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2004 (9) TMI 321 - AT - Income TaxInterpretation of the statutes - Share broker and also indulges in Purchase and sale of shares - Whether the loss is a speculative loss as held by the income-tax authorities - HELD THAT - It is the considered opinion of the Legislature that a provision was needed to be introduced only to check the malpractice adopted by business houses controlling companies by manipulating the share dealings inter se. Further, such transactions, even in the case of certain categories of companies were permitted and were treated as normal business transactions so that the loss arises out of such transactions could be adjusted against the normal business profits. The ban is applicable only to a very limited category of companies. Therefore, it is all the more necessary to apply the provision only where a device is adopted by the company concerned to reduce its taxable income by indulging in such share transactions which are apparently real, and may even involve actual delivery, but are carried out with the object of reducing the taxable income. In the scheme of section 73 fortified by the Explanation, there is no scope for ignoring genuine transactions in shares which have been carried out without any motive of reducing the taxable income of the company. In the present case, there is absolutely no material brought on record by the income-tax authorities to show that the assessee is a company controlled by a business house and that the share transactions have been effected with a view to manipulate and reduce its taxable income. In other words, there is no evidence to show that the requirements of para 19.2 of the circular issued by the CBDT are satisfied. I am, therefore, of the view that the income-tax authorities were not justified in treating the loss of Rs. 2,94,834 as a speculative loss by invoking the Explanation to section 73. I direct the Assessing Officer to treat it as a normal business loss and allow the same as claimed by the assessee. On the basis of the judgment of the Supreme Court in the case of K.P. Varghese 1981 (9) TMI 1 - SUPREME COURT , I do not consider it necessary to discuss the authorities cited on behalf of the assessee. In the result, the appeal is allowed.
Issues Involved:
1. Whether the loss of Rs. 2,94,832 is a speculative loss as held by the income-tax authorities. Summary: Issue 1: Whether the loss of Rs. 2,94,832 is a speculative loss as held by the income-tax authorities. The assessee, a share broker, reported a loss of Rs. 2,94,832, which included Rs. 1,40,412 from the sale and purchase of shares and Rs. 1,54,420 from the reduction in the value of the stock of shares held on 31-3-1997. The Assessing Officer (AO) invoked the Explanation below section 73 and treated the loss as speculative, thus disallowing it to be set off against non-speculative profits and allowing it only to be carried forward to be adjusted against future speculative profits. The CIT(A) confirmed this view, leading to the appeal before the Tribunal. The assessee argued that the Explanation to section 73, introduced by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1977, was intended to curb manipulative practices by business houses controlling groups of companies, as per Circular No. 204 dated 24-7-1976. The assessee contended that since it was a simple share broker without any controlling group, the Explanation should not apply. The assessee cited Supreme Court judgments emphasizing that statutory provisions should be interpreted in line with their intended purpose. The Ld. DR argued that the Explanation should be applied as written, without reference to the circular or its intended purpose. The Tribunal found merit in the assessee's argument, noting that the Explanation to section 73 applies only to companies and is intended to curb manipulative practices by business houses. The Tribunal emphasized that the provision should be interpreted in light of its purpose, as outlined in the circular and supported by Supreme Court judgments. The Tribunal concluded that the Explanation should not be invoked in the absence of evidence showing that the assessee was part of a controlling group manipulating share transactions to reduce taxable income. The Tribunal directed the AO to treat the loss as a normal business loss and allow it as claimed by the assessee, thereby allowing the appeal.
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