2015 (12) TMI 349 - AT - Income Tax

Set off of loss in purchase and sale of shares against business income - CIT(A) allowed the set off of speculative loss disallowed by the AO u/s 73 (1)- Held that - We find from the records that the AO has not taken into consideration that the assessee company was a non-banking financial company as per the certificate of registration granted by the Reserve Bank of India. It is also held by Hon ble Gujarat High Court in the case of Barkha Investment & Trading Company vs. CIT (2005 (4) TMI 21 - GUJARAT High Court) that once the assessee company was registered with the Reserve Bank of India and kept the registration alive as Non-Banking Financial Company, the assessee company was to be considered as a company, the principal business of which was granting of loans and advances and Chapter III-B of RBI Act will have an over riding effect. It is observed that if the assessee company has principal business of granting loans and advances then explanation to Section 73 is not applicable as held in the case of Narain Properties Ltd. vs. ACIT (2013 (4) TMI 189 - ALLAHABAD HIGH COURT ) and ACIT vs. Tanna Electro Mechanics (P) Ltd. (2005 (10) TMI 425 - ITAT MUMBAI ). Thus the AO was not justified in treating the loss in the purchase and sale of shares as speculation loss. Hence, considering the order of the ld. CIT(A) and our deliberations on the issue, we find no reason to interfere in the order of the ld. CIT(A) which is sustained. - Decided against revenue

Summary

Issues:
- Allowance of set off of loss in purchase and sale of shares against business income under Section 73 of the Income Tax Act.

Analysis:
1. Facts and AO's Observations:
- The assessee, engaged in financial services, declared a share trading loss of Rs. 54,20,000 for the assessment year 2005-06.
- The AO invoked Explanation to Section 73, treating the loss as speculation loss and disallowed set off against business income.
- The AO requested separate trading accounts for various segments, which the assessee provided, showing the loss in share transactions.

2. CIT(A)'s Decision:
- The CIT(A) allowed the set off of speculative loss disallowed by the AO, emphasizing the deeming provision of Explanation to Section 73.
- CIT(A) distinguished various case laws cited by the AO, highlighting the relevance of the assessee being a non-banking financial company.
- The CIT(A) referred to precedents where registration as a non-banking financial company impacted the applicability of Section 73.

3. ITAT Decision:
- The ITAT noted that the assessee's status as a non-banking financial company, certified by the RBI, was crucial in determining the principal business activity.
- Citing the Gujarat High Court's ruling, the ITAT reiterated that if the principal business was granting loans and advances, Explanation to Section 73 did not apply.
- The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal and allowing the set off of the loss in share transactions against business income.

4. Conclusion:
- The ITAT's judgment affirmed the CIT(A)'s decision, emphasizing the significance of the assessee's status as a non-banking financial company in determining the treatment of losses in share transactions under Section 73 of the Income Tax Act.