2017 (11) TMI 219 - AT - Income Tax

STCL on sale of shares - AO holding ST Capital Loss and Loss on F&O as speculative invoking explanation to Section 73 - Held that - Loss suffered by the assessee on sale of shares held by it as investments is to be treated as speculation loss, and the assessee was to be deemed to have been carrying on speculation business, to the extent of business of purchase and sale of shares of other companies within the meaning of Explanation to Sec.73 of the Act . Thus, the loss so suffered by the assessee would be eligible to be set off against the speculation profit, as per provisions contained in s. 73 of the Act . We thus uphold the order of the CIT (A) on this aspect of the matter, which as observed by us hereinabove is clearly supported by the judgment of the Hon ble High Court of Calcutta in the case of Arvind Investments Ltd. (1990 (3) TMI 5 - CALCUTTA High Court). The Ground of appeal No. 1, to the extent the same is relatable to the issue of loss suffered by the assessee on sale of shares held by it as investment, is dismissed in terms of our aforesaid observations. Whether the loss suffered by the assessee on the sale of shares held by it as stock in trade would fall within the realm of the Speculative loss ? - Held that - As the adjudication on the issue as to whether the loss suffered by the assessee on the sale of shares held by it as stock in trade would fall within the realm of the Speculative loss , or not, had been set aside by us to the file of the CIT (A) for fresh adjudication for verifying the fulfillment by the assessee of the requisite conditions contemplated u/s 43(5)(d) r.w. Explanation 1, therefore, the issue as regards the disallowance of any part of expenses relatable to such transactions would be dependent on the adjudication by the CIT (A) of the aforesaid issue. We thus restore the issue as regards the disallowance of expenses relatable to transactions pertaining to sale of shares held by the assessee in stock in trade to the file of the CIT (A). The assessee shall be at liberty to raise fresh submissions in context of the expenses relatable to the transactions pertaining to sale of shares held by it as stock in trade before the CIT (A), in case the need so arise. The CIT (A) is directed to pass a fresh order as regards the disallowance of the expenses to the extent relatable to the transactions pertaining to the sale of shares held by the assessee as stock in trade, in case if the assessee is found to have failed to satisfy the requisite conditions contemplated u/s 43(5)(d) pertaining to the sale transactions of the shares held by it as stock in trade . The Ground of appeal No. 2 is thus partly allowed in terms of our aforesaid observations.

Summary

Issues Involved:
1. Treatment of Short Term Capital Loss (STCL) as Speculation Loss.
2. Treatment of Trading Loss on sale of shares as Speculation Loss.
3. Disallowance of 50% of expenses attributed to speculative business.

Detailed Analysis:

1. Treatment of Short Term Capital Loss (STCL) as Speculation Loss:
The assessee company, engaged in the business of Share and Stock Broking, Investment, and Financial Consultancy, had declared a STCL of ?36,45,751/- on the sale of shares held as investments. The Assessing Officer (A.O) invoked the Explanation to Section 73 of the Income-tax Act, 1961, and treated this loss as a 'Speculation loss' instead of STCL. The A.O relied on the judgment of the Hon'ble High Court of Calcutta in CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 (Cal) to support his view. The CIT (A) upheld the A.O's decision. The assessee argued that the Explanation to Section 73 was not applicable, relying on the judgment of the High Court of Gujarat in CIT v. Apollo Vikas (P.) Ltd. [2013] 32 taxmann.com 329. However, the Tribunal found that the Explanation to Section 73 was indeed applicable, as the assessee's business involved the purchase and sale of shares, and thus, the loss should be treated as a 'Speculation loss'. The Tribunal upheld the CIT (A)'s order on this matter.

2. Treatment of Trading Loss on Sale of Shares as Speculation Loss:
The assessee claimed a trading loss of ?33,60,550/-, which included a profit on trading of shares of ?26,441/- and a loss on Futures & Options (F&O) of ?33,86,990/-. The A.O treated this as a 'Speculation loss' under the Explanation to Section 73. The CIT (A) upheld the A.O's decision, stating that the assessee failed to demonstrate that the F&O transactions were carried out through recognized stock exchanges and were screen-based transactions. The Tribunal, however, acknowledged that post-amendment Section 43(5)(d) excludes F&O transactions from being considered speculative. The Tribunal remanded the matter back to the CIT (A) to verify if the F&O transactions met the conditions specified in Explanation 1 of Section 43(5). If the transactions are verified as 'eligible transactions', the loss would be treated as a 'trading loss' and not a 'speculation loss'.

3. Disallowance of 50% of Expenses Attributed to Speculative Business:
The A.O disallowed 50% of the expenses debited to the Profit & Loss Account, attributing them to speculative transactions. The CIT (A) upheld this disallowance. The Tribunal noted that the disallowance of expenses is contingent on whether the transactions are speculative. Given that the issue of F&O transactions was remanded for fresh adjudication, the Tribunal also remanded the issue of expense disallowance to the CIT (A) for a fresh decision based on the outcome of the F&O transactions' verification.

Conclusion:
The Tribunal upheld the treatment of STCL as a 'Speculation loss' but remanded the issue of trading loss and expense disallowance back to the CIT (A) for fresh adjudication. The assessee's appeal was partly allowed for statistical purposes.