The special bench of income-tax appellate tribunal has ruled that losses incurred in the business of purchase and sale of shares can be set off against other income and, thus, reduce the extent of taxable income. The order was passed in favour of a Reliance [Get Quote] group company, Concorde Investments.

While this may be seen as a major boost for the equity market, there is a caveat. For a company to qualify for this ruling, it should be having a genuine share trading business, and the operations of the company ought not fall within the explanation under Section 73 of the Income Tax Act.

The said section specifies that losses pertaining to speculative transactions cannot be set off against business income.

According to the appellate tribunal, a company whose gross total income mainly consists of 'income from other sources' and not business income, would not attract explanation under section 73.

Concord Commercial earns income from business of trading in steel, yarn and fabrics. The company is also engaged in buying and selling of shares and holding them as stock-in-trade.

Income from other sources in the form of dividend (Rs 10.18 lakh) was higher than profit and gains from business, showing a loss of Rs 97,358.

The share trading loss of the assessee company was Rs 2.84 crore (Rs 28.4 million) against a dividend income of Rs 10.18 lakh. This was stated by the income-tax department, which added that business income exceeded that from other sources.

Hence the assessee cannot ask for exemption from section 73 to set off share trading loss against other items of business income.

Concorde however, sought refuge under Section 43(5). This Section provides a exception to speculation transaction if the contract of sale was made to guard against loss in shareholding through price fluctuations. Speculative transaction is defined as a contract settlement where delivery has not taken place.

The I-T department feet that the objective of explanation to Section 73 was to curb business houses from manipulation and thereby reduce taxable companies under its control.