2016 (4) TMI 584 - AT - Income Tax

Treatment to share trading loss - whether treated as deemed speculation loss? - Held that - We find that the ratio laid down by the Hon ble Calcutta High Court in the case of RPG Industries Ltd. (2011 (3) TMI 656 - CALCUTTA HIGH COURT ) clearly supports the conclusion of the CIT(A) as laid down s laid down that by Explanation to s. 73, a legal fiction has been created whereby loss suffered by a company in share transactions is to be treated as a speculative loss within the meaning of s. 73, notwithstanding the fact that there was actual delivery of scrips of shares and the transaction is not within the purview of the definition of speculative transaction in s. 43(5). It was laid down that by virtue of Explanation to s. 73, even the transactions which are not speculative transactions within the meaning of s. 43(5) are deemed to be speculative transactions. The Hon ble Court has explained that if the contention of the assessee that the provision of s. 43(5) of the Act defining speculative transaction should prevail even if the case comes within the purview of the Explanation to s. 73 is accepted, effect cannot be given to the Explanation at all and it would be rendered meaningless and that it was the intention of the legislature that if the assessee is a company indicated in the Explanation to s. 73, there shall be a different definition of speculation business than the one applicable to other types of assessees. The Hon ble Court further held that there is nothing illegal for the legislature to enact two different definitions of speculation business for two different categories of assessees. The Hon ble Court has explained that although ordinarily the object of an Explanation is not to enlarge the scope of the original section that it is supposed to explain, if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect should be given to the legislative intent and that only one interpretation of the Explanation to s. 73 is possible and that goes against the assessee and therefore there is no question of adopting a view which is favourable to the assessee. CIT(A) treating the share trading loss as deemed speculation loss confirmed - Decided against assessee Genuity of trading loss - Held that - CIT(A) rightly held that the loss in question had to be regarded as genuine loss. The identity of the companies from where purchase of shares was made by the Assessee stood established as the said company were assessed to income tax and their IT acknowledgement for the relevant AY was also filed. Bank statement evidencing payments through banking channels were filed . The demat statement evidencing actual transfer of shares was also filed. The sale and purchase contract notes were produced. The brokers were registered brokers with the Stock Exchange. In these circumstances, the loss in trading of shares had to be regarded as genuine. - Decided against revenue

Summary

Issues Involved:
1. Treatment of share trading loss as deemed speculation loss.
2. Jurisdiction of AO under section 153A of the Income Tax Act, 1961.
3. Genuineness of the share trading loss.

Detailed Analysis:

Treatment of Share Trading Loss as Deemed Speculation Loss:
The primary issue raised by the assessee was the treatment of a share trading loss amounting to Rs. 1,34,38,700/- as deemed speculation loss. The assessee argued that the action of the AO and the confirmation by the CIT(A) were unreasonable and bad in law. The Revenue, on the other hand, contended that the assessee failed to prove the genuineness of the share transactions, thus the loss should be treated as speculative.

The AO invoked Explanation to Section 73 of the Income Tax Act, which deems any part of the business of a company involving the purchase and sale of shares as speculation business. Consequently, the AO disallowed the set-off of the loss against business income. The CIT(A) upheld this view, relying on the decision of the Hon'ble Calcutta High Court in RPG Industries Ltd. Vs CIT, which held that even if there is actual delivery of shares, the loss must be treated as speculation loss under Explanation to Section 73.

Jurisdiction of AO under Section 153A:
The assessee challenged the jurisdiction of the AO to make additions under Section 153A, arguing that no incriminating documents were found during the search regarding the share trading loss. The assessee cited the decision of the Hon'ble Delhi High Court in CIT vs Kabul Chawla, which held that in the absence of incriminating material, completed assessments could not be disturbed under Section 153A.

The Tribunal, however, noted that the return for AY 2007-08 was filed and an intimation under Section 143(1) was issued. Since the search was conducted before the expiry of the time limit for issuing a notice under Section 143(2), the intimation under Section 143(1) could not be equated to a completed assessment. Therefore, the AO had the jurisdiction to assess the total income afresh under Section 153A.

Genuineness of the Share Trading Loss:
The AO questioned the genuineness of the share trading loss, citing discrepancies in the purchase and sale transactions and the non-existence of the companies from which shares were purchased. However, the CIT(A) found the loss to be genuine, noting that the companies were assessed to tax, and the transactions were conducted through a registered share broker with proper documentation.

The Tribunal upheld the CIT(A)'s finding, emphasizing that the identity of the companies and the genuineness of the transactions were established through tax assessments, bank statements, demat accounts, and contract notes. Therefore, the loss was deemed genuine.

Conclusion:
- The Tribunal dismissed the assessee's appeal, affirming that the share trading loss was correctly treated as speculation loss under Explanation to Section 73.
- The Tribunal also dismissed the assessee's challenge to the AO's jurisdiction under Section 153A, ruling that the intimation under Section 143(1) did not constitute a completed assessment.
- The Tribunal upheld the CIT(A)'s finding that the share trading loss was genuine, dismissing the Revenue's appeal.

Order:
Both the appeal by the Assessee and the Revenue are dismissed. The order was pronounced in the Court on 02.03.2016.