2011 (1) TMI 913 - AT - Income Tax

Speculation loss - Loss from the purchase and sales of shares - Loss from the valuation of the closing stock - Since there are large number of transactions of purchase and sale of shares during the year under consideration - Therefore, there is no dispute that explanation to section 73 is applicable - Only question is with regard to determination of loss from the business of purchase and sale of shares - while determining loss from share trading business, loss from valuation of closing stock cannot be excluded - Valuation of closing stock is integral part of preparation of treading account - Hence, reject the assessee s appeal. Disallowing - Interest expenditure - the assessee itself while computing the income has disallowed the sum of ₹ 14 lakhs out of the interest. The Assessing Officer has worked out disallowance of ₹ 14,28,000 - It is stated by the learned counsel that though the difference in disallowance is negligible, however, the assessee is pressing the ground because the assessee is working out the disallowance in the same manner every year and it is also being accepted by the revenue - Thus, the assessee gets relief of ₹ 28,000. Speculation gain - Long term capital gain on sale of shares -the assessee is a company, but in respect of sale of shares, which were held as investment, it cannot be said that it was part of the business of purchase and sale of shares -Hence, allow the assessee s appeal. Speculation business expenditure - Share transfer - the assessee fairly admittedly that these expenditure were relating to share trading business, therefore, the above expenditure will only increase the speculation loss - Therefore direct the Assessing Officer to increase the speculation loss - The assessee s appeal is rejected.

Issues Involved:
1. Framing of assessment order without show cause notice.
2. Treatment of business loss on shares as speculation loss.
3. Disallowance of interest expenditure.
4. Treatment of long-term capital gain on sale of shares as speculation gain.
5. Treatment of business expenditure on share transfer fees as speculation business expenditure.
6. Charging of interest under sections 234A, 234B, and 234C.
7. Withdrawal of interest under section 244A.

Issue-wise Detailed Analysis:

1. Framing of Assessment Order Without Show Cause Notice:
The appellant contended that the assessment order was framed without issuing any show cause notice and without affording any opportunity of hearing, violating the principles of natural justice. This ground was not pressed by the learned counsel for the assessee at the time of hearing and was accordingly rejected.

2. Treatment of Business Loss on Shares as Speculation Loss:
The appellant argued that the loss from the valuation of closing stock should not be considered speculation loss under the Explanation to section 73 of the Income-tax Act, 1961. The appellant cited several decisions to support this contention. The respondent countered that the entire loss from the business of purchase and sale of shares should be disallowed as per the Explanation to section 73. The tribunal held that the loss from the valuation of closing stock is an integral part of the trading account and cannot be treated separately from the trading business of purchase and sale of shares. The tribunal rejected this ground of the assessee's appeal.

3. Disallowance of Interest Expenditure:
The appellant argued that the entire interest expenditure should be allowed, contending that the disallowance of Rs. 14,28,208 was not justified. The tribunal noted that the assessee itself had disallowed Rs. 14 lakhs out of the interest while computing the income and followed a consistent method accepted by the revenue in past years. The tribunal directed the Assessing Officer to disallow Rs. 14 lakhs out of the interest, granting the assessee relief of Rs. 28,000.

4. Treatment of Long-term Capital Gain on Sale of Shares as Speculation Gain:
The appellant contended that the long-term capital gain on the sale of shares held as investment should not be treated as speculation gain under the Explanation to section 73. The tribunal held that the Explanation to section 73 applies only to losses and not to gains. Since the shares were held as investments and not as stock-in-trade, the tribunal concluded that the capital gain arising from the sale of shares held as investment cannot be considered speculation gain. This ground of the assessee's appeal was allowed.

5. Treatment of Business Expenditure on Share Transfer Fees as Speculation Business Expenditure:
The appellant admitted that the expenditure on share transfer fees related to share trading business, which would only increase the speculation loss. The tribunal directed the Assessing Officer to increase the speculation loss by Rs. 31,088, rejecting this ground of the assessee's appeal.

6. Charging of Interest Under Sections 234A, 234B, and 234C:
This ground was deemed consequential in nature. The tribunal directed the Assessing Officer to re-compute the interest after determining the income as per the tribunal's order.

7. Withdrawal of Interest Under Section 244A:
No arguments were advanced regarding this ground at the time of hearing, and it was treated as not pressed.

Conclusion:
The assessee's appeal was partly allowed, with specific directions provided for each issue.

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