High Court Of Calcutta
Maud Tea & Seed Co. Ltd. Vs. CIT
Section 43(5)
Soumitra Pal And Arindam Sinha, JJ.
IT Appeal No. 274 Of 2001
December 24, 2014
JUDGMENT
1. This appeal was admitted on two substantial questions of law. The first of such questions was formulated as by order dated October 1, 2002, to be :
“1. Whether, on a proper construction of the provisions of section 43(5) and in particular proviso (b) thereto, the transactions entered into by the appellant in respect of ACC shares and the loss of Rs. 14.82 lakhs incurred therein fell outside the purview of the said proviso (b) because the market price of ACC shares continued to rise and there was no adverse price fluctuation ?”
2. Mr. Khaitan, learned senior advocate appeared on behalf of the appellant-assessee, referred us straightaway to section 43(5) read with proviso (b) thereto of the Income-tax Act, 1961. It will be useful to set out below the said provision :
“43. (5) ‘speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips :
Provided that for the purposes of this clause-…..
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ;…….
shall not be deemed to be a speculative transaction.”
3. He submitted the transactions his client had entered into were those stated by the stock and share broker and dealer, Babulal Dhanuka, in answering the summons under section 131 of the said Act by a letter dated February 28, 1994. It would appear from the said letter the assessee entered into three transactions of sale and purchase of 2850 shares of ACC Ltd. between July 27, 1990, and August 29, 1990. Mr. Khaitan submitted his client entered into those transactions for the purpose of hedging. Of the shares held by his client, on July 27, 1990, it had sold 2850 shares at the rate of Rs. 913 per share which were purchased subsequently on August 8, 1990, at the rate of Rs. 1,060 per share. On the next day, the assessee again sold those shares at the rate of Rs. 1,044.50 per share to purchase them subsequently on August 22, 1990, at the rate of Rs. 1,350 per share. Lastly, on August 23, 1990, the assessee sold those shares at the rate of Rs. 1,367.50 per share and, thereafter, on August 29, 1990, purchased them at the rate of Rs. 1,435 per share.
4. Mr. Khaitan submitted scrutiny of the aforesaid transactions would reveal price fluctuation in the period when his client made the sale and purchase of the shares without actual delivery or transfer of them. This his client had done to guard against loss of its holding those shares. He pointed out that in the fluctuation of the prices of the said shares between July 27, 1990, and August 29, 1990, the market price of the shares continued to rise except between August 8 and 9, 1990, when the price of the said shares fell from Rs. 1,060 per share to Rs. 1,044.50 per share. According to the learned counsel, the relevant provision read with the proviso excepted hedging transactions without providing for the requirement of the result of such transactions. He submitted in hedging transactions if the price of the share fell between the time of sale and purchase then the shareholder would end up with profit in hand to compensate the loss in the value of the shares. On the other hand, if the price of the shares increased between the time of sale and purchase, the shareholder would incur loss being the difference between the increased value of the shares at the time of purchase against the sale price of the same. He, therefore submitted, his client having hedged by those transactions, suffered a loss by reason of the price of the shares continuing to rise. Since the transactions came within the exception provided for, those could not be said to be speculative transactions. He emphasised the proviso stipulated price fluctuation as against adverse price fluctuation mentioned in the question formulated. He relied on the following decisions :
(i) SK. AR. K. AR. Somasundaram Chettiar & Co. v. CIT [1992] 194 ITR 1/60 Taxman 406 (SC) ;
(ii) CIT v. Hotz Hotel (P.) Ltd. [2003] 260 ITR 132/128 Taxman 160 (Delhi) ;
(iii) CIT v. Ashokbhai B. Shah [1996] 218 ITR 331 (Guj.) ; and
(iv) CIT v. Mohanlal Ranchhoddas [1993] 203 ITR 304 (Guj.).
5. Mr. Khaitan relied on Somasundaram Chettiar to submit the earlier 1922 Act under section 24 provided for speculative transactions which in the later Act got separated, inter alia, under sections 43 and 73 thereof. He submitted if his client was to accept the said transactions to be speculative transactions then the loss incurred thereby could only be set off against the profit from the speculation business. However, section 43(5) read with proviso (b) thereto excepted hedging transactions out of speculative transactions defined in section 43(5). His client having entered into hedging transactions, it was entitled to set up the hedging loss as business loss.
6. He went on to submit the decision in Mohanlal Ranchhoddas (supra) could be relied on. The Gujarat High Court in that decision referred to an earlier Full Bench decision of that court in Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj.) (FB) wherein the Full Bench had referred extensively to the technique of hedge trading as explained by well known economist W. R. Natu in his book Regulation of Forward Markets. A portion of the quote from that book in Mohanlal Ranchhoddas (supra) is reproduced below (page 321 of 203 ITR) :
“Thus, by resorting to counter-balancing transactions in the market for the ready commodity on the one hand and in the hedge market on the other hand, the hedger seeks to safeguard his position. The movement of prices in the two markets may not always follow an identical course and the hedger might at times gain and at times lose but such a gain or loss would be marginal and far less than what it would be if the person had not hedged at all. While, however, the hedging operation protects the hedger against loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. The forgoing of such a possible windfall profit is the price which he pays for the insurance against loss.”
7. He then referred to Ashokbhai B. Shah (supra) to submit the Gujarat High Court in that decision had applied Mohanlal Ranchhoddas (supra) Referring to the case of Hotz Hotel Ltd. (supra) he submitted the Delhi High Court in considering the questions A and D in that appeal proposed for formulation, dismissed the same on the basis of the concurrent finding by the Commissioner of Income-tax (Appeals) and the Tribunal that the loss incurred by the assessee therein was hedging loss.
8. So, Mr. Khaitan submitted, the aforesaid substantial question of law should be answered in the negative and in favour of the appellant-assessee.
9. Mr. M. P. Agrawal, the learned advocate appeared on behalf of the respondent-Revenue, submitted, according to the Concise Oxford Dictionary, Sixth Edition in page 498, the meaning of “hedge” was to make or trim hedges ; secure oneself against loss on (bet, speculation) by compensating transactions on the other side. Chambers Twentieth Century Dictionary, Ninth reprint of the Indian Edition 1983 in page 603, gave the meaning of “hedge” as to obstruct ; to surround ; to guard ; to protect oneself from loss on, by compensatory transactions, e.g., bets on other side.
10. He submitted the answer was in the formulated question itself. The loss of Rs. 14.82 lakhs incurred by the appellant, according to him, fell outside the purview of the said proviso (b) because the market price of ACC Ltd. shares continued to rise and there was no adverse price fluctuation. Proviso (b) since excepted transactions out of speculative transactions defined by section 43(5) of the Act the said proviso needed to be strictly construed in its application. The said proviso mandated contracts in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuation. That, according to him, would mean those transactions which were made to guard against loss in holding of stocks and shares meaning thereby to compensate against loss in the value of stocks and shares through price fluctuation. In this case, there was no dispute on facts and they showed that on the contrary there was addition in the value of shares held by the assessee through price fluctuation. Therefore, there was a rising trend in the price of the shares and no adverse price fluctuation, keeping the transactions within the meaning of section 43(5) of the said Act.
11. We find the passage of the said economist W. R. Natu extracted from his book Regulation of Forward Markets as reproduced in Mohanlal Ranchhoddas (supra), very illuminating. The portion of that passage, which we have set out above, clearly contemplates hedging operation, in protecting the hedger against loss arising from adverse fluctuation in price, would also prevent him from making windfall profit owing to favourable fluctuation in price as well. The author attributes that as the price which the hedger pays for the insurance against loss. The explanation of hedge trading given by the said author, we find, truly explained the meaning of hedging as given in the dictionaries relied on by the Revenue in the context of the said Act. Proviso (b) to section 43(5) of the said Act does not require an inquiry into the result of the transactions but that it should have been entered into for guarding against loss in the holding of stocks and shares. The undisputed facts in this case, in our view, contain ingredients of hedging. The result of those transactions, however, was gain in the holding of shares by the assessee by incurring loss of the said sum of Rs. 14.82 lakhs, the value of increase in the holding of the appellant in the shares in that period. Therefore, when ultimately the appellant sold those shares at an even greater value, it was denied the windfall profit it would have made if it had not hedged at all. For the reasons aforesaid we answer the questions in the negative and in favour of the appellant-assessee.
12. The next question for adjudication as formulated is as under :
“Whether, in the facts and circumstances of this case, the proper way in law to look upon the Unit Trust Master share transaction of the assessee is that in respect of the UTI Master Share Units, the appellant incurred a loss of Rs. 68,900 and was in receipt of the dividend income of Rs. 1,26,000 as claimed by it or as held by the Tribunal, it made a profit of Rs. 56,000 and the dividend amount and, consequently, deduction under section 80M and credit for tax deducted at source has to be excluded from the appellant’s assessment ?”
The facts are the assessee purchased the Unit Trust of India Master shares in February, 1990, at Rs. 17.10 per unit. In May 1990, the assessee entered into a contract to sell the said shares at the then prevailing price of Rs. 17.90 per unit. Registration in respect of the said shares was made in favour of the assessee in August/September, 1990, thereafter dividends declared at Rs. 1.80 per unit and received by the assessee. Subsequent thereto the said shares were sold by the assessee but at Rs. 16.10 per share being the agreed price less the dividend value per unit. The assessee, therefore, claimed deduction in respect of the dividend under the then section 80M of the Income-tax Act, 1961, and showed a loss of Rs. 68,900 in respect of the share transactions.
13. Mr. Khaitan relied on the decisions in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC) and CWT v. Babulal Jatia [1982] 137 ITR 540/10 Taxman 107 (Cal.). Mr. Khaitan, by relying on Walfort Share & Stock Brokers (P.) Ltd.’s case (supra), submitted losses over and above the dividend received would still be allowed from which it follows that Parliament has not treated the dividend stripping transactions as sham or bogus. It has not treated the entire loss as fictitious or only a fiscal loss. After April 1, 2002, losses over and above the dividend received will not be ignored under section 94(7) of the Income-tax Act, 1961. Relying on Babulal Jatia he submitted until change by registration is effected, the transferor continued to be the holder of the shares.
14. Mr. Agarwal submitted the question had two parts to it. The first part was to be answered in favour of the Revenue and the second in favour of the assessee. He submitted the facts in regard to the first part of the question formulated had been concurrently found by the Commissioner of Income-tax (Appeals) and the Tribunal, to be in favour of the Revenue. They had held there was a contract, performance of which would have yielded profit to the assessee but for the dividend stripping of the shares it had indulged in.
15. We find the issue stands settled by the judgments cited and relied upon by Mr. Khaitan. The facts are that though the contract was entered into, it was not specifically performed. There was an alteration made thereto inasmuch as the assessee obtained the dividends and then sold the shares at the reduced price to its buyer. Alteration of contract is permissible in law. The hon’ble Supreme Court had made the position clear regarding dividend stripping by owners of shares in the period prior to April 1, 2002, while this court had clearly held until change by registration is effected in the books of the company, the transferor continues to be the holder of the shares. For the reasons above the answer to the first part of the second question is in the positive and the second part of it in the negative, thus both parts of the question answered in favour of the appellant-assessee and against the Revenue.
16. The appeal, is accordingly, allowed.
[Citation :Â 370 ITR 603]
