2019 (5) TMI 1603 - AT - Income Tax

Speculation loss u/s 73 - according to the AO short term capital loss and long term capital loss is a speculation loss - according to the assessee the provisions of section 73 does not apply to the assessee as assessee is falling into the exception - no part of the business of the assessee company consists of purchase and sale of the shares - HELD THAT - On looking at the computation of total income filed by the assessee before the learned assessing officer it has business income of loss, long-term capital gain exempt u/s 10(38) and exempt dividend income. The long-term capital gain which is exempt under section 10 (38) as well as the exempt dividend income which is also exempt under section 10 (34) of the income tax act does not enter into the computation of the total income but is an exempt income. Therefore the only income which is chargeable is under the business income. Therefore it is apparent that no part of the business of the assessee company consists of purchase and sale of the shares. Merely indulging in purchase and sale of shares for investment is not business activity in sale and purchase of shares of other companies for the purpose of this section. Such is the mandate in case of Standipack P Ltd V CIT 2012 (10) TMI 131 - CALCUTTA, HIGH COURT . In view of this we reverse the orders of the lower authorities and hold that explanation to section 73 does not apply to the assessee company - Decided in favour of assessee.

Issues Involved:
1. Whether the disallowances made in the assessment are based on presumptions and assumptions.
2. Applicability of Explanation to Section 73 of the Income Tax Act to the assessee's case.
3. Classification of losses from share trading as speculative business losses or capital losses.
4. Entitlement to carry forward speculative business losses.

Issue-wise Detailed Analysis:

1. Disallowances Based on Presumptions and Assumptions:
The assessee contended that the Commissioner of Income Tax (Appeals) erred in confirming the disallowances made by the Assessing Officer (AO) based on presumptions and assumptions. The assessee argued that these disallowances were arbitrary, erroneous, and contrary to the facts. The Tribunal did not provide a separate adjudication on this ground as it was considered general in nature.

2. Applicability of Explanation to Section 73:
The primary issue was whether the assessee's case falls under the exceptions provided in the Explanation to Section 73 of the Income Tax Act. The Explanation deems the business of purchase and sale of shares as speculative unless the company's gross total income consists mainly of income chargeable under the heads "Interest on securities," "Income from house property," "Capital gains," or "Income from other sources," or if the company's principal business is banking or granting loans and advances.

The assessee argued that it satisfied both exceptions as its income mainly consisted of capital gains and dividend income, and it was an NBFC engaged in financing and investments. The AO and CIT(A) disagreed, stating that the assessee's income from share trading was substantially higher than its dividend income, and it did not provide any banking services or loans and advances.

3. Classification of Losses from Share Trading:
The AO treated the short-term and long-term capital losses from share trading as speculative business losses under Explanation to Section 73. The assessee contended that these transactions were investments, not speculative business activities, and should be classified under "Income from Capital Gains." The CIT(A) upheld the AO's view, emphasizing that the assessee's gross total income did not mainly consist of business income, nor was it engaged in banking or granting loans and advances.

The Tribunal examined the computation of total income and noted that the assessee had a business loss of ?2,445, short-term capital loss of ?63,27,004, long-term capital loss of ?1,14,46,874, and dividend income of ?12,52,106. The Tribunal concluded that the assessee's gross total income did not mainly consist of business income, and the assessee was not engaged in the business of banking or granting loans and advances. Therefore, the Explanation to Section 73 did not apply to the assessee.

4. Entitlement to Carry Forward Speculative Business Losses:
The assessee alternatively requested that if the losses were treated as speculative, they should be allowed to be carried forward for set-off against future speculative income. The CIT(A) allowed this request, and the Tribunal upheld this decision.

Conclusion:
The Tribunal reversed the orders of the lower authorities, holding that the Explanation to Section 73 did not apply to the assessee as its gross total income did not mainly consist of business income, and it was not engaged in banking or granting loans and advances. Consequently, the assessee's losses from share trading were classified as capital losses, not speculative business losses. The appeal of the assessee was allowed.

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