2005 (12) TMI 273 - AT - Income Tax

Summary

Issues Involved:

1. Treatment of loss from share trading activity as speculative loss.
2. Treatment of interest income on fully convertible debentures (FCDs) as part of the assessee's business activity of sale and purchase of shares.

Issue-wise Detailed Analysis:

1. Treatment of Loss from Share Trading Activity as Speculative Loss:

The assessee contested the CIT(A)'s order that upheld the treatment of a loss from share trading activity amounting to Rs. 2,47,97,775 as speculative loss under the Explanation to Section 73 of the Income Tax Act. The AO, during assessment proceedings, noted this loss and invoked the provisions of Section 73, explaining that the loss should be treated as speculative business loss. The assessee argued that it was an investment company and thus, the provisions of Explanation to Section 73 were not applicable. However, the AO pointed out that the term 'investment company' had been omitted from the Explanation to Section 73 effective from April 1, 1988, and the exclusion was only applicable to companies whose principal business was banking or granting loans and advances. The CIT(A) confirmed the AO's action, noting that the principal business of the assessee was not banking or granting loans and advances, and its gross total income did not mainly consist of income under specified heads. The appellate tribunal upheld this decision, agreeing with the AO and CIT(A) that the loss from share trading activity should be treated as speculative loss.

2. Treatment of Interest Income on Fully Convertible Debentures (FCDs) as Part of Business Activity:

The Revenue's appeal involved the treatment of interest income of Rs. 26,27,472 earned on FCDs. The assessee argued that this interest income should be considered as part of its share trading business. The CIT(A) agreed with the assessee, noting a direct nexus between the interest received on FCDs and the trading loss, as the FCDs were eventually converted into shares and sold at a loss. The CIT(A) directed the AO to consider the interest income as speculative income and set it off against the speculative loss. The Department contended that the interest income from FCDs should be treated as income from other sources, separate from the speculative business of share trading. However, the tribunal upheld the CIT(A)'s decision, stating that interest earned on FCDs, held as stock-in-trade, retains the character of business income. The tribunal noted that the interest income should be adjusted against the trading loss before determining the net speculative loss under the Explanation to Section 73. The tribunal rejected the Department's argument, emphasizing that the interest income on FCDs should be treated as part of the business income from the sale and purchase of shares.

Conclusion:

Both the assessee's and the Revenue's appeals were dismissed. The tribunal upheld the treatment of the loss from share trading activity as speculative loss and confirmed that the interest income on FCDs should be considered part of the business activity of sale and purchase of shares, to be set off against the speculative loss.