2009 (3) TMI 35 - HC - Income Tax

Losses suffered on account of book valuation explanation to S. 73 will cover both shares which are stock in trade and shares which are traded in the F.Y. for purpose of considering the loss and profit for that year there can be no difference between the losses suffered in the course of trading by delivery and losses in terms of the book value - Tribunal rightly hold that the loss of profit on account of valuation amounts to revenue losses or revenue receipt assessee s appeal dismissed

Summary

Issues:
1. Interpretation of Explanation to Section 73 of the Income Tax Act, 1961 regarding treatment of loss in share trading as speculation loss.
2. Whether loss originating from the valuation of stock of shares can be considered as covered by the Explanation to Section 73 of the Act.

Issue 1: Interpretation of Explanation to Section 73:
The appellant, a non-banking financial company, challenged an order by the I.T.A.T. for the assessment year 2001-2002, which treated a loss in share trading as speculation loss under the Explanation to Section 73. The C.I.T. (A) observed that the appellant's business involved trading and investment in shares, debentures, etc. The Tribunal relied on precedents and held that the loss in shares was not speculative. However, the Revenue appealed, citing a Supreme Court judgment and another Tribunal decision. The High Court analyzed the Explanation to Section 73, emphasizing that a company dealing in the purchase and sale of shares is deemed to be carrying on a speculation business. The Court noted that the language of the Explanation is clear and unambiguous, and the Circular's purpose is to prevent manipulation of taxable income by business groups. The Court upheld the Tribunal's decision, rejecting the appellant's argument against the treatment of the loss as speculative.

Issue 2: Treatment of Loss from Valuation of Stock of Shares:
The appellant argued that the loss from the valuation of stock of shares should not be covered by the Explanation to Section 73. The appellant relied on provisions related to speculative transactions and separate treatment of speculative business. However, the Court referred to relevant sections and previous judgments to establish that the valuation of unsold stock is integral to determining trading results and cannot be considered a source of profits. The Court emphasized that losses in trading, whether by delivery or book value, are relevant for speculative business assessment. The Court concluded that the Explanation covers both stock in trade and traded shares for profit and loss calculation. Therefore, the Court upheld the Tribunal's decision, ruling in favor of the Revenue.

In conclusion, the High Court dismissed the appeal, finding no merit in the appellant's arguments and affirming the Tribunal's decision regarding the treatment of loss in share trading and valuation of stock of shares under the Explanation to Section 73 of the Income Tax Act, 1961.