2004 (10) TMI 277 - AT - Income Tax

Business loss deemed as speculation loss - set off against income from other sources - Interpretation of proviso to section 43(5) - share broking activities - income derivers from dividend and interest - scope of the provisions of Explanation to section 73 - HELD THAT - It is the settled proposition of law that proviso simply carves out what is included in the main proviso. Therefore, the proviso would refer to only those transactions which are otherwise speculative in nature and, therefore, would not apply to those transactions which are effected with regular delivery of shares. The sale and purchase of shares with delivery are already outside the ambit of section 43(5) itself and, therefore, question of applying the proviso (c) to the section in such situation would not arise. It has never been the case of assessee that transactions of purchase and sale of shares were otherwise speculative within the meaning of the main provisions of section 43(5). Hence, question of applying clause (c) of the proviso does not arise. If a transaction is not made in course of jobbing or arbitrage to safeguard against the future loss, then such transactions would not fall within the scope of clause (c) of the proviso to section 43(5). It has never been the case of the assessee either before Assessing Officer or before CIT(A) that transactions of purchase and sale of shares, in which loss was incurred, were entered into in the course of jobbing and arbitrage to safeguard the future losses. Hence, the contention of assessee's counsel cannot be accepted even on this ground. Further, the Explanation to section 73 applies only to regular dealing in shares made in the normal course of business and not to speculative transactions falling u/s 43(5). It is only by virtue of such Explanation that such normal non-speculative transactions are deemed to be speculative transactions. Since, the loss to the assessee has arisen in the normal course of business i.e. purchase and sale of shares with delivery, the case of assessee would not fall u/s 43(5) and consequently, would not be covered by clause (c) of the proviso to section 43(5). Accordingly, such transactions would fall within the scope of the provisions of Explanation to section 73. It is not the case of assessee that his client falls within the exception provided in Explanation to section 73. Therefore, in my opinion, the lower authorities were justified iniholding the loss to assessee as speculative loss. The order of the CIT(A) is, therefore, upheld. In the result, appeal of assessee is dismissed.

Summary

Issues involved:
The judgment addresses the treatment of business loss as speculation loss and the allowance of set off against income from other sources. The interpretation of proviso to section 43(5) and the application of Explanation to section 73 are also key issues in this case.

Treatment of Business Loss as Speculation Loss:
The Assessing Officer treated the business loss of Rs. 2,53,417 as speculation loss based on the Explanation to section 73, which was upheld by the CIT(A). The contention of the assessee that the proviso (c) to section 43(5) should apply was rejected. The Tribunal considered the legislative intent behind the Explanation and the proviso, emphasizing that the Explanation deems certain transactions as speculative which are otherwise not speculative. The Tribunal concluded that the loss incurred by the assessee in the normal course of business did not fall under section 43(5) and was rightly treated as speculation loss under the Explanation to section 73.

Interpretation of Proviso to Section 43(5):
The assessee argued that the proviso (c) to section 43(5) should exclude transactions entered into by a member of a stock exchange in the course of jobbing or arbitrage from being deemed speculative. The Tribunal analyzed the provisions of section 43(5) and section 73, highlighting that the proviso excludes certain transactions which are otherwise speculative. It was clarified that the proviso applies to transactions made in the course of jobbing or arbitrage to safeguard against future losses, which was not the case for the assessee. Therefore, the contention that the proviso should apply was rejected.

Application of Explanation to Section 73:
The Tribunal explained that the Explanation to section 73 applies to regular dealings in shares made in the normal course of business, deeming such transactions as speculative. Since the loss in question arose from normal business activities of purchase and sale of shares with delivery, it did not fall under section 43(5) and was rightly covered by the Explanation to section 73. The Tribunal upheld the lower authorities' decision to treat the loss as speculative and dismissed the appeal of the assessee.

This judgment clarifies the distinction between speculative transactions under section 43(5) and the deemed speculation under the Explanation to section 73, emphasizing the legislative intent behind these provisions and their application to business losses incurred in the normal course of activities.