2006 (5) TMI 134 - AT - Income Tax

Applicability of Sec 73 - In Speculation Business - loss on sale of TISCO shares - Difference Of Opinion between learned Members - Third Member Order - Whether, the loss arising to the assessee is to be treated as speculation loss within the meaning of Explanation to section 73, or to be treated as loss arising on transfer of a capital asset as claimed by the assessee? - HELD THAT - In the present case the Assessing Officer did not bring any material on record to show shares were purchased as an adventure in nature of trade nor showed that any of factors considered by Courts to take a transaction as an 'adventure' were satisfied in this case. The position did not change in the appellate proceedings and therefore without evidence it is difficult to hold that sale/purchase of shares of TISCO by the assessee was an adventure in nature of trade or it was business or part of business. The Explanation to section 73 is part of section 73 and by fiction makes purchase and sale of other companies by a company itself speculation business. As the Explanation creates a fictional solution, it is required to be construed in a narrow sense. There is no indication that business as per the Explanation can be given a meaning different from meaning given under the main section. Further the Explanation uses terms gross total income , income under the heads like Interest on securities , Income from house property , etc. etc., making it absolutely clear that part of business means part of such business where income is computable under the head Business . The Explanation provides for set off and adjustment of income/loss of particular type of business mentioned in the Explanation. Having regard to clear language, there is no need in my view to speculate what is the import of word business in the Explanation. There is no question drawing any sort of presumption, either in favour of carrying business or against it. The ld AM is right in holding that even capital assets held by company were business asset. This is the position when word business is considered in a wider sense. Every transaction carried on by the assessee relating to its asset cannot be treated as a transaction, liable to be assessed under the head Business . It may give rise to capital gain or income assessable under the head Other sources . The company can also have receipt of casual and non-recurring nature. The computation of income has to be done as per the machinery and rules provided by the Income-tax Act and not on general notion of term business . Both the Members have held that shares of TISCO were held by the assessee as an investment. It was not part of trade. Therefore the profit or loss suffered, subject to other provisions, is taxable under the head Capital gains and not as Business income . In the light of accepted position by both the Members that shares of TISCO were held and sold by assessee as a capital asset (investment), the loss accruing to the assessee was liable to be assessed as short-term capital loss. Therefore, there was no question of treating it as a speculation loss by applying Explanation to section 73 of the Income-tax Act. The ld JM did not agree with the proposed order of the learned Accountant Member. He was of the view that loss arising to the assessee on sale of shares was short-term capital loss. Thus, I agree with the view proposed ld JM. The case should now be put before the regular Bench, for disposal, in accordance with law.

Summary

Issues Involved:
1. Attribution of interest towards earning of dividend for deduction under section 80M.
2. Applicability of Explanation to section 73 regarding loss on share transactions.

Issue-wise Detailed Analysis:

1. Attribution of Interest Towards Earning of Dividend for Deduction Under Section 80M:

The first ground of appeal concerns the learned CIT (Appeals) not proportionately attributing the interest towards earning of dividend and thereby allowing the full claim of deduction under section 80M as claimed by the assessee. The assessee received dividend income of Rs. 1,37,75,850/- and claimed a deduction under section 80M of Rs. 1,31,82,228/-. The Assessing Officer (AO) allocated a proportionate amount of bank charges and interest to the dividend income, reducing the eligible dividend income for deduction under section 80M to Rs. 1,31,15,555/-, resulting in a short deduction of Rs. 66,673/-. The CIT (Appeals) disagreed with the AO, noting that the interest paid was related to a packing credit loan for export purposes, with no nexus to the investment in shares. The Tribunal held that while deduction under section 80M is admissible on net dividend after reducing attributable expenditure, such expenditure should be worked out on an actual basis. The issue of bank charges and remaining interest was restored to the AO to reduce from the dividend income only such charges and interest directly related to the acquisition of shares.

2. Applicability of Explanation to Section 73 Regarding Loss on Share Transactions:

The second ground of appeal concerns the CIT (Appeals) finding that Explanation to section 73 does not apply to the assessee, thus treating the loss on share transactions as short-term capital loss instead of speculation loss. The assessee disclosed a loss on the sale of TISCO shares, which the AO treated as speculation loss, arguing that the transactions were squared up within the same settlement period without actual delivery of shares. The CIT (Appeals) accepted the assessee's contention that the shares were purchased as an investment and not for trading, thus holding that the provisions of section 73 were wrongly applied by the AO. The Tribunal, however, held that the provisions of Explanation to section 73 apply to any part of the business of a company involving the purchase and sale of shares, irrespective of whether the shares were held as stock-in-trade or investment. The Tribunal concluded that the loss was speculative, reversing the CIT (Appeals)'s decision.

Separate Judgments:

There was a dissenting opinion by the Judicial Member, who argued that Explanation to section 73 should not apply to shares purchased as an investment, as such transactions do not constitute business activities. The Judicial Member held that the loss on the sale of shares should be assessed as short-term capital loss. Due to this difference in opinion, the matter was referred to a Third Member.

The Third Member, after considering the facts and arguments, agreed with the Judicial Member, concluding that the loss on the sale of shares was a short-term capital loss and not speculative, as the shares were held as an investment. Thus, the provisions of Explanation to section 73 were not applicable.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the AO to reassess the bank charges and interest directly related to the acquisition of shares for deduction under section 80M, and concluding that the loss on the sale of TISCO shares was a short-term capital loss, not speculative, thereby not falling under Explanation to section 73.