Section 73

Section 73 — the law in short

What the courts have decided on section 73, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Snowtex Investment Ltd v PCIT Supreme CourtHelps department
  Can I set my share trading loss off against my F&O profits?
  No, for years up to AY 2014-15. Where a company's principal business is dealing in shares, the Explanation to s.73 deems that loss to be speculative, while derivatives profits on a recognised exchange are non-speculative under s.43(5)(d) — so the two cannot be set off. The 2014 amendment to the Explanation is prospective and does not help earlier years.
• Apollo Tyres Ltd v CIT Supreme CourtHelps taxpayer
  The AO has rewritten my audited book profit for MAT. Is he allowed to?
  No. His power is limited to examining whether the accounts have been certified by the authorities under the Companies Act as properly maintained, and then making only the additions and reductions the Explanation prescribes. He cannot sit in judgment over the correctness of an audited profit and loss account.
• CIT v Madhukant M. Mehta Supreme CourtHelps taxpayerValidity unconfirmed
  My client's father died and the heirs formed a firm to carry on his business. Can the firm use his brought-forward loss, or does s.78(2) stop it?
  It can, if the succession is by inheritance — s.78(2) denies the carry forward only where a business is succeeded to otherwise than by inheritance. The Supreme Court declined to interfere with the finding that heirs who executed a partnership deed within a month of the death and carried on the identical speculation business, in the same name, at the same premises, with the same constituents, had succeeded to the deceased's business by inheritance for the purposes of s.78(2).
• Davenport & Co P Ltd v CIT Supreme CourtHelps department
  I bought and sold goods by endorsing delivery orders and never handled them. Is my loss a speculation loss even though the sale was perfectly valid?
  Yes. The Supreme Court held that actual delivery in the definition of a speculative transaction means real as opposed to notional delivery. The wider meaning of delivery in the Sale of Goods Act, which takes in constructive or symbolic delivery, has no bearing on it. A transaction that is speculative in the ordinary sense is not caught if the commodity is actually delivered, and a transaction that is not speculative in any ordinary sense is caught if it is not. The definition does not invalidate anything; it only brands such transactions as speculative for income-tax purposes and confines the loss accordingly.
• Souvenir Developers (I) Pvt Ltd v Union of India High CourtHelps taxpayerHigh Courts differ
  My company is not a share dealer at all, but it lost money on exchange-traded F&O. The AO says the Explanation to s.73 makes it speculation loss. Can I set it off against my ordinary business income?
  In the Bombay High Court, yes. Once a derivative transaction falls inside clause (d) of the proviso to s.43(5) it is not a speculative transaction at all, and the Court held that neither s.73(1) nor the Explanation to s.73 applies to the loss, so it is an ordinary business loss set off under s.70 against any other business income. The Court expressly recorded that the Delhi High Court in DLF Commercial Developers has taken the contrary view.
• Shankar Sales Promotion Pvt Ltd v CIT High CourtHelps taxpayerValidity unconfirmed
  My company lends money and also deals in shares. How is it decided which is the 'principal business' for the exclusion in the Explanation to s.73?
  There is no single test. The Calcutta High Court held that the memorandum of association, turnover, capital expenditure and the relation of profit to expenses are all relevant, that all of them must be judiciously analysed and assessed, and that what emerges is a tricky question of fact which the Tribunal must determine threadbare on the record. Because the Tribunal had not done that, the Court set its order aside and remitted the appeal with a direction to decide within six months.
• CIT v DLF Commercial Developers Ltd High CourtHelps department
  My company lost money trading in exchange traded derivatives. Section 43(5)(d) says those are not speculative transactions, so can I set the loss off against ordinary business income?
  No, not if the Explanation to section 73 applies to the company. The Delhi High Court held that the exclusion of eligible derivative transactions from "speculative transaction" in section 43(5)(d) is confined to the provisions for which that definition was enacted, and does not carry into the Explanation to section 73. Derivatives take their value from the underlying stocks and shares, and if the share business itself is deemed speculative under the Explanation, so is the derivative business built on it. The Tribunal's order allowing carry forward of the Rs.4.92 crore loss was set aside and the Revenue's appeal allowed.
• CIT v Darshan Securities Pvt Ltd High CourtHelps taxpayerValidity unconfirmed
  The AO says my company's gross total income does not 'consist mainly' of the four excluded heads because he has left the share loss out of the business head. Is that the right computation?
  No. To decide whether the exception in the Explanation to s.73 applies you compute gross total income under the normal provisions of the Act, taking into account both the income and the loss under the head profits and gains of business or profession, and only then ask whether what results consists mainly of interest on securities, house property, capital gains and other sources. Section 73(1) is applied after the Explanation, not before it, because to apply the bar first in order to decide whether there is a speculation business at all would reverse the order of the statute.
• CIT v Shri Bharat R. Ruia (HUF) High CourtHelps department
  My derivative loss is for a year before assessment year 2006-07. Can I argue that clause (d) of the proviso to s.43(5) is clarificatory and covers it?
  No, in the Bombay High Court. Exchange-traded derivative transactions settled otherwise than by actual delivery are speculative transactions within the main part of s.43(5), and clause (d) of the proviso, inserted by the Finance Act 2005, operates prospectively from 1 April 2006 only. For years up to assessment year 2005-06 the loss is speculation loss.
• CIT v Lokmat Newspapers Pvt Ltd High CourtHelps taxpayer
  My company has brought forward speculation loss from the Explanation to s.73. This year it made a profit on delivery-based share sales. The AO says the deeming fiction works only on losses. Can I set the brought forward loss against that profit?
  Yes. Once the Explanation to s.73 deems a company to be carrying on speculation business, the fiction attaches to the business, not to the result, so profits from that same business - including delivery-based share sales - are profits of a speculation business against which brought forward speculation loss can be set off under s.73(2). The Revenue's argument that the fiction applies to a loss but not to a profit would read a restriction into the Explanation that Parliament did not enact.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.