2018 (7) TMI 876 - HC - Income Tax

Loss in the share transactions as not a speculative loss - assessee as an investment company - Held that - On perusal of the assessment order, working evidences that the loss on trading in shares at ₹ 2.74 crores has been taken into account to arrive at income from business. Thus, the basic premises on the part of the Revenue that the respondent assessee s income mainly consisted of income from business is factually incorrect. Once it is found as a fact in the order dated 17th September, 1998 of the Tribunal that the assessee s income mainly consisted of income from other sources as it forms 91.68% of its total income, then in the absence of any challenge to the finding of fact, it cannot be a subject of inquiry. Once the finding of fact has not been challenged, it must follow that Section 73 of the Act which introduces a deeming fiction to define a speculation business will not apply as the bracketed portion in the Explanation carves out an exception so far as main income is from Income from other sources . Thus, in our view, the question has proposed for our consideration stands concluded by the decision of this Court in Darshan Securities Pvt. Ltd. 2012 (2) TMI 117 - BOMBAY HIGH COURT As in the present fact, the respondent is an Investment Company. Therefore, the question of law referred to us for our opinion is answered in the affirmative i.e. in favour of the respondent assessee and against the appellant Revenue.

Summary

Issues:
Interpretation of the Explanation to Section 73 of the Income Tax Act, 1961 regarding the classification of a company as an investment company and the treatment of losses in share transactions as speculative losses.

Analysis:

Issue 1: Applicability of the Explanation to Section 73
The primary issue in this case was whether the assessee should be classified as an investment company and if the loss incurred in share transactions should be considered a speculative loss under the Explanation to Section 73 of the Income Tax Act, 1961. The Tribunal initially held that the assessee was not covered by the Explanation as its income mainly consisted of income from other sources, making Section 73 inapplicable.

Issue 2: Interpretation of Gross Total Income
The contention between the parties revolved around the interpretation of the assessee's gross total income. The Revenue argued that the Explanation to Section 73 should apply as the gross total income did not mainly consist of income from other sources, contrary to the assessee's position. However, the Tribunal found that the income mainly comprised income from other sources, forming 91.68% of the total income, leading to the exclusion of the assessee from the scope of Section 73.

Issue 3: Impact of Loss on Share Transactions
The appellant contended that the loss incurred by the assessee in share transactions should be considered as income from business rather than income from other sources. This argument aimed to trigger the applicability of the Explanation to Section 73, which would negate the classification of the assessee as an investment company.

Issue 4: Legal Precedents and Interpretation
The decision relied on legal precedents and the interpretation of the term "investment company." It was established that an investment company is defined as a company whose gross total income mainly consists of income chargeable under specific heads, a definition not disputed in this case. This interpretation further supported the conclusion that the assessee qualified as an investment company.

Conclusion:
The High Court, considering the facts and legal interpretation presented, concluded that the assessee should be classified as an investment company and that the loss in share transactions was not a speculative loss under the Explanation to Section 73. The judgment favored the respondent assessee and dismissed the Revenue's contentions, aligning with established legal principles and precedents.