2006 (5) TMI 110 - AT - Income Tax

Speculation Loss - Addition on account of loss in sale and purchase of shares while treating the same as speculation loss - disallowance of foreign travel expenses of the director. Whether addition of Rs. 20,38,775 on account of loss in sale and purchase of shares while treating the same as speculation loss be allowed? - HELD THAT - The loss arisen to assessee does not fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in the course of its business activity of brokerage. It is not the case of Revenue that loss has not occurred to assessee and the same is not genuine. Thus, the loss is allowable as business loss in the normal course of business of the assessee and is available to be set off against brokerage income - In the decision in the case of COMMISSIONER OF INCOME-TAX, KERALA VERSUS PANGAL VITTAL NAYAK AND CO. PVT. LIMITED 1968 (8) TMI 19 - SUPREME COURT , the assessee was found to be carrying on sale and purchase of shares of other companies on his own account also. Thus, it was held that both the activities of business, i.e., business of brokerage and business of dealings in shares were separate activities and thus assessee was held not entitled to set off the loss. Here in the present case, the assessee is found to have no business activity of sale and purchase of shares at its own. Thus, this decision has no application to the facts of present case - assessee is entitled to get set off of a sum of Rs. 20,38,775, being loss accrued to assessee being incidental to its business activity as a broker against its brokerage income - appeal allowed. Whether disallowance of foreign travel expenses of the director of Rs. 6,20,841 to be allowed in full? - HELD THAT - There are force in the argument of learned counsel that the visit of director was not purely personal. It may have some elements of business nature. Therefore, entire expenses could not be disallowed and expenses relating to the director only should be estimated which have been incurred for the purpose of business. The expenses relating to the wife of director cannot be allowed being not wholly and exclusively incurred for the purpose of business of assessee. Keeping in view the entirety of facts, 25 per cent of total expenses is allowed and rest 75 per cent is held disallowable. The AO will work out the disallowance accordingly. This ground is partly allowed. The appeal filed by the assessee is partly allowed.

Summary

Issues Involved:

1. Addition of Rs. 20,38,775 on account of loss in sale and purchase of shares while treating the same as speculation loss.
2. Disallowance of foreign travel expenses of the director amounting to Rs. 6,20,841.

Issue-wise Detailed Analysis:

1. Addition of Rs. 20,38,775 on account of loss in sale and purchase of shares while treating the same as speculation loss:

The assessee appealed against the addition of Rs. 20,38,775 treated as speculation loss by the AO and upheld by the CIT(A). The AO's assessment was based on the Explanation to Section 73 of the IT Act, which deems part of a company's business involving the purchase and sale of shares as speculation business. The AO observed that the assessee-company's transactions in shares were settled without delivery, indicating speculative transactions. The CIT(A) supported this view, noting the absence of specific evidence from the assessee to prove that these transactions were due to errors or client disowning.

The assessee argued that the transactions were incidental to its broking business and not speculative. It claimed that increased turnover due to NSE membership led to occasional client disowning of transactions, compelling the company to honor these trades to maintain its brokerage business. The assessee provided detailed documentation, including client bills and affidavits, to substantiate its claim that the transactions were not speculative but necessitated by business exigencies.

The Tribunal examined the nature of the assessee's business, the purpose behind the transactions, and the effect of the transactions. It found the assessee's explanation credible, noting that the transactions were compelled by client disowning and not speculative intent. The Tribunal cited relevant case law, emphasizing that transactions under compulsion do not constitute speculative business. It concluded that the loss was a business loss, not speculative, and allowed the set-off against brokerage income.

2. Disallowance of foreign travel expenses of the director amounting to Rs. 6,20,841:

The assessee claimed foreign travel expenses for the director and his wife, which the AO disallowed due to lack of supporting evidence showing business activity during the trip. The CIT(A) upheld this disallowance.

The assessee argued that the director visited various stock exchanges and financial institutions, indicating a business purpose. The Tribunal acknowledged that the visit had some business elements but found no justification for the entire claim. It allowed 25% of the expenses as business-related, disallowing the remaining 75%, particularly the expenses related to the director's wife, as not wholly and exclusively for business purposes.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the AO to set off the loss of Rs. 20,38,775 against brokerage income and allowing 25% of the foreign travel expenses as business-related.