2012 (6) TMI 715 - HC - Income Tax

Set off of loss incurred on purchase and sale of shares as Ordinary Business Loss or Speculation Loss - assessee contended non-application of Explanation to Section 73 on ground that only income which is included in gross total income is dividend income, i.e. Income from other sources - Held that - Section 73 would not apply in view of the fact that the explanation thereto, does not operate in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of interest on securities , income from housing property , capital gains and income from other sources . In present case, in the relevant year, the income from other sources was the only chargeable income, as the respondent had suffered a business loss otherwise, hence, assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1) - Decided in favor of assessee.

Summary

Issues:
- Interpretation of section 73 of the Income Tax Act regarding trading loss classification
- Application of deeming provision in section 73 to determine speculation loss
- Consideration of gross total income mainly from specific sources for section 73 exception

Interpretation of Section 73:
The case involved an appeal under section 260-A of the Income Tax Act against the ITAT's order partly allowing the respondent's appeal regarding the classification of trading loss. The appellant raised a question of law concerning the classification of a trading loss as Ordinary Business Loss instead of Speculation Loss. The judgment highlighted the conflicting decisions of different ITAT benches and the relevance of the Explanation to Sec. 73. However, the court found that the matter was already covered in favor of the respondent by a Division Bench judgment in another case.

Application of Deeming Provision in Section 73:
The respondent had filed a return for the assessment year, initially declaring a total loss and later revising it. The AO's assessment order recorded the gross total income and composition of the loss. The respondent appealed against this order, arguing that the explanation to Sec. 73 is a deeming provision that should be strictly construed. The CIT partly allowed the appeal, leading to the respondent filing another appeal. The ITAT partly allowed this appeal based on the judgment in Aman Portfolio Pvt. Ltd. v. D.C.I.T., stating that Sec. 73 could not be invoked against the respondent due to the nature of the transactions not being related to controlling group companies.

Consideration of Gross Total Income for Section 73 Exception:
The court analyzed the application of Sec. 73 in the present case, concluding that the explanation does not operate for companies whose gross total income mainly consists of specific sources like interest on securities, income from housing property, capital gains, and income from other sources. Referring to a previous judgment, the court emphasized that the gross total income computation should include all relevant sources, and losses from one source can be set off against income from another source under the same head. The court highlighted the deeming fiction introduced by the explanation and the exception carved out for specific income sources. Ultimately, the court dismissed the appeal, aligning with the respondent's case based on the exception in the explanation to Sec. 73.

In conclusion, the judgment provided a detailed analysis of the interpretation and application of section 73 of the Income Tax Act in the context of trading loss classification and the deeming provision for speculation loss. It emphasized the importance of considering the gross total income composition for determining the applicability of the exception under section 73.