2016 (3) TMI 592 - HC - Income Tax

Short term capital loss on sale of shares - treated as a speculative loss by virtue of Explanation to Section 73 of the Act when actual delivery and possession has been made in respect of sale of shares - Held that - The nature of the transaction alleged is important, it has been stated the order of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appellant has chosen to invest fund in shares. Moreover, the transaction is not periodic. It was also not settled otherwise than by actual delivery. Only when there is settlement otherwise than by delivery speculative transaction can be thought of. In the present case, it is not so. As the main activity is only in manufacture and sale of yarn, the purchase of shares, having not been regular, should be construed only as an investment. When there is no systametic or organised course of activity and when there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition of business, under Section 2(13) of the Income Tax Act, 1961, there is no point in contending that the assessee is engaged in the business muchless in a speculative business. Therefore, the Assessing Officer ought to have allowed the loss, as short term capital loss and set off against the other business income of the appellant Company. As the appellant Company had properly delivered the shares at the time of selling, the transaction would not come under the provisions of Section 43 (5) of the Income Tax Act, 1961. When the provisions of Section 43 (5) is not applicable to the facts of this case, the contention that the case of the assessee would be covered under explanation to Section 73 of the Income Tax Act, 1961, cannot be accepted. As the genuineness of the transaction is not doubted the contention of the Revenue that it is a case of avoidance of tax liability by dubious means also cannot be accepted. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the short-term capital loss on the sale of shares should be treated as a speculative loss under the Explanation to Section 73 of the Income Tax Act.
2. Whether the transactions of sale of shares are covered under Section 43(5) of the Income Tax Act.

Issue-wise Analysis:

1. Treatment of Short-term Capital Loss as Speculative Loss:
The core issue was whether the short-term capital loss on the sale of shares by the appellant company should be treated as a speculative loss under the Explanation to Section 73 of the Income Tax Act. The appellant argued that the transactions in shares were neither systematic nor organized and were conducted with the intention of investment rather than speculation. The Revenue contended that since the appellant company was not a company dealing in shares and securities nor a banking company, the Explanation to Section 73 would apply, thus treating the loss as speculative.

The court examined the relevant provisions:
- Section 2(13): Defines "business" broadly to include any trade, commerce, or manufacture.
- Section 28: Deals with profits and gains of business or profession.
- Section 43(5): Defines "speculative transaction" as a transaction settled otherwise than by actual delivery.
- Explanation to Section 73: Deems business of purchase and sale of shares by certain companies as speculative business unless excluded by specific criteria.

The court noted that the appellant was primarily engaged in the manufacture and sale of yarn and not in the business of dealing in shares. The shares were purchased due to financial problems of a sister company and not for speculative purposes. The transactions were not periodic and involved actual delivery, thus not meeting the definition of speculative transactions under Section 43(5).

2. Applicability of Section 43(5):
The second issue was whether the transactions of sale of shares fell under Section 43(5) of the Income Tax Act, which defines speculative transactions. The appellant argued that the transactions involved actual delivery of shares and thus could not be deemed speculative. The court reviewed various judicial precedents, including:
- CIT v. Shantilal P. Ltd.: Distinguished between settlement of contracts otherwise than by actual delivery and breach of contract.
- CIT v. Lakshmi Mills Co. Ltd.: Held that buying and selling of units could not be treated as speculative business.
- CIT v. Kamani Tubes Ltd.: Clarified that speculative transactions involve contracts settled otherwise than by actual delivery.

The court concluded that the transactions in question involved actual delivery and were not periodic, thus not speculative under Section 43(5). The court also referenced decisions like Mysore Rolling Mills Pvt. Ltd. and CIT v. H.Holock Larsen, which emphasized the importance of the nature and intention behind transactions to determine if they constitute speculative business.

Conclusion:
The court ruled in favor of the appellant, holding that the transactions in shares were not speculative and the loss should be treated as a short-term capital loss. The court set aside the order of the Income Tax Appellate Tribunal and allowed the appeal, emphasizing that the appellant's main activity was the manufacture and sale of yarn, and the share transactions were neither systematic nor intended for speculation. The transactions involved actual delivery, thus not falling under the purview of Section 43(5) or the Explanation to Section 73 of the Income Tax Act.