2012 (4) TMI 207 - AT - Income Tax

Business loss - loss on sale of shares - genuine transaction or shame transaction - held that - the transactions have been undertaken in the normal course of business and since the client has refused to take delivery of the shares, the resultant loss incurred by the assessee-company for the sale of the said shares, is required to be allowed as deduction from the business income. - Speculation loss as per Explanation to section 73 - A.O. stated that assessee s business income during the year consisted of brokerage, the loss incurred in purchase and sale of the above shares should be as speculation loss - assessee contented that transaction of purchases and sale of shares resulting in loss do not pertain to the assessee but pertains to the clients and as per Section 73 of the Act it is applicable only if the transactions are pertaining to the assessee in whose case the same are intended to be applied - Held that - the assessee-company is not engaged in the business of carrying out purchase and sale of shares for its own profit or loss. The above fact is evident from the balance sheet of the company - The said loss being duly supported by documentary evidences and being genuine delivery based loss, the same cannot be treated as speculative loss.

Summary

Issues Involved:
1. Deletion of disallowance of loss claimed on account of transaction in the name of Shri Vinod H. Shah.
2. Classification of the loss as speculation loss under Explanation to Section 73 of the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Disallowance of Loss Claimed on Account of Transaction in the Name of Shri Vinod H. Shah

Facts and Findings:
The assessee-company, a sub-broker dealing in shares, claimed a deduction of loss of Rs. 9,82,980/- due to clients not taking delivery of shares. The AO disallowed the claim, stating that the transactions were not genuine and the loss was speculative.

CIT (A) Observations:
- The CIT (A) examined the evidence, including statements from clients and transaction records.
- It was clarified that the shares were sold directly through the Ahmedabad Stock Exchange, which justified the non-appearance of 1725 shares in the broker's statement.
- The CIT (A) found no ambiguity in the dates of the transactions, with Mr. Vinod H. Shah confirming the purchase enquiry on 23-2-01.
- The transactions were deemed genuine and conducted in the normal course of business, with the resultant loss allowed as a deduction from business income.

Conclusion:
The CIT (A) allowed the loss of Rs. 9,76,592/- as a business loss, based on the genuineness of the transactions and the evidence provided, while confirming a minor disallowance of Rs. 6,388/- due to lack of evidence.

2. Classification of the Loss as Speculation Loss Under Explanation to Section 73 of the Income Tax Act, 1961

Facts and Findings:
The AO classified the loss as speculation loss under Explanation to Section 73, arguing that the assessee's business income consisted of brokerage, and the loss incurred in the purchase and sale of shares should be treated as speculation loss.

CIT (A) Observations:
- The CIT (A) noted that the transactions were on behalf of clients, not the assessee itself, and were delivery-based, thus not fitting the definition of "speculative transactions" under Section 45 (3).
- The CIT (A) emphasized that the assessee's business was primarily brokerage, not dealing in shares on its own account.
- The solitary nature of the transaction and the lack of continuous exercise of such activities indicated that it was not an adventure in the nature of trade.

Conclusion:
The CIT (A) concluded that the loss incurred was a business loss and not speculative. The explanation to Section 73 was deemed inapplicable as the transactions were not part of the assessee's business of dealing in shares for profit.

Tribunal's Decision:
The Tribunal upheld the CIT (A)'s decision, confirming that the transactions were genuine and conducted on behalf of clients. The loss was allowed as a business loss, not speculative, and available for set-off against brokerage income. The appeal of the Revenue was dismissed.

Summary:
The Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s order that the loss incurred by the assessee in share transactions was a business loss and not speculative under Explanation to Section 73 of the Income Tax Act, 1961. The transactions were genuine and conducted in the normal course of business on behalf of clients.