Case Law Details
Speculative loss incurred in earlier years by a company can be set off against profit earned on delivery-based share trading transactions. The HC held that since the business of delivery-based share trading transactions is deemed to be a speculative business for a company, such set off is permissible.
Background and facts of the case:- Under the Indian Tax Law (ITL), a speculative transaction is defined to mean a contract for purchase or sale of any commodity, including stocks and shares, which is settled otherwise than by actual delivery or transfer of commodity or scrips. The characterisation of a transaction as a speculative one is relevant since, in terms of the set off provisions of Section 73 (Section) of the ITL, speculative business loss can be set off only against speculative business profit.
Further, under the Explanation to the Section (Explanation), where any part of the business of a company consists of purchase and sale of shares of other companies, such a business is deemed to be a speculative business (Refer Note- 1).
The Taxpayer, a company, had incurred speculative loss in the years prior to tax year 2002- 03. During tax year 2002- 03, it earned profit from delivery-based purchase and sale of shares. The Taxpayer set off the speculative loss of the earlier years against the delivery- based share profit of the tax year 2002- 03.
The Tax Authority denied the set off on the ground that the delivery- based share profit did not constitute speculative business profit. The first appellate authority confirmed the Tax Authority’s action.
On further appeal to the Tribunal by the Taxpayer, the Tribunal held that the set off was permissible. Aggrieved by this, the Tax Authority preferred an appeal before the HC.
Contentions of the Tax Authority :- In terms of the definition of speculative transaction under the ITL, share trading transactions which involve actual delivery do not constitute speculative transactions.
The Explanation, which creates fiction of deeming delivery-based share trading transactions to be a speculative business for a company, applies only to the loss incurred and not to the profit earned from such transactions. Stated alternatively, loss incurred in such transactions is deemed to be speculative loss but profit earned is not treated as speculative profit. Hence, set off of speculative loss incurred in earlier years is not permissible against profits from delivery-based share transactions.
Contentions of the Taxpayer:- The deeming fiction of the Explanation does not carve out any distinction between loss or profit. Once delivery-based share trading transactions are deemed to be speculative for a company, the fiction needs to be given full effect. Hence, both profit and loss from such transactions would be speculative. The speculative loss of earlier years can be set off against profit of business which is fictionally deemed to be a speculative business.
Ruling of the High Court
The Explanation stands attracted when a part of the business of the company consists of sale and purchase of shares. Since any business postulates a systematic course of activity or dealing, the fiction does not apply in case of isolated transactions of purchase and sale of shares.
However, once the Explanation applies, it must be given full and free effect in relation to the ambit within which it is intended to operate. The legal fiction is that the Taxpayer (being a company) is deemed to be carrying on a speculative business to the extent to which the business consists of the purchase and sale of shares. The fiction will apply whether the carrying on of such a business results in loss or profit.
Once the business of trading in shares is deemed to be speculative, a taxpayer is entitled to set off speculative loss against profit of such a business.
If the Tax Authority’s argument that the deeming fiction is attracted only in the event of loss is accepted, it will amount to introducing a further restriction in the Explanation, which is not permissible.
In the present case, since a part of the business of the Taxpayer comprised purchase and sale of shares, the Explanation stood attracted and the Taxpayer was entitled to set off speculative loss of earlier years against profit of deemed
speculative business.
Our View:- The statutory provisions, applicable to share trading activity undertaken by a company, create a statutory fiction of deeming such an activity to be a speculative business. Whether or not such deeming fiction applies to profit from such a business has been a matter of judicial conflict. The present ruling provides guidance that profit and loss from such a business are to be treated as speculative in nature.
This ruling further provides guidance that before a statutory fiction can be applied, the prerequisites for such a fiction should be fulfilled. However, once the statutory fiction is attracted, it needs to be given full effect and no further restriction can be imputed on the application of the fiction in the absence of specific statutory provisions to the contrary.
Note 1:- Except under certain carved out circumstances which are not of relevance to the present case, this deeming provision does not apply to two categories of companies viz.
(a) Companies whose gross total income consists mainly of non-business income.
(b) Companies whose principal business is banking or grant of loans and advances.
