Explanation To Section 73 Of The Income Tax Act .
Section 73 of the Income Tax Act, 1961 deals with carry forward and set off losses from speculation business. Explanation to Section 73 is a deeming provision wherein if specified conditions are satisfied, purchase and sale of shares are deemed speculation activities. This explanation becomes very important now-a-days in view of more and more NBFC activities.
Explanation to Section 73 read as under :
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 & Advances) consists in the purchase and sale of shares of other companies, such company shall, for the purpose 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 explained in para 19 of the Circular no. 179 dt. 30 th September, 1975 TC 24S. 1053, the object behind the insertion of the Explanation is to curb the device restored to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.
Explanation to Section 73 does not attract any assessee other than a company. Again if the following conditions are satisfied the provisions in Explanation to Section 73 does not attracts to the companies also. The conditions are :-
- If the gross total income of the company includes income mainly from the following heads i.e." Interest on Securities", "Income from House Property", "Capital Gains" and " Income from Other sources".
- The principal business of the company is the business of banking or the granting of loans and advances.
Explanation to Section 73 provides that a company if fulfills any one of the aforesaid two conditions shall be exempted from the preview of the provisions of the explanation. The word "OR" written in between the two conditions suggests that either first or second conditions needs to be satisfied. Chambers twentieth Century dictionary defines "OR" is a word used for marking an alternative.
The explanation to section 73 is not applicable in case the whole of the business of a company consists of purchase and sale of shares because the first line of the explanation reads as under.
Where any part of the business of a Company. It means only when part of the business of the company consists of purchase and sale of shares, explanation is applicable. Part of the business means some percentage of the whole business of a company and it includes any percentage, say 90% but part does not include whole. Whole includes part. Dictionary meaning of the word "Part" is "something less than the whole", " a portion". It is clear that part does not include whole. But Hon"ble High Court of Calcutta has taken a contrary view in the case of COMMISSIONER OF INCOME TAX VS. ARVIND INVESTMENT LTD. (1991) 192 ITR 36J (CAL). The Hon'ble High Court of Calcutta has decided in the above case that explanation to section 73 applies not only where a part of the business of a company consists of purchase and sale of shares but also where the entire business activities of the company consists of purchase and sale of shares. But I am the opinion that Part does not include whole, therefore if whole of the business consists of purchase and sale of shares of other companies Explanation to Section 73 is not applicable.
Gross total income includes income, profit, gains and loss as well. Loss is nothing but a negative income. Therefore, loss incurred during the year should be considered or taken into account to calculate the percentage of income under each head. The Hon'ble Calcutta High Court has decided in the case of ARYASTHAN CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX (2002) 253 ITR 401 (CAL) that :
Loss in share dealings far in excess of income computed under the head " Income from other Sources" - Assessee cannot be said to be a company whose gross total income comprise mainly of income which is chargeable under the heads " interest on securities", " income from house property", "capital gains" and " income from other sources"- Not an investment company within the meaning of S. 109(ii) – explanation to section 73 clearly applicable and loss was speculated loss – Eastern Aviation & Industries Ltd. VS. CIT (1994) 208 ITR 1023(CAL), TC 46R.254 followed.
The first conditions used the words “mainly” relevant to the income from the specified four heads of income which has to be understood in true legal terms. The dictionary meaning of the word “mainly” is chiefly, principally, much etc,. This is very clear that the aggregate income from the specified four heads should be the main portion of the gross total income of the company. The plain meaning of the word “mainly” is more than half. It means any element which has the presence of more than half in the total shall be termed as main element. So, if the aggregate income of the four specified heads is more than 50% of the gross total income of a company, it can be said that the company has the main income from the four specified heads. Mainly is the word come from the word Main and carries some more weight than the word Main. Therefore, to do the justice to the word “Mainly” some more weightage has to be given in terms of percentage. In my opinion, 51% and above is the right percentage for the word “Mainly”. So, if the aggregate income of the four specified heads is 51% and above of the gross total income of a company, it should be said the company has the income mainly from the four specified heads.
The second condition used the word “Principal” relevant to the business of the company. The conditions specified that the principal business of the company should be banking or granting of loans and advances. It means that any company whose principal business is banking or granting of loans or advances is not attracted to the provisions in the explanation to section 73 of the Income Tax act, 1961. The dictionary meaning of the word “ Principal” are taking the first place, highest rank, character, or importance. It means that the banking business or business of granting Loans and Advances should take the first place or highest rank or importance in terms of the total business of the company. The business which is more important will in natural terms requires more investments but may or may not earn income. So the investment criteria is the main criteria to judge the principal business of the company. Therefore, the money invested in banking business or in business of granting loans and advances should be more than the investment in other business or activities.
All companies other than the company discussed above is a company attracting to the provisions in the explanation to section 73 of the Income Tax Act, 1961 and if any part of their business consists purchase and sale of shares of other company, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. The plain reading of the language suggests that all the companies if not exempted as discussed above do purchase and sale of shares of other companies and profit and loss, if any, arising out of purchase and sale of shares of other companies shall be deemed as speculation profit or speculation loss as the case may be.
The word “Purchase” of shares of other companies has great significance here in the explanation. Purchase means buying something at a agreed price from the market and delivery of the goods is assured once the full payment is made. So, if a company purchase shares from the market at a predetermined or agreed price, the delivery of shares is assured after making the payment. This transaction is covered as per the explanation to Section 73 of the Act and shall be deemed as speculation business.
We all know the shares can be acquired in the following manners :-
- purchase from the market.
- Application for allotment of shares
Under (a) system of acquisition of shares quantity of shares purchased are delivered within the stipulated time as per the clearing system of the Stock Exchange after payment is made. In this system we are sure of delivery of shares and the purchased quantity.
Under (b) system of acquisition of shares, we are not sure
- whether we will get allotment of share or not.
- Even if we get allotment, we will get the total shares as applied for,
- We do not know the no. of shares we get unless the allotment scheme is finalized.
Therefore, “Purchase” and “application” are two different words and does not include each other and from the above it is very clear that there is no certainties to get the shares as applied for. Both the word have different system of acquiring the shares and purchase does not include application. Hence as per explanation section 73 of the Act., shares if purchased is covered and shall be deemed to be speculation business. Company if applies for shares of other companies, gets the allotment and sale the allotted shares subsequently will not come within the preview of explanation to section 73 of the Income Tax Act, 1961. Acquiring the shares through primary application and allotment will not come within the preview of purchase as mentioned in the explanation.
A similar view has been taken by Hon’ble “C” bench of Calcutta ITAT in ITA no. 2827 of 2001 in the case of Ginni Finance (P) Ltd. VS. ITO (Not reported). It was decided that the assessee had incurred the loss by selling the shares of the companies whose capital was subscribed by the assessee hence it was not a loss suffered in purchase and sale of shares of other companies.
The Hon’ble “D” bench of Mumbai ITAT has taken the similar view in the case of Laxmi Feeds & Exports Ltd. VS. ACIT, 62 ITD 315. In this case it was held that there is only acquisition of shares and not purchase of shares, in as much as, the 100,000 shares in question were obtained only by way of subscription to a public issue.