2015 (6) TMI 449 - AT - Income Tax

Loss on the sale of shares - treating as speculation loss - Held that - The undisputed facts in the case in hand is that the assessee is engaged in the business of financing and substantial income has been derived from interest. The assessee claimed loss on sale of shares of ₹ 15,50,000/-. The Assessing Officer treated the same as speculation loss and allowed it to be carried forward and to be adjusted against future speculation profit only. It is undisputed fact that the principal business of the assessee-company is granting of loans and advances and the substantial income has been derived therefrom. The R.B.I. has granted to the assessee Certificate of Registration u/s.45-IA of the Reserve Bank of India Act, 1934 to commence/carry on the business of non-banking financial institution subject to certain conditions. Under these facts, the authorities below have erred and are not justified in applying the provisions of Explanation to Section 73 of the I.T. Act, 1961. Therefore, the impugned order is hereby set aside and the Assessing Officer is directed not to treat the loss as speculation loss. - Decided in favour of assessee.

Issues:
1. Treatment of loss on sale of shares as speculative loss under Explanation to Section 73(1) of the Income Tax Act, 1961.
2. Exclusion of non-banking finance company from the purview of Explanation to Section 73.
3. Interpretation of the Explanation to Section 73 regarding companies engaged in the purchase and sale of shares.

Issue 1: Treatment of Loss on Sale of Shares as Speculative Loss
The appellant, a non-banking finance company, contested the treatment of a loss on the sale of shares as speculative loss under Explanation to Section 73(1) of the Income Tax Act. The Assessing Officer and the CIT(A) had upheld the treatment, leading to the appeal before the ITAT Ahmedabad. The ITAT analyzed the provisions of Section 73 and the Explanation, emphasizing that certain companies are excluded from the deeming provision of carrying on speculative business. The ITAT concluded that the authorities had erred in applying the provisions of Explanation to Section 73 to the appellant, whose principal business involved granting loans and advances. Consequently, the ITAT set aside the impugned order and directed the Assessing Officer not to treat the loss as speculative loss.

Issue 2: Exclusion of Non-Banking Finance Company
The appellant argued that being a non-banking finance company, it should be excluded from the purview of the Explanation to Section 73. The ITAT noted the appellant's status as a non-banking finance company engaged in financing, with substantial income derived from interest. The ITAT considered the Certificate of Registration issued by the Reserve Bank of India and held that the authorities had erred in applying the speculative loss treatment to the appellant. Consequently, the ITAT allowed the appeal, setting aside the earlier decisions.

Issue 3: Interpretation of Explanation to Section 73
The ITAT delved into the interpretation of the Explanation to Section 73 concerning companies involved in the purchase and sale of shares. The ITAT highlighted that the Explanation excludes certain companies whose gross total income consists mainly of specified sources or are engaged in banking or granting loans and advances. The ITAT scrutinized the application of the Explanation in the appellant's case and found that the authorities had misapplied the provision. By emphasizing the nature of the appellant's business and the RBI's certification, the ITAT concluded that the speculative loss treatment was unwarranted. As a result, the ITAT allowed the appeal and directed the Assessing Officer not to treat the loss as speculative.

This detailed analysis of the judgment from the ITAT Ahmedabad showcases the issues raised by the appellant, the arguments presented, and the ITAT's comprehensive examination leading to the decision in favor of the appellant.

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