1983 (9) TMI 108 - AT - Income Tax

Summary

Issues Involved:

1. Classification of the loss on sale of shares as a short-term capital loss or a speculation loss.
2. Applicability of Explanation to Section 73 of the Income-tax Act, 1961.
3. Determination of whether the transaction was an investment or a speculative venture.

Detailed Analysis:

1. Classification of the loss on sale of shares as a short-term capital loss or a speculation loss:

The assessee claimed a sum of Rs. 10,86,300 as short-term capital loss on the sale of 12,070 shares of P.G. Textile Mills Ltd. The shares were purchased at Rs. 100 per share and sold at Rs. 10 per share, resulting in the claimed loss. The ITO, however, proposed to treat the loss as a speculation loss under the Explanation to Section 73 of the Income-tax Act, 1961. The assessee argued that the shares were purchased as an investment and not for trading purposes, and thus the loss should be treated as a capital loss. The ITO rejected this argument, stating that the transaction constituted a business transaction due to the object clause in the memorandum of association.

2. Applicability of Explanation to Section 73 of the Income-tax Act, 1961:

The Explanation to Section 73 deems a company to be carrying on a speculation business if any part of its business consists of the purchase and sale of shares. The ITO argued that the object clause in the memorandum allowed for dealing in shares, thus making the transaction speculative. The Commissioner (Appeals) disagreed, stating that the object clause does not automatically mean that such transactions are business activities. The Commissioner (Appeals) concluded that the shares were acquired as an investment and not for trading, and thus the Explanation to Section 73 could not be invoked.

3. Determination of whether the transaction was an investment or a speculative venture:

The ITO and the IAC argued that the purchase of shares in a loss-making company like P.G. Textile Mills Ltd. was not a prudent investment and was speculative in nature. They pointed out that the company was under liquidation, and the shares had no real value at the time of purchase or sale. The Commissioner (Appeals) accepted the assessee's explanation that the shares were acquired as an investment in a sister concern and sold off due to subsequent developments. However, the Tribunal observed that the financial condition of P.G. Textile Mills Ltd. was known to the assessee, and no prudent investor would purchase such shares. The Tribunal concluded that the transaction was speculative, and the Explanation to Section 73 applied.

Conclusion:

The Tribunal reversed the finding of the Commissioner (Appeals) and restored the ITO's decision, holding that the loss incurred by the assessee was speculative and subject to the Explanation to Section 73 of the Income-tax Act, 1961. The Tribunal emphasized that the purchase of shares in a loss-making company was not an investment but a speculative venture, and thus the loss should be treated accordingly.