2016 (1) TMI 991 - AT - Income Tax

Disallowance of loss from purchase and sale of shares - CIT(A) treating it as speculation loss as assessed by Assessing Officer and not covering the case of the applicant within the Explanation to the provisions of section 73 - Held that - From going through the main objects of the company we find that assessee s main business is of dealing in shares, stocks, bonds etc. whereas under head of objects incidental or ancillary to the main object there are 41 types of activities and similarly under the head of other objects there are 43 types of activities which can be carried on by the assessee. The second condition of the explanation to section 73 refers to the principal business which is carried on by the assessee and in the case under appeal the principal business of the assessee is of purchase and sale of shares and the business of earning interest on loans and advances is covered under the ancillary and other objects and more so ever in the computation of income assessee is showing the interest income under the head income from other sources and not under the head income from business or profession because assessee is not running a non-banking financial company (NBFC) nor its main object was of finance and earning of income from giving loans else interest income from such loans and advances should have figured under the head profits and gains of business. Therefore, assessee s business does not fulfill the condition no.2 of explanation to sec.73 of the Act. Further there has been an amendment made by Finance Act, 2015 w.e.f. 1.4.2015 where at the place of principal business fo which is banking has been substituted by principal business of which the business is of trading in shares or banking . This amendment itself conveys that business of trading in shares was not included in the explanation to sec.73 of the Act and assessee s business is mainly of trading in shares as reflected from the main objects of the Memorandum of association and the audited financial statements. We are, therefore, of the view that assessee s business is not covered under the explanation to section 73 of the Act and we find no reason to interfere with the order of ld. CIT(A) and we uphold the same. - Decided against assessee

Summary

Issues Involved:

1. Whether the disallowance of Rs. 14,93,823/- as speculation loss by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] was lawful.
2. Whether the assessee's case falls under the exceptions provided in the Explanation to Section 73 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 14,93,823/- as Speculation Loss:

The primary issue revolves around the disallowance of Rs. 14,93,823/- as a speculation loss by the AO, which was subsequently upheld by the CIT(A). The AO treated the loss on trading of shares as speculation loss, which could only be set off against speculation income, based on the observation that the assessee did not fall under the exceptions provided in the Explanation to Section 73 of the Income-tax Act, 1961.

The assessee, a private limited company, filed its return of income for the Assessment Year (AY) 2009-10, declaring a loss of Rs. 8,80,969/-. During the assessment proceedings, the AO noticed that the assessee had shown a loss on trading of shares amounting to Rs. 14,93,823/-, income from brokerage at Rs. 1,77,164/-, and interest on loans and advances at Rs. 9,53,119/-. The AO framed the assessment order by treating the loss on trading of shares as speculation loss, which could only be set off against speculation income, as per the provisions of Section 73 of the Act.

2. Applicability of Explanation to Section 73:

The CIT(A) upheld the AO's decision, noting that the assessee's case did not fall within the exceptions provided in the Explanation to Section 73. The CIT(A) observed that the principal business of the assessee was not the granting of loans and advances but dealing in shares, stocks, bonds, etc., as per the Memorandum of Association and Articles of Association. The CIT(A) further noted that the sales turnover of shares was significantly higher than the turnover of loans and advances, indicating that the principal activity was trading in shares.

The CIT(A) also considered various judgments cited by the assessee but found them inapplicable due to differing facts. The assessee relied on the argument that its principal business was granting loans and advances, evidenced by the fact that income from interest on loans and advances was more than income from other activities. However, the CIT(A) concluded that the principal business of the assessee was trading in shares, not granting loans and advances.

Tribunal's Findings:

The Income Tax Appellate Tribunal (ITAT) examined the provisions of Section 73 and the Explanation thereto. The Tribunal noted that for a company to fall within the exceptions provided in the Explanation, its gross total income should mainly consist of income chargeable under the heads "Interest on securities," "Income from house property," "Capital gains," and "Income from other sources," or its principal business should be banking or granting loans and advances.

The Tribunal found that the assessee's gross total income did not mainly consist of the specified heads of income. Additionally, the principal business of the assessee, as per the Memorandum of Association, was dealing in shares, stocks, bonds, etc., and not granting loans and advances. The Tribunal also noted that the assessee was not a non-banking financial company (NBFC) and that the interest income was shown under the head "Income from other sources" and not "Profits and gains of business."

The Tribunal further observed that an amendment made by the Finance Act, 2015, effective from 1.4.2015, clarified that the principal business of trading in shares was not included in the Explanation to Section 73. Therefore, the Tribunal concluded that the assessee's business was not covered under the Explanation to Section 73 and upheld the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the appeal of the assessee, holding that the disallowance of Rs. 14,93,823/- as speculation loss was justified and that the assessee's case did not fall within the exceptions provided in the Explanation to Section 73 of the Income-tax Act, 1961. The order was pronounced in the open Court on 27th January 2016.