2017 (4) TMI 61 - AT - Income Tax

Application of provisions of explanation 1 to section 73 - why loss suffered in share trading activity should not be considered as speculation loss as per the provisions of explanation to section 73? - Held that - We find that the assessee had disclosed loss of ₹ 1.85crores from share trading business, longterm capital loss of ₹ 1.68 crores and short-term capital gain of ₹ 20.52 lakhs, that the AO treated the share trading business under the head speculative business and denied the benefit of setting off of losses to the assessee, that the FAA reversed his order. The assessee, being an investment company, was dealing in shares and had suffered a loss during its regular course of business. Therefore, in our opinion, the AO was not justified in holding it to be speculative business. Now, if the facts of the case are considered it becomes clear that the assessee was a investment company and the share were sold in the normal course of its business. Therefore, in our opinion, the order of the FAA does not suffer from any legal or factual infirmity. Upholding the same, we decide the effective ground of appeal against the AO. - Decided in favour of assessee

Summary

Issues:
1. Application of provisions of explanation 1 to section 73 of the Act.

Analysis:
1. The Assessing Officer (AO) challenged the order of the CIT (A)-9 Mumbai regarding the application of provisions of explanation 1 to section 73 of the Act. The AO determined the income of the assessee-company, engaged in investments, at Rs. 20.52 lakhs under normal provisions, disregarding the loss suffered in share trading as speculation loss under section 73. The AO disallowed setting off the loss against any other head of income and brought the short-term capital gain to tax.

2. The First Appellate Authority (FAA) allowed the appeal filed by the assessee after considering submissions and case laws. The FAA held that the assessee's business did not fall under the explanation to section 73, as its gross total income mainly consisted of income chargeable under capital gains. The FAA referred to relevant cases and concluded that the assessee was not carrying on a speculation business, overturning the AO's decision.

3. The ITAT Mumbai found that the AO treated the share trading business as speculative, denying the benefit of setting off losses. However, considering the nature of the assessee being an investment company dealing in shares, the ITAT disagreed with the AO's classification. Referring to a relevant case law, the ITAT emphasized that the assessee's business activities did not qualify as speculation business, upholding the FAA's decision and dismissing the AO's appeal.

In conclusion, the ITAT Mumbai dismissed the appeal filed by the AO, as the assessee's business did not meet the criteria for speculation business under section 73 of the Act. The judgment highlighted the distinction between regular business activities and speculation business, emphasizing the importance of assessing the nature of income and business operations before applying relevant provisions.