Section 43(5) v Explantion to Section 73

Section 43(5) v  Explanation to section 73

 

Consider the following case

1.       Assessee is earning income taxable under the head Profit and gains of business or profession.

2.       Assessee incurred loss in share derivative transactions, being transaction of nature specified in Proviso (d) to section 43(5). As per said proviso, losses from such transactions are not loss from speculative transaction.

3.       Can assessee set off his loss from share derivative transaction with other business income?

 

In recent case in CIT v DLF Commercial Developers Ltd (ITA 94/2013), Hon’ble Delhi High Court denied such set off in view of provisions of explanation to section 73. Section 73 contains the provisions for set-off loss from speculative business and carry-forward of the same.

 

The explanation to section 73 provide as under:-

 

[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.]

 

As per said ruling, share derivative transactions carry the character of speculative transactions for section 73 and any loss arising therefrom will be characterised as loss from speculative business and same cannot be set-off against normal business income.

 

As per court section 43(5) defining speculative transaction is only for the purpose defining terms used in section 28 to 41.

Section 43(5) has no application over section 73.

 

This ruling will open Pandora’s box for Share brokers, Share traders and other institution investors, being corporate assesses, if they are showing their share dealings (cash & Derivative transactions) under the head PGBP  i.e they are not falling under exception provided by explanation to section 73 namely, the Gross total income mainly consist of income chargeable under heads “Income from House property”, “Capital Gains” and “Income from other Sources”.

Such assessee will not be able to set off loss in share derivative transactions with other business income.

 

Critical Analysis

The application of above-mentioned ruling will create practical problem in administration of provisions of Income Tax Act, especially relating to set off and carried forward of losses.

It will lead to situation where Nature of Loss will be determined post setting off with other source of Business income and also nature of loss will be dependent upon the quantum of other business income.

 The same is illustrated as under:-

A.      Suppose XYZ Ltd having following source of income:-

1.       Business income

Normal Business Income (Say N) – Rs. 1,00,000

Share Derivative Trading loss (Say S) – Rs. 1,00,000

 

2.       Capital Gain – Rs. 80,000

Computation of Income

1.       Assessee has Income under two heads – PGBP & capital gains

2.       For application of section 73 explanation, one has to determine the components of Gross Total income (GTI)

3.       If  GTI is consist of Income from house property,  Capital gain & Income from other sources, then loss from share transaction is not speculative loss, as per explanation to section 73.

4.       Till section 73 explanation application, loss from share derivative transactions will be treated as non-speculative u/s 43(5), to determine income under the head PFBP

 

Income under PGBP

Source N              – Rs. 1,00,000

Source S               – Rs. 1,00,000

Total                      -- Rs. NIL

 

Income under Capital Gain – Rs. 80,000

 

Gross Total Income – Rs. 80,000

Since GTI is mainly consist of income under the head capital gains, loss from share derivative transaction is not speculative loss

 

Thus nature of loss from share derivative transaction is determined post set-off of the same with other business income

 

B.      Suppose in above example, source N income is Rs. 2,00,000, the GTI will be consist of as under:-

1.       Income under head PGBP    -              Rs. 1,00,000

2.       Capital Gain                                                -              Rs.    80,000

Since GTI is not consist of income under the head capital gains, loss of Rs. 1,00,000 will be treated as speculative loss and GTI will be recomputed.

 

Thus nature of loss from share derivative transaction is based on quantum of other business income

 

C.      Continuing with Example A, suppose in assessment proceedings, income from source N is enhance to Rs. 2,00,000. In that scenario also, the nature of loss from source S will be change to speculative loss from non-speculative loss as claimed by assessee.

 

Thus nature of loss from share derivative transaction will keep on changing as the with the finalisation of normal business income in  appellate proceedings.