Speculative loss: Section 73: A.Y. 1996-97: Service charges Rs.2.25 crore, share trading loss Rs.2.23 crore and dividend income Rs.4.7 lakh: Exception in Explanation to section 73 applicable: Assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).

For the A.Y. 1996-97, the assessee returned an income of Rs.2.25 crore from service charges, share trading loss of Rs.2.23 crore: and dividend income of Rs.4.7 lakh. The assessee claimed that in computing the gross total income for the purpose of Explanation to section 73 of the Income-tax Act, 1961, the income from service charges have to be adjusted against the loss in share trading. The Assessing Officer did not accept the claim and disallowed the share trading loss as speculation loss. The Tribunal accepted the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Explanation to section 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that s.s (1) of section 73 can apply.

(ii) In computing the gross total income the normal provisions of the Income-tax Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. In the present case, both the income from service charges of Rs.2.25 crore and the share trading loss of Rs.2.23 crore, would have to be taken into account in computing the income under the head business, both being sources under the same head.

(iii) The assessee had a dividend income of Rs.4.7 lakh. The Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).”