2000 (5) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Acceptance of the loss on purchase and sale of shares as claimed by the assessee.
2. Computation of business income under section 28 and the applicability of section 73 (explanation) to the assessee's transactions.

Issue-wise Detailed Analysis:

1. Acceptance of the loss on purchase and sale of shares as claimed by the assessee:

The assessee claimed a loss of Rs. 1,99,850 on the purchase and sale of shares. The shares were purchased and sold within a short period due to a fall in their value. The transactions were settled by payment of the differences without actual delivery of shares, invoking section 43(5) of the Income-tax Act, which defines "speculative transaction" as a transaction settled otherwise than by actual delivery or transfer of the commodity or scrips. The proviso (b) to section 43(5) states that a contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in his holdings through price fluctuations shall not be deemed a speculative transaction. The assessee argued that their transactions fell under this proviso, thus should not be considered speculative.

The Tribunal considered the facts, including the immediate sale of shares to avoid further losses and the settlement of differences through payment to the broker. It was noted that the transactions were entered to guard against loss due to price fluctuations, fulfilling the conditions of proviso (b) to section 43(5). Therefore, the Tribunal held that the transactions should not be deemed speculative, and the loss of Rs. 1,99,850 should be allowed.

2. Computation of business income under section 28 and the applicability of section 73 (explanation) to the assessee's transactions:

Section 73 deals with losses in speculative business and the rules for their set-off. The explanation to section 73 deems a company engaged in the purchase and sale of shares to be carrying on a speculative business, except for companies whose gross total income consists mainly of income chargeable under specific heads or whose principal business is banking or granting loans and advances. The assessee claimed to fall under the second exception, arguing that their principal business included banking and granting loans and advances, supported by their financial statements and the main objects in their Memorandum of Association.

The Tribunal reviewed the assessee's financials, noting that their gross sales included significant income from the sale of shares, interest, and dividends, and that their principal business activities aligned with the exceptions stated in the explanation to section 73. The Tribunal concluded that the assessee's business of purchase and sale of shares should not be classified as speculative under section 73, and the loss should be included in the computation of total income.

Conclusion:

The Tribunal found that the transactions in question were not speculative as per proviso (b) to section 43(5) and that the assessee's business activities fell under the exceptions provided in the explanation to section 73. Consequently, the Tribunal quashed the order of the Commissioner (Appeals) and allowed the assessee's appeal, accepting the loss of Rs. 1,99,850 in the computation of business income.