2013 (10) TMI 222 - HC - Income Tax

Whether the income earned by the assessee through sale of shares should be taxed as business income or should be treated as capital gain Held that - Such issue had to be decided on the basis of the question whether the assessee is involved in any business of buying and selling shares or had purchased and sold the shares by way of investment - Assessing Officer went completely in a wrong direction and relied on the explanation to section 73 of the Act - Section 73 of the Act pertains to losses in speculation business . Sub-section (1) thereof provides that any loss computed in respect of speculation business carried on by the assessee shall not be set off except against profits and gains of another speculation business. Sub-section (2) of section 73, likewise, puts certain restrictions on carrying forward the speculative losses. Sub-section (4) further provides that no loss shall be carried forward under that section for more than four assessment years. Thus the entire section has application when the assessee has incurred loss or intends to carry forward non-absorbed loss. Explanation to section 73 only provides for a deeming fiction in certain circumstances where the assessee would be deemed to be carrying on a speculation business. Such deeming fiction would not apply in situations not covered under section 73 since such explanation is applicable to section 73 only Decided against the Revenue.

Summary

Issues:
1. Application of section 73 of the Income Tax Act, 1961 to determine the nature of income earned through the sale of shares.
2. Interpretation of the deeming fiction provided in the explanation to section 73 in the context of speculative business.

Analysis:
Issue 1: The primary issue in this case revolved around the application of section 73 of the Income Tax Act, 1961 to ascertain whether the income derived from the sale of shares should be treated as business income or capital gain. The Assessing Officer initially categorized the income as arising from speculative business, invoking section 73. However, the Court found this approach erroneous as the determination should have been based on whether the assessee was engaged in the business of trading shares or merely investing in them. The Court highlighted that section 73 specifically pertains to losses in speculation business and does not apply when there is no loss or intention to carry forward non-absorbed losses.

Issue 2: The explanation to section 73 introduces a deeming fiction where a company engaging in the purchase and sale of shares is deemed to be carrying on a speculation business under certain conditions. The Court emphasized that this deeming provision is limited to situations falling within the ambit of section 73 and does not extend to scenarios outside its scope. In this case, the Court concluded that the Assessing Officer's reliance on the explanation to section 73 was misplaced since there was no evidence to support the assessee being involved in a speculative business of trading shares.

In summary, the Court dismissed the Tax Appeal, upholding the decision of the Tribunal and CIT(Appeals) that the income from the sale of shares should be treated as capital gain, not business income. The judgment underscored the importance of correctly applying the provisions of the Income Tax Act and emphasized that deeming fictions, like the one in the explanation to section 73, must be interpreted within the statutory framework they are designed for.