2006 (10) TMI 177 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of loss of Rs. 53,22,770 as a speculation loss under Explanation to section 73.
2. Attribution of Rs. 33,34,903 as proportionate disallowance of expenditure in respect of share trading activities, increasing speculation loss.

Issue-wise Detailed Analysis:

1. Treatment of Loss of Rs. 53,22,770 as Speculation Loss:

The assessee, a stock broker dealing in shares, reported a loss of Rs. 53,22,770 under "Trading in Securities." The Assessing Officer (AO) considered this loss as speculative under Explanation to section 73 of the Income-tax Act, 1961, rejecting the assessee's contention that the transactions were not speculative as they were supported by delivery and that the major loss was due to the diminution in the value of stock. The AO's decision was based on the Tribunal's ruling in *Prudential Construction Co. Ltd v. Asstt. CIT* and the provisions of Explanation to section 73, which deems dealings in shares as speculative business unless exceptions apply. The CIT(A) upheld this view, leading to the assessee's appeal.

The Tribunal examined the scope of "gross total income" as per section 80B(5) and the scheme of the Act, concluding that gross total income consists only of positive income, not losses. The Tribunal provided examples to illustrate the application of Explanation to section 73, determining that the assessee's gross total income was "Nil" after setting off the business loss against income from other sources. Consequently, the first exception in Explanation to section 73 did not apply, and the loss from trading in shares was deemed speculative, disallowing set-off against other business income but allowing carry forward to subsequent years.

2. Attribution of Rs. 33,34,903 as Proportionate Disallowance of Expenditure:

The AO attributed Rs. 33,34,903 as proportionate disallowance of expenditure related to speculative business, based on the decisions of the Hon'ble Calcutta High Court in *Eastern Aviation and Industries Ltd. v. CIT* and the Hon'ble Bombay High Court in *Sinh National Sugar Mills (P.) Ltd. v. CIT*. The Tribunal directed the AO to exclude the loss from trading in securities (Rs. 53,22,770) from the total expenditure for allocation purposes, as such loss cannot be treated as part of the total expenditure.

The Tribunal also addressed the assessee's contention that interest expenditure of Rs. 84,37,224 should not be considered since borrowed funds were not used for purchasing shares. The AO was instructed to verify this claim and exclude the interest expenditure from total expenses if the borrowed funds were not used for share investment.

Conclusion:

The Tribunal partially allowed the assessee's appeal, affirming the treatment of the loss as speculative under Explanation to section 73 but directing the AO to exclude specific expenditures from the total expenses for allocation purposes.