The Income Tax Appellate Tribunal (ITAT), Mumbai Bench while deleting the penalty ruled that change in nature of loss from business loss to speculative loss is not enough to impose a penalty.
The assessee, Af-taab Investment Company Ltd. is an investor and dealer in shares and securities. During assessment proceedings, AO observed from the annual report for FY 2001-02 that some of the shares are held as long-term investments while the others are stock-in-trade. The profit or loss on sale of long-term investments is offered for tax under the head ‘Capital gains’ while the stock-in-trade is offered for tax under the head ‘Business Income’.
The AO observed that the positive business income which includes a loss from the sale of shares held as stock-in-trade. The assessee’s case was selected for scrutiny and AO held that loss incurred by the assessee from the sale of shares held as stock-in-trade is a speculative loss as per the explanation to section 73 of the Act. AO observed that the assessee has profit under the head ‘business’ and loss under the head ‘capital gains.
The main income of the assessee is from profit and gains of business and the explanation of section 73 of the Act is applicable in the assessee’s case. Accordingly, the assessment was completed assessing the total income at Rs. NIL (after adjusting the brought forward losses). AO reclassified the business loss from the sale of shares held as stock-in-trade as speculation loss.
The assessee submitted that AO has reclassified the head of income from business income to speculative income. There is a difference of opinion and the assessee is of the view that the explanation to section 73 of the Act is not applicable to the case of the assessee. However, CIT(A) and ITAT have rejected the contention of the assessee in quantum appeal.
The coram headed by Justice P. P. Bhatt held that the assessee had a bonafide belief that the loss suffered by it is business loss. The change of nature of loss from business loss to speculative loss was not enough to impose a penalty on the assessee.
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