed Analysis:

1. Treatment of Loss in Trading of Shares as Speculation Loss:

The assessee, a company engaged in trading and investment in shares, filed a return declaring a significant loss under "profits and gains of business or profession." The A.O. treated the loss from share trading as speculation loss by invoking Explanation to section 73, which was consistent with the treatment in earlier years. The assessee argued that:
1. The transactions involved actual delivery of shares.
2. The principal business was granting loans and advances, making Explanation to section 73 inapplicable.
3. Explanation to section 73 applies only if the business is entirely dealing in shares.

The A.O. rejected these arguments, emphasizing that Explanation to section 73 is a deeming provision, treating the business of trading shares as speculation business regardless of actual delivery. The CIT(A) upheld the A.O.'s decision, stating that:
- Delivery of shares is irrelevant for the applicability of Explanation to section 73.
- The phrase "any part" of the business includes the entire business activity of share dealing.
- The share dealing loss exceeded other income, making the exclusion clause inapplicable.

The Tribunal agreed with the authorities, noting that the conditions for applying Explanation to section 73 were met. It cited judicial precedents, including the Calcutta High Court's decision in CIT v. Arvind Investments Ltd., which held that Explanation to section 73 introduces a legal fiction treating share trading by certain companies as speculation business for the purpose of section 73, even if actual delivery of shares occurred. The Tribunal dismissed the assessee's contention that Explanation to section 73 can only be invoked if there is a loss from speculative transactions as defined in section 43(5).

2. Disallowance of Interest Expenditure:

The A.O. disallowed Rs. 1,60,26,141 of interest expenditure, observing that the assessee's net worth was negative, indicating that loans and advances were given from borrowed funds. Specific advances to four parties were identified as non-business-related:
1. Rs. 85 lacs to M/s Puneet Infosis Pvt. Ltd.
2. Rs. 50 lacs to M/s Wockhardt Life Sciences Ltd.
3. Rs. 9,90,00,000 to M/s Puneet Advisory Services P. Ltd.
4. Rs. 40,53,750 transferred to M/s Sarkar Builders.

The CIT(A) confirmed the disallowance. However, the Tribunal noted that the advance to M/s Puneet Infosis Pvt. Ltd. was for purchasing shares, a business purpose, and directed the A.O. to allow the interest claim for this amount. For the other advances, the Tribunal remanded the issue to the A.O., instructing to provide the assessee an opportunity to establish the business expediency of these transactions.

3. Disallowance of Loss on Account of Shortage of Shares:

The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the treatment of share trading loss as speculation loss under Explanation to section 73 and remanded the issue of interest disallowance for certain advances back to the A.O. for fresh consideration. The claim for loss on account of shortage of shares was dismissed as not pressed.

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