1. S. 73 of the
Income-tax Act provides that any loss computed in respect of speculation
business carried on by an assessee will not be set off except against the
profits and gains, if any, of another speculation business. Further, where any
loss computed in respect of a speculation business for an assessment year is
not wholly set off in the above manner in the said year, the excess shall be
allowed to be carried forward to the
following assessment year and set off
against the speculation profits, if any, in that year, and so on.
2. Under normal
circumstances profits and loss from trans-actions in shares based on delivery
made by an assessee with the intent of business would be assessable under the
head profits and gains of business. The loss, if any, from such transactions
would be adjustable with income from any source under the same head or from,
any other head except income under the head ‘Capital Gains’. But in the case of
certain companies by virtue of Explanation to S. 73, such profit or loss will
be deemed to be speculative. This Explanation was introduced by the Taxation
Laws (Amendment) Act, 1975, with effect from 1-4-1977 and was amended by the
Finance Act, 1987, with effect from 1-4-1988 and reads as follows :
Explanation :
Where any part of the business
of a company other than
a company whose
gross total income consists mainly of income which is chargeable under the heads
‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and
‘Income from other sources’, or a company the principal business of which is
the business of banking or the granting of loans and advances, consists in the
purchase and sale of shares of other companies, such company shall, for the
purposes of this section, be deemed to be carrying on a speculation business to
the extent to which the business consists of the purchase and sale of such
shares.
3. The object of
this provision is to curb the device sometimes resorted to by business houses
to manipulate and reduce the taxable income of companies under their control.
Scope :
4. To begin with,
this Explanation applies to companies and its scope is limited to their
aggregate profits and losses arising from purchase and sale of shares.
5. This Explanation
excludes certain type of companies and as a corollary, includes the rest of the
companies.
Exclusions:
6. Companies whose
gross total income (GTI) consist mainly of the sum of income derived from
‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’
are saved from the rigours of this Explanation.
7. Banking companies
or companies whose principal business is that of granting loans and advances
are also excluded from the scope of this Explanation.
Analysis :
8. What, therefore,
needs to be determined first is the nature of companies to which the provisions
of this Explanation would apply. And in that context, it becomes necessary to
understand what is meant by the term ‘consists mainly of’ used in the
Explanation. This phrase has been used to describe the quality of ‘gross total
income’ (GTI). And although GTI has not been defined in S. 73, its meaning
could be culled out from the use of this phrase in S. 80B(5) of the Act which
contains the following definition of GTI :
(5) ‘Gross total
income’ means the total income computed in accordance with the provisions of
this Act, before making any deduction under this Chapter;
9. The manner of
computation of GTI has not been prescribed in the Act. But forms for filing
Return of Income prescribed in the Income-tax Rules have laid out the manner of
arriving at the GTI. Incomes under the various heads are aggregated to arrive
at the GTI as a step to computing the Total Income. Deductions allowed under
Chapter VIA are made from the GTI to arrive at the Total Income. Agricultural
Income is to be added to the Total Income to find out the applicable rate of
tax.
10. To see what the
gross total income ‘consists mainly of’, one has to put incomes under the head
‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’
on one side and ‘Profits and Gains of Business and Profession’ on the other
side to see which is greater. Any income that does not form a part of the total
income though, will have to be excluded for the purpose of determining the
constituents of GTI. For instance, dividend income would not form any part of
the ‘Income from Other Source’; similarly, share of profit or loss in a
registered partnership firm will not form part of the ‘Profits and Gains of
Business & Professions’, if the company happens to be a partner in any
registered firm.
11. A question that
would immediately come to mind is, what if there is a loss under the head
business (including loss from share dealings) and there is income in the
aggregate from all the residual heads, though the loss under the head business
be a far greater number than the income from the other heads. In other words,
whether a negative integer would always be smaller than a positive integer ? It
may well be so in arithmetic but not, so it seems, for the purpose of the
Income-tax. The Calcutta High Court has, relying upon the decision of the
Supreme Court in CIT v. J. H. Golta, [(1985) 156 ITR 323] in Commissioner
of Income-tax v. Park View Properties P. Ltd., [261 ITR 473], held that we
need only look at the magnitude and not the direction of amounts to determine
which is larger, and if the numbers in loss under the head business are greater
than the numbers in income in the residual categories then business ought to be
regarded as the main activity. The Supreme Court had held in CIT v. J. H.
Golta (ibid) that income defined in S. 16(3) of the Indian
Income-tax Act, 1922 would also include ‘loss’.
12. Another aspect
that needs to be borne in mind is that the scope of this Explanation is
restricted to profits and losses emanating from purchase and sale of shares of
other companies with the intent of business. And therefore, profit and loss
resulting from trade in any other form of security would not attract the
provisions of this Explanation. In Trade Team Private Limited. v. Deputy
Commissioner of Income-tax, [54 ITD 306] Bombay, the ITAT found that the
assessee had purchased and sold the shares only of one company, i.e., Annapurna
Foods Pvt. Ltd. and there was no material before them to hold that it had been
dealing in shares of other companies. They held that a solitary transaction
cannot be regarded as business activity unless proved otherwise by the
department, and thus, provisions of this Explanation were not applicable to the
company. Similar view has been expressed in Kruti Marketing Ltd. v.
Assistant Commissioner of Income-tax, 118 Taxman 194 (May).
13. Whether units of
Unit Trust of India could be considered shares of a company so as to fall
within the ambit of this Explanation was resolved by the Supreme Court in Apollo
Tyres Ltd. v. CIT, [122 Taxmann 562] where it was held that even if UTI was
a deemed company and the income distributed by it was by way of dividend, it
did not make the UTI a deemed company, and therefore, the transaction by a
company in units of UTI would not result into speculative income or loss.
14. This Explanation
begins with ‘where any part of the business of a company’ and it has been
argued as to whether this Explanation could be invoked where dealing in shares
was the only business of the company and not merely a part. The Calcutta High
Court held in Commissioner of Income-tax v. Arvind Investments Limited,
[192 ITR 365] that a part would include the whole, and even if dealing in
shares happened to be the only business of the company, its profits or losses
from such dealings would be deemed speculative, irrespective of whether share
transactions were based on delivery or not, provided the other conditions are
satisfied. To put it in perspective, where even an investment company which has
been incorporated with the object inter alia of dealing in shares,
transacts in shares as its only business or even its main business, then its
profit or loss from such transactions would be regarded as speculative, and
dealt with accordingly. It is interesting though, as to how the various
expenses incurred by such a company, in carrying on business like interest on
capital borrowed to purchase shares, the various administrative and statutory
expenses, etc. of the company would be treated ? Whether they would partake of
the charter of expenses incurred in connection with speculative business or
non-speculative business, even though no such non-speculative business was
being carried on. The deeming provision requires the profit or loss from share
trade to be considered speculative, and therefore, expenses directly
attributable to such business would have to be regarded as having been incurred
in the course of speculative business.
15. It has been
variously argued that if the nature of transaction were not such that it could
be regarded as speculation as per Ss.5 of S. 43, then Explanation 73 would have
no application. It has also been argued that S. 70 dealing with adjustment of
losses inter se within the various sources of income under the same head
or S. 71 dealing with set-off of losses amongst the various heads of income as
envisaged by that Section, will take precedence over the application of
Explanation to S. 73 for various reasons including the fact that S. 70 and 71
precede S. 73. It was argued in R. P. G. Industries Ltd. v. Assistant
Commissioner of Income-tax, [85 ITD 105 ITAT, Calcutta] that the
application of sections is to be taken in the order in which they are placed in
the Act, and therefore, S. 72 will take precedence over the application of S.
73 and since business loss is already carried forward u/s.72 of the Act, by the
time it comes to application of S. 73, there is nothing left to which this Section
could be applied. The tribunal held that the very basis of this proposition was
fallacious because of application of the principle of generalia specialibus
non-derogant, which says that a specific provision has to take precedence
over the general provision. Besides, precedence being assigned to provisions of
law based on the order in which they are placed in an enactment was alien to
the principles of interpretation.
16. The Calcutta
High Court has in Commissioner of Income-tax. v. New India Investment
Corporation Limited, [205 ITR 618] held that if speculation losses for the
earlier years are carried forward, and if in the year of account speculation
profit is earned by the assessee, then such speculation profits for the
accounting year should be adjusted against the carried forward speculation loss
of the previous year, before allowing any other loss to be adjusted against
those profits.
17. Since this
Explanation also excludes companies whose principal business is the business of
banking or the granting of loans and advances, it would be necessary to
understand the manner of determining the principal business of a company. In
most cases, there would be no obvious difficulty in ascertaining what the
principal business of the company is. But there are cases where the
ascertainment of principal business may not be straightforward. For instance,
how would the principal business be ascertained where the majority of the funds
of the company have remained invested in shares or some such asset throughout
most of the financial year, but were used for grant of loans and advances
towards the end of the year or vice versa; or where small funds applied
in shares yielded a much greater income than the larger tranche of funds
invested in loans and advances which could yield relatively smaller gains.
Principal business has not been defined in the Explanation to the section or
even elsewhere in the act and its meaning has, therefore, to be understood in
the context of this section. It was held in Off-Shore India Ltd. v. Income-tax
Officer, [15 ITD 549 ITAT Calcutta] that objects in the Memorandum of
Association of a company are not conclusive of the nature of business carried
on by the assessee-company, and the activity which the company actually engages
in alone determines the nature of its business. If the amount invested in the
share business is more in aggregate than the amount invested in the
money-lending business, then the assessee company cannot be deemed to be
engaged principally in the business of granting loans.
18. To sum up, the
profits and losses of a company from the business of dealing in shares will be
speculative and dealt with as such, unless the company is a banking company or
is principally engaged in the business of granting loans and advances or whose
gross total income from heads of income other than business is larger than
income under the head Profits and Gains of Business or Profession.
Now
let us analyse the above provision with the latest case laws.
·
The Tribunal held where swapping of
shares was approved by a Government agency like FIPB, approved ratio of shares
to be swapped, prudence of transaction could not be challenged and loss there
from had to be assessed. Refer, Capital International Emerging Markets Fund .v.
Dy. DIT, 145 ITD 491.
·
Under Explanation to s.73, business of
purchase and sale of shares by assessee was speculation business and it was
entitled to set off losses from sale and purchase of share against profits of
business of company from loans and advances. Refer, Saurabh Industrial
Financing Ltd. v. ITO, 219 Taxman 112.
·
Deeming fiction that where any part of
companys business consists of purchase and sale of shares company deemed to
carry on speculative transaction. Whether assessee was in business of advancing
loans and earning interest. Not to be concluded by one isolated instance and Gross
total income of assessee mainly consisting of income chargeable under head
Capital gains or Income from other sources and Deeming fiction not applicable
& Loss cannot be treated as speculation loss. Refer, CIT v. Paranjay
Mercantile Ltd., 361 ITR 462.
·
The assessee was engaged in trading of
shares for customers and for itself on delivery basis. The A.O. treated
business of the assessee with regard to trading of shares for itself as
speculative business within the meaning of provisions of section 73. The
tribunal upheld the action of the A.O. and held that where assessee is engaged
in business of share brokerage and share trading, income on account of trading
of shares for itself is speculation income. Refer, Nashik Capital Financial
Services (P) Ltd. .v. Dy.CIT, 142 ITD 581.
·
Derivative transaction – Definition of
speculative transaction in section 43 (5) is confined to its application to
that section and cannot be extended to section 73 of the Act. Refer, CIT .v. DLF Commercial Developers, 91
DTR 49.
·
Loss from shares dealing cannot be
deemed to be from “speculation” under Explanation to s. 73 if company is not
engaged in the “business” of shares dealing. Refer, CIT .v. Orient Instrument Pvt.
Ltd Delhi HC.
·
As per CBDT Circular Carry forward and
set off-To be set off against speculative profit of current year before
adjusting any other loss. Refer, CIT v.
Ashok Mittal, 357 ITR 245.
·
The Assessee had shown income from house
property at Rs.35,73,950/-, income from other sources at Rs.24,92,129/-,
capital gain on sale of flat at Rs.,62,285/- and loss from sale of shares at
Rs.3,25,23,981/-. The Assessee contented that main source of income was income
from house property and therefore, explanation to section 73 was not
applicable. The Tribunal held, that since the figure of loss in absolute terms
in share trading was higher than income from other sources taken together, the
explanation to section 73 would be applicable. The assessment order was upheld.
Refer, DCIT v. Savlani Trading & Investments Co. (P) Ltd, 56 SOT 208
(Mum.)(Trib.).
·
Business of purchase and sale of shares
by assessee being speculation business, loss therefrom was entitled to be set
off of against profits of business of company from loans and advances. Refer, Usha
Politex Ltd. v. ITO, 217 Taxman 113.
·
Assessee involved in trading in shares
on own account and on behalf of customers. Income from trading in shares on
assessees own account to be treated as speculation income and Carry forward of
losses to be allowed accordingly. Refer, Nashik Capital Financial Services P.
Ltd. v. Deputy CIT, VOL 25 PG 48.
·
Assessee was engaged in business of sale
and purchase of shares and government securities. It sold shares of JP and HFCL
at loss and set off loss against profit from sale of shares. Sale and purchase
were made through a sister concern. There was no physical delivery of shares
and shares were sold on dates when prices were lowest. The court held that the
Assessing Officer was justified in disallowing loss on sale of shares of JP on
ground that it was a sham transaction. And also the Assessing Officer was right
in treating loss in sale of shares of HFCL as speculation loss. Appeal of
revenue was allowed. Refer, CIT v.Vachanband Investment Ltd, 212 Taxman 131.
·
The Assessing Officer the treated the
loss on derivative as speculation loss and has not allowed to be set off
against the short term capital gains . In appeal Commissioner (Appeals)
confirmed the view of Assesing Officer. On further appeal The Tribunal held
that in view of amendment with effect from 1-4-2006 the loss suffered by
assessee during derivative trading amounted to short term capital loss and same
could be set off against short term capital gain during relevant year.
Accordingly the appeal of assessee was allowed. Refer, Devendra Exports (P.)
Ltd. v. ACIT, 54 SOT 220.
·
Tribunal rightly set off the losses from
sale and purchase from the income of the assessee from loans and advances. [S.
28(i)]. Refer, CIT v. Narain Properties Ltd, 254 CTR185.
·
Assessee company was not involved in the
business of sale and purchase of shares, and merely indulging in purchase and
sale of shares for investment is not business activity and therefore
explanation to S. 73 was not attracted. The loss has to be allowed as short
term capital loss. The reasoning of CIT (A ) that there was no pressing need
for the appellant company to sell shares within a short span of its acquisition
was held to be perverse. Refer, Standipack (P) Ltd v. CIT, 78 DTR 252.
·
For the purpose of deciding weather the
case of assessee is covered by exception provided in explanation to S. 73,
speculation loss is to be excluded while computing business income and arriving
at the gross total income. Refer, Paramount Information Systems Pvt. Ltd. vs.
ITO, ITAT ‘K’ Bench, Mumbai, ITA No. 921/Mum/2008, decided on 24-2-2010 (BCAJ
42-A, May 2010 pg. 169).
·
Where assessee a share broker, had
incurred loss on trading transactions of shares entered into on its own
Account, and said loss was to be treated as speculation loss as assessee would
be deemed to be carrying on speculative business to extent of business of
purchase and sale of shares of other companies with in meaning of Explanation
to s. 73. Refer, B.L.K. Securities (P) Ltd., 27 SOT 142.
·
Explanation to S. 73 is not restricted
only to the group of companies, and is
applicable to all the companies which carry on business of purchase and sale of
shares. Even shares-in-stock on valuation at the close of accounting year resulting
in profit or loss, such profit & loss u/s. 28(1) is speculation profit or
loss by virtue of Explanation to S. 73. Refer, Prasad Agents (P) Ltd., 213
Taxation 571.
·
Assessee’s main business being earning
of share brokerage from purchase and sale of shares on behalf of its customers,
loss from purchase and sale of shares by assessee itself constituted
speculative business and loss arising there from was speculative loss and could
not be set off against income from brokerage by virtue of application of
explanation s. 73. Refer, Priyasha Meven, 22 DTR 473.
·
Any speculation loss computed for Asst
year 2006-07 and latter assessment years alone would be hit by the amendment
made w.e.f. 1-4-2006 by Finance Act 2005 to section 73(4). Limit of carry
forward of subsequent assessment years applies only to such loss. Refer, Virendra
Kumar Jain vs. ACIT, ITA No. 1009/Mum/2010 Asst. Year 2006-07 Bench ‘B’ dt.
31-5-2010. (BCAJ July P. 42 (493 (2010) 42A BCAJ).
·
Where assessee company was engaged in
business of financing, trading in paper, shares and real estate and highest
funds were employed in investment activities while principal business was of
granting loans and advances, merely because income / loss in dealing in shares
in a particular year was more than income / loss from principal business of
granting loans and advances, assessee was not covered by deeming provisions of
explanation to section 73. Refer, ITO vs. Bijay Paper Traders & Investments
Ltd, 38 SOT 578.
·
Assessee company earning income from the
sale of shares. AO holding that income earned was from speculation and on the
fact it was held that income earned was in the nature of capital gains. Refer, Axis
Capital Markets (India) Ltd., ITA No. 4098/Mum/2007 BCAJ January (2010) Vol.
41-B..
·
Even shares-in-stock on valuation at the
close of accounting year resulting in profit or loss, such profit & loss
u/s. 28(1) is speculation profit or loss by virtue of proviso to s. 73. Refer, Prasad
Agents (P) Ltd., 213 Taxation 571.
·
Speculative business is not limited to
shares but also to commodity also. Refer, CIT v Periakarmalai Tea & Produce
Co Limited, 7 taxmann.com 123.
·
Loss arising on account of purchase and
sale of shares in another company is to be treated as speculative loss in view
of the clear provisions of Explanation to section 73. Refer, Centurion
Investment & International Trading Co. (P) Ltd. vs. ITO, 133 TTJ 803.
·
Deemed fiction contained in Explanation
to section 73 is in relation to the entire activity of purchase and sale of
shares wheather or not they affected by actual delivery. Refer, Dartmour
Holdings (P) Limited v ITO, 8 Taxmann.com 244.
·
It is held that the Explanation to
section 73 creates a fiction that the loss suffered by certain companies from
the business of purchase & sale of shares shall be deemed to be speculation
loss. The definition of speculative transaction in section 43(5) not applicable
to Explanation to section 73. The CBDT Circular dated 24.7.1976 cannot be
treated as guide for interpretation of section 73 when the provision is very
clear and free from any ambiguity. Refer, Paharpur Cooling Towers Ltd. vs. ACIT,
9 Taxmann.com 213.
·
Badla charges claimed by the assessee
company were rightly treated to be speculative loss in view of Explanation to
section 73, since entire share trading activity was deemed to be speculative,
provisions of Explanation to section 73 being deeming provisions, section 43(5)
cannot override section 73. Refer, Dartmour Holdings (P) Ltd. vs. ITO, 51 DTR
321.
·
Where the Company amended its memorandum
and articles of association so as to enable it to make money lending as its
main business, the loss on account of sale and purchase of shares was allowed
to be adjusted against other business income as the assessee’s case fell under
exception clause of section 73 of the Act. Refer, CIT vs. Front Line Securities
Ltd., 50 DTR 337.
·
Loss from valuation of closing stock
cannot be excluded while determining the loss from share trading business ,
therefore , Explanation to section 73 is applicable even to the loss arising
from the valuation of closing stock of shares. If the shares are held by the
assessee company as investment and not as stock in trade, the second condition
of Explanation to section 73 Viz . business of purchase and sale of shares is
not satisfied and therefore , capital gain arising from the sale of shares held
as investment is not hit by Explanation to section 73. Refer, Krishna Lakshmi
Multi Trade (P) Ltd v Asst CIT, 55 DTR 167.
·
Loss from speculative transaction cannot
be set off against income from property. Refer, Aravali Engineers P. Ltd . v.
CIT, 335 ITR 508.
·
Finding that principal business of assessee
was granting of loans hence, Loss from share dealing could be carried forward
and set off against business income. Refer, PCBL Industrial Ltd . v. CIT, 337
ITR 536.
·
Assessee was mainly doing business of
bill discounting /rediscounting, under contractual obligation between the
assessee and parties to the bills. Bills were re discounted and placed only as
collateral security. The Tribunal held that activity of bills rediscounting
would amount to granting of loans and advances and accordingly, Explanation to
section 73 would not be applicable, hence loss on account of sale and purchase
of shares could not be treated as speculation losses, though the object clause
of memorandum of Association showed that advancing the money was only ancillary
object. Refer, Momaya Investments (P) Ltd v ITO, 132 ITD 604
·
Assessee, company dealing with
transaction of sale and purchase of shares and suffering loss. The Transaction
should be treated to be speculative transaction within the meaning of section
73, though it is not speculative nature as there has been actual delivery of
share scripts. Business loss arising out such transaction could be carried
forward and set off only against speculative transaction and not from any other
head. Refer, R.P.G. Industries Ltd. v. CIT, Tax. L. R. 913.
·
The department’s submission that in
computing the gross total income for the purpose of the explanation to section
73, income under the heads of “Profits and gains of business” must be ignored and /or that the share loss should
not be allowed to be set off against the income from any other source under the
head “Profits and gains of business” is not acceptable because it leads to an
incongruous situation where in determining whether a company is carrying on a
speculation business within the meaning of the Explanation, sub‐section (1) of section
73 is applied in the first instance. This is not permissible as a matter of
statutory interpretation because the Explanation is designed to define a
situation where a company is deemed to carry on speculation business. It is only
thereafter that sub‐section (1) of section
73 can apply. Applying the provisions of section 73(1) to determine whether a
company is carrying on speculation business would reverse the order of
application. Legislature has mandated that in order to determine whether the
exception that is carved out by the Explanation applies, a computation of the
gross total income has to be made in accordance with the normal provisions of
the Act and it is only thereafter that it has to be determined whether the
gross total income so computed consists mainly of income which is chargeable
under the heads referred to in the Explanation to section 73 or not. Refer, CIT
v. Darshan Securities Pvt. Ltd, Mumbai HC.
Hope the above small summary on section 73 will help you in getting some relief from the
hardship from the ITD. In case you have any further clarification please mail
me at taxbymanish@yahoo.com.
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