S. 73

DCIT v M/s. Baljit Securities Private Limited /I.T.A No.1183/Kol/2012 (Kol ITAT) dated 21.10.14 Background: The assessee is engaged in the business of trading in shares on self account, derivative transactions and share broking activity. During the course of assessment proceedings, the AO noted that the assessee has incurred it incurred net loss of Rs.2,16,75,441/- in purchase and sale of shares (delivery based loss of Rs.7,29,56,706 and non-delivery based profit of Rs.5,12,81,265). The assessee treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading, as one, before application of the deeming provision contained in explanation to section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with the profit derived from derivative trading. The AO applied explanation of Section 73 of the Act and denied the claim of set off of loss from dealing of shares with profit from F & O operations. The CIT(A) allowed the claim of the assessee by holding that share trading loss is to be allowed to be set off with the profits earned in derivative transactions. The Department filed an appeal before the ITAT against the CIT(A) order. 

Explanation to section 73 to be applied after setting off share trading loss against derivative ...

Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.

Interest on borrowings for investment in group company cannot allowed u/s 36(1)(iii) – Mum ITAT

CIT v HSBC Securities & Capital Markets India (P.) Ltd. [ITA No: 657 OF 2007] (Bombay HC) Background: The assessee filed its return of income showing loss of Rs. 1,65,29,711 comprising of loss of Rs 1,72,31,711 arising out of the purchase and loss of shares and income from other sources of Rs 7,02,000. The AO passed assessment order under section 143(3) holding the aforesaid  loss as speculation loss by virtue of explanation to section 73. Before the CIT(A), the assessee argued that “the explanation refers to the words “income which is chargeable under the heads” and since in the Appellant’s case, the only income which is included in gross total income is dividend income, the gross total income mainly consists of “Income from other sources” and therefore, explanation does not apply to Appellants case.“ The CIT(A) partly allowed the assessee’s appeal. However, the ITAT reversed the claim of assessee and invoked explanation to section 73 to treat the aforesaid loss as speculation in nature.

Bombay HC clarifies position on applicability of Explanation to S. 73