2004 (6) TMI 288 - AT - Income Tax

Interpretation of section 73 of the Income-tax Act, 1961 - treatment of losses in speculation business -Applicability of the explanation to section 73 - earns a profit in speculative transactions - HELD THAT -From this CBDT circular, it is clear that the object of this provision is to curb the device being resorted to by some business houses to manipulate and reduce the taxable income by booking speculative losses. A plain reading of the section, as we have already stated, and a reading of the heading puts it beyond doubt that this section cannot be invoked in a case where there is a profit from a speculative transaction. Coming to the explanation to section 73, the same should be so read as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. Reliance is placed on Bihta Co-operative Development and Cane Marketing Union Ltd. v. Bank of Bihar 1966 (10) TMI 145 - SUPREME COURT . The explanation is only for the purposes of section 73 and when the section itself does not apply, the explanation cannot be invoked, under the facts and circumstances of this case. The argument of the learned departmental representative that the term 'loss' includes profit, is not correct, as only under explanation 2 to proviso of section 64(2) it is stated that for the purposes of that section 'income' includes loss. There is no proposition that 'profit' includes loss. Thus, we allow the appeal of the assessee by holding that section 73 is inapplicable to this case. In the result, the appeal of the assessee is allowed.

Summary

Issues involved:
The judgment involves the interpretation of section 73 of the Income-tax Act, 1961, regarding the treatment of losses in speculation business and the applicability of the explanation to section 73 in a case where the assessee earns a profit in speculative transactions.

Summary:

Facts of the Case:
The assessee, a public limited company engaged in investment activities, filed its return for the assessment year 1997-98, declaring income under section 115J of the Income-tax Act. The assessee had both speculative and non-speculative transactions in shares during the year, with a net loss from non-speculative transactions and a profit from speculative transactions. Additionally, the assessee earned a commission from arranging a lease, which was offered for tax under 'income from business or profession.'

Contentions:
The Assessing Officer treated the entire share trading business as speculative based on certain judgments, disallowing the set-off of losses against other income. The assessee contended that section 73 did not apply as there were no losses in speculative business and argued for relief. The departmental representative argued that section 73 applied as per the explanation and that the commission income should not be reclassified under 'other sources.'

Judgment:
The Tribunal analyzed section 73, noting that it applies to losses in speculation business and does not cover cases with profits from speculative transactions. Referring to a CBDT circular, the Tribunal highlighted that the provision aimed to prevent manipulation of taxable income through speculative losses. It concluded that section 73 was inapplicable to the case, rejecting the department's interpretation. The Tribunal did not delve into the alternative argument due to the favorable decision on the main issue, allowing the appeal of the assessee.