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2005 (6) TMI 228 - AT - Income TaxSpeculative Loss - loss claimed on purchase and sale of share - HELD THAT - During the course of hearing before us, the learned counsel placed reliance on the decision of Tribunal,Bombay, in the case of Aakrosh Investment Leasing (P) Ltd. 2003 (8) TMI 544 - ITAT MUMBAI . We find that judgment to be against the contentions of the assessee and in favour of the Revenue. We are also at loss to understand as to how dividend earned on one's own stock-in-trade of shares can be treated at par with brokerage income earned on the business transactions of the third parties. The assessee also placed reliance on the decision of Tribunal, Mumbai, in the case of Samba Trading Investment (P) Ltd............. In that case the assessee disclosed profit in share business, but loss in speculation of shares. But there was no claim in that case that loss in share business should be set off against brokerage income. We are now left with the other reasons given by the learned CIT(A) for deletion of the addition of Rs. 38.09 lakhs made by the AO after invoking the Explanation to s. 73 of the Act. It has been held that the loss arising on the holding of 30,000 shares pledged with NSCCL should have been charged against the brokerage amount. We find this contention to be entirely illogical. It is admitted fact that in the case of the assessee the loss has arisen on account of depreciation in the market value of shares vis-a-vis cost of acquisition even though the assessee continued to be the owner of the shares. The assessee has been able to work out loss for the reason only that those shares have been treated by the assessee as his stock-in-trade. If those shares are to be treated as an investment made by the assessee as part of its brokerage business, there is no loss incurred by the assessee in the first instance to be charged against the brokerage amount. We, therefore, do not see any force in that contention of the assessee. There is also the question of expenses to be allocated to the business of sale and purchase of shares, the dividend income and brokerage income. We find that this issue has not been addressed to in proper manner by the learned AO as well as the learned CIT(A). We, therefore, remand this issue to the file of the learned AO for decision afresh after allowing the assessee reasonable opportunity of being heard. In the result, the order of the learned CIT(A) is set aside and the matter is restored to the file of the learned AO for the limited purpose of allocation of expenses between deemed speculation loss and other income of the assessee. For statistical purposes this appeal shall be treated as partly allowed.
Issues Involved:
1. Whether the loss claimed by the assessee on the purchase and sale of shares should be treated as speculation loss under Explanation to Section 73 of the Income Tax Act. 2. Whether the assessee carried on two distinct businesses: one as a share broker and another as a share trader. 3. Whether the loss on shares pledged with NSCCL should be charged against the brokerage income. 4. Allocation of expenses between deemed speculation loss and other income. Issue-wise Detailed Analysis: 1. Treatment of Loss as Speculation Loss: The Revenue disputed the CIT(A)'s order that the loss claimed by the assessee on the purchase and sale of shares could not be treated as speculation loss. The assessee, a member of the National Stock Exchange, declared brokerage income and a loss in share trading. The AO invoked Explanation to Section 73, treating the loss as deemed speculation loss, arguing that the assessee carried out two distinct businesses: share brokerage and self-trading. The AO relied on the judgments of the Punjab High Court (Kanahaya Lal Puran Mal vs. CIT) and the Calcutta High Court (CIT vs. Sun Distributors & Mining Co. Ltd.). The CIT(A) disagreed, stating that Explanation to Section 73 was not applicable as the assessee was not involved in tax avoidance schemes. The Tribunal, however, found no merit in the assessee's argument that the provision should only apply in cases of tax avoidance, citing the clear language of the statute and prior judgments (SRJ Securities Ltd. vs. Asstt. CIT). 2. Distinction Between Share Brokerage and Share Trading: The Revenue argued that the assessee's activities as a share broker and share trader were distinct. The Tribunal agreed, noting that the business of a share broker does not consist in the purchase and sale of shares conjointly, as required by Explanation to Section 73. The Tribunal referenced the judgments of the Punjab High Court and the Supreme Court (CIT vs. Pangal Vittal Nayak & Co. (P) Ltd.), which supported the view that brokerage income and trading loss should be treated separately. 3. Loss on Shares Pledged with NSCCL: The CIT(A) held that the loss on shares pledged with NSCCL should be charged against brokerage income, arguing that these shares were part of the brokerage business. The Tribunal found this contention illogical, stating that the loss arose due to depreciation in market value, not from the brokerage business. If the shares were treated as an investment, no loss would be incurred to be charged against brokerage income. 4. Allocation of Expenses: The CIT(A) held that no expenses should be allocated to the business of sale and purchase of shares, and that dividend and capital gain income should be adjusted against the trading loss. The Tribunal found that the issue of expense allocation had not been properly addressed by the AO or CIT(A). Therefore, the Tribunal remanded the issue to the AO for a fresh decision, allowing the assessee a reasonable opportunity to be heard. Conclusion: The Tribunal set aside the order of the CIT(A) and remanded the matter to the AO for the limited purpose of allocating expenses between deemed speculation loss and other income. The appeal was treated as partly allowed for statistical purposes.
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