2006 (3) TMI 187 - AT - Income Tax

Carry forward of losses in Speculation Business - HELD THAT - A careful perusal of Explanation to section 73 indicates that this Explanation lays down that the expression speculation business , under the specified circumstances, will cover assessee's business 'to the extent to which the business consists of the purchase and sale of such shares'. Unlike the definition under section 43(5) which defines 'speculative transactions', the provisions of Explanation to section 73 lay down the circumstances in which, and the extent to which, a business is to be deemed as, 'speculation business'. The thrust of the provisions under Explanation to section 73 is on the nature of 'business', rather than nature of 'transaction'. Even the circular itself provides that the Explanation would apply to the business of purchase and sale of shares of certain companies. The case of the assessee is covered by the plain, clear and unambiguous statutory language of the provisions of Explanation to section 73 of the Act which requires no external aid, like object etc. to construe them differently and therefore, the loss suffered on account of acquisition by allotment and sale thereof being in denature of loss arising on purchase and sale of shares of a company and also being in the nature of business of the assessee being purchase and sale of shares of other companies is to be taken as a speculative loss. The appeal of the assessee is dismissed.

Issues Involved:
1. Whether the loss arising from the sale of shares applied for by a dealer and allotted to it in a Public Issue is hit by the Explanation to section 73 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of Explanation to Section 73 to Loss from Sale of Shares
The primary issue was whether the loss arising from the sale of shares acquired in a public issue by a dealer is considered a speculative loss under the Explanation to section 73 of the Income-tax Act, 1961.

Assessing Officer's View:
The Assessing Officer (AO) argued that the terms "purchase" and "sale" inherently involve a physical exchange of commodity and money. He emphasized that the conditions for purchase and sale were satisfied in the case of shares acquired in the primary market and subsequently sold. The AO rejected the assessee's contention that the procedural differences between acquiring shares in the primary market and purchasing them in the secondary market were relevant.

CIT(A)'s View:
The CIT(A) upheld the AO's decision, stating that the assessee's activities fell within the purview of the Explanation to section 73. The CIT(A) noted that the assessee's investment in shares and subsequent sale constituted a purchase and sale of shares, thus falling under the speculative business as defined by the Explanation.

Assessee's Argument:
The assessee argued that the loss from shares acquired through public issue allotment should not be treated as speculative. The assessee relied on judicial precedents and a Board Circular No. 204, dated 24-7-1976, which suggested that the Explanation was intended to curb tax avoidance through manipulation by business houses. The assessee also contended that acquiring shares by allotment did not constitute a "purchase" in the context of the Explanation to section 73.

Tribunal's Decision:
The Tribunal examined the language of the Explanation to section 73 and relevant judicial precedents. It noted that the Explanation was clear and unambiguous, applying to any business of purchase and sale of shares. The Tribunal emphasized that the term "purchase" included acquiring shares through allotment, as shares become existing property upon allotment. The Tribunal also referred to provisions of the Sale of Goods Act, which allow for the sale and purchase of future goods.

The Tribunal dismissed the assessee's reliance on the Supreme Court's decision in Gopal Jalan & Co., which dealt with the meaning of "allotment" under the Companies Act, and not the Income-tax Act. The Tribunal also distinguished the case from the decision in Mysore Rolling Mills (P.) Ltd., noting that the latter involved an investment transaction rather than a business of trading in shares.

The Tribunal concluded that the loss from the sale of shares acquired through public issue allotment fell within the scope of the Explanation to section 73, as the business of the assessee involved the purchase and sale of shares. The Tribunal held that the language of the Explanation was clear and did not require external aids for interpretation.

Conclusion:
The Tribunal upheld the treatment of the loss as speculative under the Explanation to section 73 of the Income-tax Act, 1961, and dismissed the appeal of the assessee.

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