2019 (7) TMI 1037 - HC - Income Tax

Treatment to the loss as speculation loss - non-banking financial company (NBFC) engaged in the business of sale and purchase of shares - revenue appeal dismissed by ITAT holding that Explanation to Section 73 is not applicable to the case of the assessee - chargeability for the purpose of exemption - HELD THAT - In the present case for the subject assessment year the assessee had an income from other sources, which was a refund of income tax. It is against this refund of income tax that the assessee claims set off of business loss. If we accept the contention raised by the assessee, then the exception as provided in the Explanation in Section 73 has to be understood as being applied to each of the assessment years where there is a change in the gross total income from any other sources other than the profits and gains arising from business or profession. The question of chargeability for the purpose of exemption as argued by the learned Counsel for the assessee even if found to be acceptable, it has to be held that though the negative income would be chargeable; for reason of it being negative there could be no tax leviable since that would also be a negative figure. It could only be understood as, when there is a loss, then there would be no payability of tax at all. In such circumstances, we are of the opinion that there could be no set off of the speculative business loss as against the income from other sources for the year, since the exception under the Explanation to Section 73 does not apply to the Company. Assessee also has a contention that sub-section (2) refers to the specific assessment year in which it has to be applied. We cannot accept the said contention also, since the prohibition is insofar as sub-section (1) of Section 73, which provides that any loss in a speculation business shall not be set off except against profits and gains, if any, of another speculation business. This does not provide for looking at the profits and gains arising in each year in which the assessee is carrying on the business. Sub-section (2) of Section 73 is a provision for carry forward as found in Sections 70 to 72 itself. In fact, Section 73 culls out a particular type of business loss out of Section 72 and places it under Section 73, being one occasioned by a speculative business. Hence, the very same carry forward under Section 72 has been permitted with respect to speculation loss also, but subject to the condition under Section 73. In the light of the findings above, we set aside the orders of the first appellate authority and the Tribunal, and restore that of the A.O. We answer the questions of law in favour of the revenue and against the assessee.

Summary

Issues:
1. Whether the Tribunal should have restored the assessing officer's order?
2. Whether the Tribunal was correct in holding that the assessee company falls under the first exception provided in the explanation to Section 73?
3. Whether the explanation to Section 73 of the Income Tax Act is applicable in this case?

Analysis:
Issue 1:
The Revenue appealed against the order of the Income Tax Appellate Tribunal, challenging the dismissal of the Revenue's appeal and the confirmation of the first appellate authority's order. The assessee, a non-banking financial company engaged in share trading, filed a revised return for the assessment year 2003-04, claiming a refund. The assessing officer treated the loss as speculation loss under Section 73 of the Act, which could only be set off against speculative income.

Issue 2:
The Commissioner of Income Tax (Appeals) allowed the assessee's appeal, citing a CBDT circular excluding non-banking finance companies from the scope of Section 73. The Tribunal dismissed the Revenue's appeal, stating that the Explanation to Section 73 did not apply as the company's income mainly comprised sources other than business income. The substantial question of law was whether the Tribunal correctly applied the first exception in the explanation to Section 73.

Issue 3:
The argument revolved around whether the assessee's business loss, arising from share trading, could be set off against income from other sources. The Revenue relied on precedents where losses from speculative business were not allowed to be set off against non-business income. The Court held that the assessee's losses could only be set off against speculative business income unless the gross total income was mainly from sources other than business income.

In conclusion, the Court set aside the orders of the first appellate authority and the Tribunal, restoring that of the assessing officer. The Court ruled in favor of the Revenue, stating that the assessee's speculative business losses could not be set off against income from other sources, as the exception under the Explanation to Section 73 did not apply to the company.