2017 (3) TMI 1327 - AT - Income Tax

Upholding valuation loss on stock of shares as speculation loss u/s.73 - Held that - We find that the assessee had claimed loss on account of valuation of closing stock on the last date of AY, that the AO invoked the provisions of section 73 and held that the transactions entered into by the assessee were of speculative nature, that the FAA confirmed his order, that both the authorities did not consider the argument about the exception to the explanation to section 73, that the assessee had earned profit of ₹ 2,20,67,126/-, that it had STCG on sale of mutual funds to the tune of ₹ 2.68 crores. It is a fact that shares traded by the assessee were not of any of the good companies.The assessee had in the normal course of business purchased the shares. Because of the turmoil in the share market in the year under consideration the assessee suffered huge loss.It was valuing its stock on cost or market price whichever was lower and had accordingly valued the shares.The resultant loss, in these circumstances, cannot be considered speculative loss as held by AO and confirmed by FAA.In our opinion facts of Lokmat case 2010 (2) TMI 94 - BOMBAY HIGH COURT are applicable to the facts of present case. - Decided in favour of assessee Penalty u/s 271(1)(c) - Held that - While deciding the appeal filed by the assessee we have held that transaction entered into by the assessee were not of speculative nature that the loss was allowable as business loss. Therefore, penalty order would not survive.- Decided in favour of assessee

Summary

Issues Involved:

1. Treatment of valuation loss on stock of shares as speculation loss under Section 73 of the Income Tax Act.
2. Deletion of penalty levied under Section 271(1)(c) for furnishing inaccurate particulars of income.

Issue-wise Detailed Analysis:

1. Treatment of Valuation Loss on Stock of Shares as Speculation Loss:

The assessee, engaged in the business of finance, trading, and investment, filed a return declaring a loss of ?30.52 crores. The AO completed the assessment determining the income at ?3.72 crores and treated the valuation loss of ?34.26 crores on stock of shares as speculation loss under Section 73 of the Income Tax Act. The assessee argued that its business consisted solely of share trading and that the loss was due to the valuation of stock, not trading. The assessee referred to several cases, including A. B. Shanti (225 ITR 258) and Allied Motors Private Ltd (224 ITR 677), to support its claim that the loss should not be treated as speculation loss.

The AO, however, held that the loss had to be treated as speculation loss as per Explanation 1 to Section 73, citing the case of Eastern Aviation & Industries Ltd. (208 ITR 1023). The FAA upheld the AO's decision, referencing the judgment of the Hon'ble Jurisdictional High Court in Lokmat Newspapers Pvt. Ltd. (332 ITR 43).

Upon appeal, the assessee contended that the loss was part of its normal business and resulted from the valuation of stock due to market conditions. The assessee also cited the case of HSBC Securities and Capital Markets India (P.) Ltd. (208 taxmann 439). The tribunal found that the assessee had earned significant profits under the head 'income from capital gains' and that the loss was due to market conditions and consistent accounting policies. The tribunal concluded that the loss could not be considered speculative and decided in favor of the assessee, referencing the judgment in HSBC Securities and Capital Markets (P.) Ltd.

2. Deletion of Penalty Levied Under Section 271(1)(c):

The AO had levied a penalty of ?9.96 crores for furnishing inaccurate particulars of income, treating the business loss as speculation loss. The FAA, however, held that there was no case of furnishing inaccurate particulars or concealment of income, as the AO had merely reclassified the business loss as speculative loss. The FAA relied on the case of Reliance Petro Products (322 ITR 158) and allowed the appeal of the assessee.

The tribunal, upon hearing the appeal, upheld the FAA's decision, noting that the transaction entered into by the assessee was not speculative in nature and the loss was allowable as a business loss. Consequently, the penalty order was not sustainable.

Conclusion:

The tribunal allowed the appeal filed by the assessee, treating the valuation loss on stock of shares as a business loss and not a speculative loss. It also dismissed the AO’s appeal, thereby deleting the penalty levied under Section 271(1)(c) for furnishing inaccurate particulars of income. The judgment was pronounced in the open court on 24th March 2017.