2007 (4) TMI 291 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Explanation to Section 73 of the IT Act, 1961.
2. Inclusion of loss on dealing in shares for calculating gross total income.
3. Set off of dividend income against loss on dealing in shares.

Detailed Analysis:

1. Applicability of Explanation to Section 73 of the IT Act, 1961:
The primary issue is whether Explanation to Section 73 applies to the appellant, whose only business is dealing in shares and securities. The CIT(A) upheld the AO's decision that Explanation to Section 73 was applicable. The AO argued that the law clearly states that losses from trading shares are to be treated as speculation losses. The Tribunal noted that Explanation to Section 73 introduces a deeming fiction that treats a company's business of purchasing and selling shares as speculation business. The Tribunal emphasized that this provision aims to curb manipulative practices by business houses to reduce taxable income.

2. Inclusion of Loss on Dealing in Shares for Calculating Gross Total Income:
The CIT(A) held that the appellant should include the loss on dealing in shares when calculating gross total income. The AO reasoned that dividend income cannot be treated as business profits and must be taxed as 'income from other sources.' The Tribunal found that the emphasis of Explanation to Section 73 is on the business as a whole and not on individual transactions. It concluded that the loss from the business of purchasing and selling shares should be viewed in the context of the entire business activity.

3. Set Off of Dividend Income Against Loss on Dealing in Shares:
The AO did not allow the set off of dividend income against the loss on dealing in shares, arguing that dividends are assessed under 'income from other sources' and cannot be treated as income from speculative business. The Tribunal disagreed, stating that since the shares were held as stock-in-trade, the dividend income should be considered part of the business income, even if it is taxed under a different head. The Tribunal noted that the loss of a speculation business should be set off against the profits of the same business, irrespective of the head under which the income is taxed.

Conclusion:
The Tribunal held that the CIT(A) was not justified in upholding the AO's decision to decline the set off of speculation loss from share dealings against the dividend income earned from shares held as stock-in-trade. The Tribunal emphasized that the dividend income, though taxable under 'income from other sources,' is still part of the business income and should be set off against the speculation loss. The appeal was allowed, granting relief to the assessee.