Exp. to S. 73 would apply even when entire business consists of purchase & sale of shares

 ITAT MUMBAI BENCH ‘G’

Deputy Commissioner of Income-tax, Range – 3(3), Mumbai

Versus

Savlani Trading & Investments Co. (P.) Ltd.

IT APPEAL NO. 2343 (MUM.) OF 2005

[ASSESSMENT YEAR 2001-02]

DECEMBER 14, 2012

ORDER

Rajendra Singh, Accountant Member

This appeal by the revenue is directed against the order dated 9.12.2004 of CIT(A) for the assessment year 2001-02. The revenue has challenged the decision of CIT(A) treating the share trading loss of Rs. 3.25 crores as normal business loss and allowing expenses relating thereto of Rs. 31,12,030/- which had been disallowed by the AO who had treated the loss as speculation loss.

2. Facts in brief are that the AO during the assessment proceedings after examining the details furnished by the assessee noted that the assessee had shown income from house property at Rs. 35,73,950/-, income from other sources at Rs. 24,92,129/- and capital gain on sale of flat at Rs. 62,285/-. The assessee had also made purchase and sale of shares in which it had incurred loss of Rs. 3,25,23,981/- as per details given below :-

2.1 The AO referred to the provisions of Explanation to section 73 as per which in case gross total income does not consist mainly of income from house property, capital gain and other sources or the principal business is not of business of banking or granting of loans and advances then any loss incurred by the assessee from sale and purchase of shares has to be treated as speculation loss. In this case, the AO observed that the main business of the assessee was purchase and sale of shares. The AO therefore, asked the assessee to explain as to why the loss from trading of shares should not be treated as speculation loss and expenses relating thereto should not be disallowed. The assessee submitted that main source of income was income from house property and therefore, provisions to Explanation to section 73 were not applicable. The AO however, did not accept the explanation given. The AO observed that the provisions of Explanation to section 73 were applicable when part of the business consisted of purchase and sale of shares which was also applicable when the entire business was only of purchase and sale of shares. Further, the assessee had incurred loss of Rs. 3,25,23,981/- in purchase and sale of shares and, therefore, it could not be said that the gross total mainly consisted of income from house property and other sources. The AO placed reliance on the judgment of Hon’ble High Court of Calcutta in the case of CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 and on the judgment of same court in the case of Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 1023. The AO thus treated the loss from trading of shares as speculation loss. As regards allocation of expenses, the AO observed that the assessee had claimed composite expenses of Rs. 31,37,574/- in relation to all activities which consisted of sale of shares to the tune of Rs. 698 crores and other income of Rs. 25.54 lacs. He, therefore allocated expenses relating to other income at 1% of such income i.e., Rs. 25,540/- and expenses relating to share trading were estimated at Rs. 31,12,030/-. The AO therefore, disallowed expenses to the tune of Rs. 31,12,030/- (wrongly mentioned as Rs. 27,36,426/- in the computation) and speculation loss was allowed to be carried forward and not adjusted against other income.

2.2 The assessee disputed the decision of AO and submitted before CIT(A) that gross total income of assessee consisted of huge loss incurred in share trading and, therefore, it did not have any positive gross total income. Accordingly it was argued that provisions ofExplanation to Section 73 were not applicable. It was also submitted that the gross total income which had to be considered as positive income consisted of house property income and income from other sources and, therefore, provisions of Explanation to section 73 were not applicable. CIT(A) after referring to some decisions of the Tribunal accepted the claim of the assessee that in applying provisions ofExplanation to Section 73, only positive income under different heads has to be considered. He, therefore, held that provisions ofExplanation to section 73 were not applicable and accepted trading loss as normal business loss aggrieved, by which, the revenue is in appeal.

3. At the time of hearing of the appeal, no one appeared on behalf of the assessee though notice sent by registry had been served on assessee well in advance. Neither someone appeared nor was any adjournment application received. On earlier date of hearing i.e. 15.10.12 also no one had appeared on behalf of the assessee. Therefore, we proceed to decide the appeal on the basis of material available on record and after hearing the ld. DR who argued that the issue raised in the appeal was covered by the judgment of Hon’ble High Court of Calcutta in case of Eastern Aviation & Industries Ltd. (supra) the judgment in case of Arvind Investments Ltd. (supra) and judgment in case of CIT v.Park View Properties (P.) Ltd. [2003] 261 ITR 473. It was accordingly argued that the appeal of the revenue has to be allowed.

4. We have perused the records and considered the rival contentions carefully. The dispute is regarding application of provisions of Explanation to section 73 as per which in case of a company, other than a company gross total income of which consists mainly of income from house property, capital gain and other sources or the company principal business of which consists of banking or of granting loan/advances, any part of the business consists of purchase and sale of shares of other companies loss arising therefrom has to be treated as speculation loss. The assessee is a company whose gross total income consists of house property, capital gain, other sources and loss from trading of shares. In so far as the business is concerned, entire business consists of purchase and sale of shares.

4.1 There are two issues arising in this case which need to be addressed. First issue is whether the provisions of Explanation to section 73 would apply when the entire business consists of purchase and sale of shares. This issue is covered by the judgment of Hon’ble High Court of Calcutta in the case of Arvind Investments Ltd. (supra), in which it has been held that Explanation to Section 73 would apply even when entire business consists of purchase and sale of shares. The second issue is regarding treatment of loss from different heads included in the gross total income. This issue is also covered by the judgment of Hon’ble High Court of Calcutta in the case of Park View Properties (P.) Ltd. (supra). In the said judgment, the Hon’ble High Court of Calcutta following the judgment of Hon’ble Supreme Court in the case of CITv. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 and the judgment of Supreme Court in the case of CIT v. J.H. Gotla [1985] 156 ITR 323 in which it was held that loss is negative income, held that while considering the different constituents of gross total income, the figures in absolute terms should be considered whether positive or negative. The Hon’ble Court followed the earlier judgment in case of Eastern Aviation & Industries Ltd. (supra), in which it was held that when the income from house property, capital gain and other sources even if positive is lower than figure of loss from business activities, it will not be a case of gross total income consisting mainly of income from house property, capital gain and other sources. Since the figure of loss in absolute terms in share trading was higher then income from other sources taken together, it was held that the provisions of Explanation to Section 73 would be applicable. Situation in the present case is identical. Therefore, following the above judgments it has to be held that case of the assessee will be covered by the provisions ofExplanation to section 73. No contrary judgment of any other High Court or Apex Court has been brought to our notice or has been referred to by CIT(A) who has only relied on the decisions of the Tribunal. We, therefore, hold that trading loss in this case has been rightly treated as speculation loss by AO and accordingly we confirm the disallowance of expenses of Rs. 31,12,030/- attributable by AO towards trading activities. Thus, order of CIT(A) is set aside and order of AO is upheld.

5. In the result, appeal of the revenue is allowed.