Loss on sale of shares held as investment is “capital loss”: ITAT

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BANGALORE.  Vide a significant ruling AIT-2006-100-ITAT passed by Mr Vimal Gandhi President of ITAT; the Tribunal vide majority has ruled that   when shares were held and sold by assessee as a capital asset (investment), the loss accruing to the assessee was liable to be assessed as short-term capital loss.  Therefore, there was no question of treating it as a speculation loss by applying Explanation to section 73 of the Income Tax Act.

T H E   Q U E S T I O N : On account of difference between Members, the following question was referred   to President:

            “Whether, on the facts and in the circumstances of the case, the loss arising to the assessee amounting to Rs. 4,90,500/- is to be treated as speculation loss within the meaning of Explanation to section 73 of the Act, or to be treated as loss arising on transfer of a capital asset as claimed by the assessee? 

T H E   F A C T S : Assessee company, in the relevant period, filed return declaring Nil income on 30^th November, 1996.  On scrutiny of accounts, the AO found that assessee had claimed short term capital loss of Rs. 4,90,500/- on sale of shares of TISCO. The AO  held that Explanation to section 73 was applicable in this case and loss of Rs. 4,90,500 was treated as speculative loss directed to be carried forward and not adjusted against other income. 

The CIT(Appeals) directed the AO to allow adjustment of loss to the assessee, with the following directions:

            “I have considered the arguments raised on behalf of the appellant.  The AO applied Section 73 which relates to cases where the assessee is not an investment company.  In case of non investment companies, if there is a business carried on of banking or the granting of loans and advances and there is purchase and sale of shares, loss will be deemed as from speculation.  The appellant has not done any such business.  The AO has tried to hold that the sale of shares was an adventure in the nature of trade but it is only a presumption in the case of the appellant.  The appellant has not been doing any business of banking or advancing of loans.  Merely on account of the fact that there is a transaction which has resulted in loss, it cannot be termed as business carried on by the appellant.  The finding of the AO that Section 73 was applicable in the case of the appellant is not based on correct appreciation of facts and law.  The rejection of set off of loss which was short term capital loss by the AO was not correct.  The AO is directed to allow relief admissible in this regard.” 

            The Revenue being aggrieved brought the issue in appeal before the Appellate Tribunal.                       

T H E    R U L I N G  :The question required to be considered is, whether transaction of purchase and sale of shares of TISCO can be treated as business and, therefore, a speculation business in terms of Explanation to Section 73 of the Income Tax Act.             

• A single or a few isolated transactions of purchase and sale of shares may or may not be an adventure in the nature of trade.  There is no presumption that a single transaction or isolated transactions are “adventure in the nature of trade”.  Adventure in the nature of trade postulates existence of certain elements of adventure which is law is vested with character of a trade or business.  The question has to be decided on consideration of different circumstances including frequency of sales, nature of assets sold, price received as compared with cost and several other factors.  Adventure in nature of trade pre-supposes transaction being in nature of revenue transaction.  Purchase and sale of capital asset per se can not be business.

• Further in spite of inclusion of “adventure or concern in nature of trade” in the definition of “business” u/s 2(13) of Income Tax Act, it is not possible to hold that every transaction of purchase and sale would be an adventure in nature of trade and, therefore, business transaction as understood in Explanation to Section 73 of the Income Tax Act.  The revenue has to consider facts and circumstances of the case and establish that the transaction or transactions were carried with intention to carry trade.  Several other factors, right from the beginning at the time of purchase, till the sale are required to be examined like magnitude of transaction, nature of investment, length of ownership-holding, conduct and subsequent dealing of assessee, manner of disposal.  Frequency and multiplicity of transactions and other facts which are a valuable guide in determining the question whether assessee had entered into a trade venture.  The revenue cannot simply rest on the definition of the term “business” and hold every transaction of sale and purchase to be a business transaction.  There is no such presumption that every activity of the limited company is part of business carried on by the assessee. 

• In the present case the AO did not bring any material on record to show shares were purchased as an adventure in nature of trade nor showed that any of factors considered by Courts to take a transaction as an “adventure” were satisfied in this case.  The position did not change in the appellate proceedings and therefore without evidence it is difficult to hold that sale/purchase of shares of TISCO by the assessee was an adventure in nature of trade or it was business or part of business. 

• Above conclusion is further supported by the language of Explanation to section 73 and scheme of the enactment.  For giving proper meaning to words “any part of business of a company”, we have to take into account not only Explanation but entire Scheme of the Act, particularly of section 73 of the Income Tax Act.  Sub-section (1) of Section 73 in clear terms refers to “computed” speculation business.  So business as per the aforesaid sub-section means computed business (speculation) which shall be set off against profits and gains, if any, of another speculation business.  The word “business” as for as this sub-section is concerned, can have no other meaning except business as computed under the Statute.

• In all the sub sections of section 73, business has to be understood as “computed business” income under the provisions of the Act.  The word “business” is not required to be understood in isolation and out of context and given wider or narrow meaning.  There is no need to give a go by to the classification of income under different heads for computation of income particularly under the head “business”.  In fact language of section is so clear that there is no need to speculate as to what meaning is required to be given to word “business” for purposes of the said section. 

• The Explanation to section 73 is part of section 73 and by fiction makes purchase and sale of other companies by a company itself speculation business.  As the explanation creates a fictional solution, it is required to be construed in a narrow sense.  There is no indication that “business” as per the Explanation can be given a meaning different from meaning given under the main section.  Further the Explanation uses terms “gross total income”, “income under the heads” like “interest on securities”, “income from house property”, etc., making it absolutely clear that “part of business” means part of such business where income is computable under the head “business”.  The Explanation provides for set off and adjustment of income/loss of particular type of business mentioned in the explanation.  Having regard to clear language, there is no need in my view to speculate what is the import of word “business” in the Explanation. 

• There is no question drawing any sort of presumption, either in favour of carrying business or against it.  Whether a single or more transactions carried on by the assessee are adventure in nature of trade so as to constitute business for purposes of computation under the head “profit and gains of business” is a question of fact required to be determined on facts and in the circumstances of the each case.  One has to see intention of the assessee at the time of purchase of the asset and other circumstances to determine whether profit derived or loss suffered was liable to be assessed under the head “business”.  As has been laid down by their Lordship of Bombay High Court, the onus to prove that the assessee carried on speculation business is always on the revenue.

• Even capital assets held by company were business asset.  This is the position when word “business” is considered in a wider sense.  Every transaction carried on by the assessee relating to its asset cannot be treated as a transaction, liable to be assessed under the head “business”.  It may give rise to capital gain or income assessable under the head “other sources”.  The company can also have receipt of casual and non recurring nature.  The computation of income has to be done as per the machinery and rules provided by the Income Tax Act and not on general notion of term “business”.  

  ( Click here for full text of ruling AIT-2006-100-ITAT )  

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