2016 (3) TMI 631 - AT - Income Tax

Share trading loss treated as speculation loss - application of provisions of Explanation to Section 73 - Held that - When the principal business is that of granting loans and advances and if such company also engages itself in purchase and sale of shares, then the purchase and sale of shares activity would fall under the exception to Explanation to Section 73 of the Act. We have already held that one of the main objects of the assessee company is lending activity and more so the assessee is a NBFC registered with RBI having valid certificate of registration and the fund deployed in lending activity is much more than the fund deployed in share trading activity on a consistent basis over a period of time. Hence the principal business of assessee company is that of granting loans and advances and thereby outside the ambit of Explanation to Section 73 of the Act. Accordingly, the share trading loss claimed by the assessee cannot be construed as speculation loss and accordingly we find no infirmity in the order of the Learned CIT(A) in this regard. - Decided against revenue

Summary

Issues:
1. Whether the share trading loss can be treated as speculation loss under Explanation to Section 73 of the Income Tax Act.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata involved the issue of treating a share trading loss as speculation loss under the Income Tax Act. The original assessment disallowed a share trading loss as speculation loss, which was confirmed by the CIT(A). The Tribunal directed the Assessing Officer (AO) to verify the funds deployment to determine the principal business of the assessee. The AO treated the share trading loss as speculation loss, disregarding the funds deployment theory. The CIT(A) observed that the principal business was granting loans, falling under an exception clause. The revenue appealed, arguing that share trading was the main business. The Tribunal considered the Memorandum of Association, fund deployment, and RBI registration, concluding that the principal business was lending, not share trading.

The main objects of the assessee company, as per its Memorandum of Association, included investment business, dealing in shares, and lending activities. The company was an NBFC registered with RBI, engaged in lending activities. The Tribunal had directed the AO to verify fund deployment, emphasizing lending as the principal business. The AO ignored this, focusing on share trading income. The Explanation to Section 73 deems share trading as speculation business unless lending is the principal activity. As the company primarily engaged in lending, the share trading loss was not speculation loss. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In conclusion, the Tribunal affirmed that the share trading loss was not speculation loss but a result of the company's principal business of granting loans. The revenue's appeal was dismissed, emphasizing the significance of the company's activities outlined in the Memorandum of Association and fund deployment in determining the principal business for tax treatment.