2013 (6) TMI 375 - AT - Income Tax

Company's income from trading of shares - whether be treated as business income / speculative business - assessee is a private limited company engaged in the business of share brokerage and share trading - Held that - The case laws relied upon by assessee of CIT v. Lokmat Newspapers (P) Ltd. 2010 (2) TMI 94 - BOMBAY HIGH COURT and CIT v. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT the facts in both the cases are different from that of the assessee's case CIT(A) was justified in holding that the provision of section 73 and explanation thereto was applicable in the assessee's case and AO was justified in treating the income on account of brokerage of shares as business income and income on account of trading of shares for itself as speculation income within the meaning of section 73 and explanation thereto of the Act. The AO was further rightly directed to carry forward losses if any as per provisions. On this account AR submitted that AO has not allowed to carry forward of the losses as directed by the CIT(A). This limited issue is restored to the AO with a direction to allow carry forward of losses as directed by the CIT(A) as per provisions of the Act after providing opportunity of hearing to the assessee.

Summary

Issues:
Treatment of company's income from trading of shares as speculative activity under section 73 of the Income Tax Act for A.Y. 2000-01, 2002-03, 2003-04, and 2004-05.

Analysis:

Issue 1: Treatment of company's income from trading of shares as speculative activity
The judgment deals with the issue of whether the company's income from trading shares should be treated as speculative activity under section 73 of the Income Tax Act. The Assessing Officer applied the provision of explanation to section 73(2) and treated the share trading business as speculation business. The company argued that all transactions were delivery-based, thus should be considered as business activity, not speculation. The company relied on case law to support its position. However, the tribunal noted that section 73 and its explanation apply specifically to companies engaging in the purchase and sale of shares, irrespective of the transaction mode. The purpose of the provision is to prevent manipulation of taxable income by companies. The tribunal upheld the Assessing Officer's decision to treat income from brokerage of shares as business income and income from trading shares for itself as speculation income. The tribunal directed the Assessing Officer to allow carry forward of losses as per the Act, which was not done initially.

Issue 2: Application of legal principles
The tribunal referred to the decision in the case of Lokmat Newspapers (P) Ltd., emphasizing that the deeming fiction created by the explanation to section 73 defines when an assessee is deemed to be carrying on a speculation business. It clarified that once a company is deemed to be carrying on a speculation business, any loss from that business can only be set off against profits from another speculation business. The tribunal concluded that the provision of section 73 and its explanation were correctly applied in the case at hand, supporting the Assessing Officer's treatment of the company's income.

Conclusion:
The tribunal upheld the decision to treat the company's income from trading shares as speculative activity under section 73 of the Income Tax Act. The tribunal directed the Assessing Officer to allow the carry forward of losses as per the Act. All appeals were allowed for statistical purposes, with the issue being disposed of in favor of the Assessing Officer's treatment of the income.