2016 (3) TMI 685 - HC - Income Tax

Interpretation of the Explanation to section 73 - Tribunal held that the loss incurred in eligible transactions within the meaning of proviso (d) to section 43(5) not involving any purchase or sale of shares as such was speculation loss ? - Held that - It would appear that the activities appearing in Clauses (a) to (e) are not to be deemed to be speculative transactions. Therefore, this comes within the category of deemed business which is however distinct and separate from any other business. Now, the question is, whether loss arising out of such deemed business can be set off against the profit arising out of other business or businesses which may for clarity be called proper business. Under Section 70 of the Act, the assessee is entitled to have the loss set off against his income from any other source under the same head unless otherwise provided. Therefore answer to the question is that the assessee is entitled to have the loss arising out of deemed business set off against the income arising out of business proper unless otherwise provided. The question however remains whether the explanation to Sub-Section (4) of Section 73 relied upon by Mr. Lodh provides otherwise. A plain reading of the explanation quoted above cannot be said to have provided otherwise. In that case the irresistible conclusion is that the assessee is entitled to set off such loss arising out of deemed business against the income arising out of business proper. We are inclined to think that the clause of the sentence which fall squarely . , qualifies the word shares and not the word derivatives . We have no difficulty in accepting the views that shares fall squarely within the Explanation to Section 73(4) but we are unable to agree when derivatives are treated at par with the shares because the legislature has treated them differently.

Summary

Issues:
1. Disallowance of expenditure under section 14A of the Income Tax Act, 1961.
2. Treatment of loss incurred in eligible transactions under proviso (d) to section 43(5) as speculation loss.
3. Set off of loss in eligible transactions against profit in the business of purchase and sale of shares.

Analysis:

Issue 1:
The first issue pertains to the disallowance of expenditure under section 14A of the Income Tax Act, 1961. The appellant contended that the assessing officer correctly disallowed a sum of &8377; 9,79,873/- as expenditure incurred in relation to the exempt income of &8377; 33,288/-. The appellant argued that the administrative expenses and salaries and bonus could not have been entirely for earning the exempt income. However, the CIT (A) had reduced the disallowed amount by 50%, which was then restored to 100% by the Tribunal without any valid reason. The Tribunal's decision was challenged as arbitrary and unreasonable.

Issue 2:
The second issue revolves around the treatment of a loss of &8377; 3,24,76,184/- incurred in eligible transactions under proviso (d) to section 43(5) as speculation loss. The appellant argued that this loss should be treated as a business loss under the proviso to section 43(5), and therefore, the application of section 73 to disallow the set off against business income was incorrect. The appellant criticized the judgment of the Delhi High Court, which classified dealing in derivatives as speculation within section 73.

Issue 3:
Regarding the third issue, the appellant contended that since profit was earned in the business of purchase and sale of shares, the Tribunal should have directed the loss in eligible transactions to be set off against such profit. The revenue, on the other hand, argued that a company dealing in shares not falling within the exceptions in the explanation to section 73 would be deemed to be carrying on a speculation business. The revenue supported the Delhi High Court's view that derivatives, based on stocks and shares, should be treated as speculation business.

In conclusion, the High Court disagreed with the revenue's interpretation and held that the loss arising from deemed business could be set off against income from proper business unless otherwise provided. The Court rejected the revenue's reliance on the Delhi High Court judgment, emphasizing the distinction between shares and derivatives. The first issue was left open for future consideration, while the second issue was answered in the negative, and the third issue did not require an answer. Consequently, the appeal was disposed of based on the Court's analysis and conclusions.