Is share trading by Investment company speculation ?

Explanation to Section 73 of the Income Tax Act, 1961 states “ 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”

Thus plain reading of the aforesaid provison shows that the Explanation is not applicable :

1. Income from House Property,

2. Capital Gains,

3. Income from Other Sources, (including interest on securities) and

2. in case of a company whose principal business is that of banking or granting of loans and advances, the Explanation shall not apply.

Explanation mention the word” consist mainly of ..” which has been interpreted by diffrent judicial fora in different ways .

The Bombay Tribunal in Rajan Enterprises Pvt. Ltd. v. I.T.O. 41 ITD 469 has held that in the absence of any specific provision in the Explanation, the gross total income will have to be considered without taking into consideration the impact of the Explanation, i.e., no separate treatment is to be given to the loss on sale of shares.

Another judgement ,that of the Calcutta High Court in the case of Eastern Aviation and Industries Ltd. (208 ITR 1023) wherein the High Court observed that while judging the relative composition of gross total income, one has to consider the absolute quantum of loss against other positive income. In the view of the court, the term income includes “loss” and what one needs to consider and compare are the relative figures of loss and income.

You should also note that the Explanation exempts a company whose principal business is that of grant of loans and advance. This term “principal business” has not been defined in the Act.Here also different courts have interpretated in different manners.

In the case of I.T.O vs. Raghav Commercial Ltd. [16 TT] 335 (Cal.); income composition test was applied for determining principal business of the company. In case of Offshore India Ltd. vs. I.T.O. [15 ITD 549] (Cal.). the assessee’s contention of being in business of grant of loans as principal business was rejected as the value of investment was more than value of loans and advances.