Delhi H.C : Whether the Tribunal was right in holding that loss of Rs. 10,05,740 on account of sale of shares is a hedging loss and is not a speculative loss as held by the AO ? B. Whether the Tribunal was right in not appreciating that the transaction related to speculative loss as covered under s. 43 of the Act ?

High Court Of Delhi

CIT vs. Hotz Hotel Ltd.

Sections 43(5), 260A

Asst. Year 1988-89

D.K. Jain & Mahmood Ali Khan, JJ.

IT Appeal No. 213 of 2002

7th January, 2003

Counsel Appeared

R.D. Jolly with Ms. Rashmi Chopra, for the Appellant : C.S. Aggarwal with Prakash Kumar, for the Respondent

JUDGMENT

D.K. JAIN, J. :

This appeal by the Revenue under s. 260A of the IT Act, 1961 (for short the Act), is directed against the order dt. 31st Oct., 2001, passed by the Tribunal, Delhi Bench-B, New Delhi, in ITA No. 5326/Del/94, pertaining to the asst. yr. 1988-89. The following questions, stated to be substantial questions of law, have been proposed in the appeal memo : “A. Whether the Tribunal was right in holding that loss of Rs. 10,05,740 on account of sale of shares is a hedging loss and is not a speculative loss as held by the AO ? B. Whether the Tribunal was right in not appreciating that the transaction related to speculative loss as covered under s. 43 of the Act ? C. Whether the order of the Tribunal in holding that Rs. 10,05,740 is a business loss, is perverse and has ignored the fact that actual delivery of the shares was taken by the assessee ? D. Whether the Tribunal has correctly interpreted and applied ss. 43(5), Expln. 2 to ss. 28 and 73 of the IT Act, 1961, and correctly held that the loss of Rs. 10,05,740 is not on account of speculative transaction of business ?” The respondent, hereinafter referred to as the assessee, a private limited company, is engaged in the business of running a hotel. It also derives income from some other sources as well, including interest and dividend from shares. For the asst. yr. 1988-89, the assessee filed its return declaring an income of Rs. 27,86,630, but was assessed on a total income of Rs. 39,60,615. The main reason for the difference between the returned income and the assessed income was the addition of Rs. 10,05,740, representing the disallowance of the amount claimed by the assessee as hedging loss. In this appeal we are concerned with this addition. The said loss was claimed under following circumstances : On 26th May, 1987, and 27th May, 1987, the assessee had sold 77,000 shares of Food Specialities Ltd. through a broker, namely, M/s Bharat Bhushan & Co. for a total sum of Rs. 95,66,250, at rates varying from Rs. 120 to 128 per share. These shares were thereafter repurchased by the assessee through the same broker on 1st, 3rd and 5th June, 1987, for a consideration of Rs. 1,05,71,990 at the rates varying from Rs. 134 to 138 per share, thus incurring the aforenoted loss. The AO treated the said loss as speculative loss and, therefore, disallowed it on the grounds : (i) broker’s certificate regarding purchase and sale of shares did not contain the distinctive numbers; (ii) the assessee had itself sold some shares on 31st May, 1987, at Rs. 170 per share and, therefore, it could not be believed that the market rate on 26th May, 1987 and 27th May, 1987, varied between Rs. 122 to 128 per share; (iii) there was no contract between the buyer and the seller and, therefore, the transaction could not be considered as an exception to s. 43(5)(b) of the Act, and (iv) the assessee did not discharge the onus which lay upon it to prove that the sales in question were for safeguarding further loss.

Aggrieved, the assessee preferred appeal to the CIT(A)who agreed with the assessee. While holding that the said loss was a hedging loss and was to be allowed as such, the CIT(A) corrected two factual errors in the assessment with regard to the date on which the appellant had last sold the shares of the said company and the total shareholding of the assessee in Food Specialities. He noted that the assessee had sold shares of Food Specialities at Rs. 170 per share on 31st Jan., 1987, and not on 31st May, 1987, as noted in the assessment order; the fall in value of shares on 26th May, 1987, and 27th May, 1987, was in comparison to the rate prevailing on 31st Jan., 1987 and not 31st May, 1987, and that the transaction in question was only in 77,000 shares, which was far less than the total shareholding of the assessee. Observing that the share sold and repurchased bear a reasonable proportion to the stocks held in hand, the CIT(A) held that the assessee was not trying to speculate in the shares by putting all the shares on sale for repurchase and its clear intention was to reduce investment loss by selling the shares in question for repurchase in the depressed market so that the entire loss or part of the loss could be recouped. The CIT(A) also found that the transaction in question was based on a contract inasmuch as in stock market contract notes are treated as binding contract between the seller and the buyer; the usual format of contract is neither insisted upon nor is in fact the practice in the share market; though it was true that the contract did not contain distinctive numbers of shares involved in the transaction but contract, where the transaction is settled otherwise than by physical delivery of shares, does not and cannot contain distinctive numbers of shares; the assessee had adequately discharged the onus to prove that the transaction was not a speculative transaction and since the shares involved in the transaction were physically in possession of the appellant and since they represented a smaller portion of the total share-holding, it was clear that the intention of the assessee was not to speculate but to safeguard against further loss.

Being dissatisfied with the said order, the Revenue carried the matter in further appeal to the Tribunal but without success. While affirming the view taken by the CIT(A), the Tribunal concluded that on the facts of the present case, contract did exist between the parties and out of a substantial stock of shares of the said company only 77,000 shares were sold for guarding against future loss and, further, sales and purchases were made in a depressed market with the same intention as also to boost the market so that the share value would not go down further. Rejecting the contention of the Revenue that the assessee’s claim could not be accepted as distinctive numbers had not been mentioned and there was no physical delivery, the Tribunal observed that if these two things would have been there, then there was no need to refer to s. 43(5) and its exceptions, since the said section deals with speculative transactions and the three exceptions pertain to those transactions which at first look will fall under the same category but are deemed not to be so. Hence, the present appeal.

6. We have heard Mr. R.D. Jolly, learned senior standing counsel for the Revenue, and Mr. C.S. Aggarwal, learned counsel for the assessee.

7. It is submitted by learned counsel for the Revenue that though initially it was the stand of the assessee itself that there was a written contract for the sale and purchase of the shares in question but no such written contract was produced and, therefore, broker’s note could not be treated as a contract, particularly when no correspondence between the assessee and the broker was placed on record. It is also urged that the assessee has not produced any resolution passed by the Board of Directors of the assessee-company to indicate that a conscious decision had been taken to go in for such a transaction to guard against future loss. It is asserted that the transaction having been entered into just a few days before the end of the previous year, it was per se, speculative in nature. Mr. C.S. Aggarwal, learned counsel for the assessee, on the other hand, while supporting the orders of the appellate authorities would submit that genuineness of the transaction not being in dispute, the conclusions arrived at by the two appellate authorities with regard to the existence of the contract and the intention behind the transaction are pure findings of fact, therefore, the impugned order does not involve any substantial question of law.

8. We find substance in the contention of learned counsel for the assessee. Sub-s. (5) of s. 43 of the Act defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, which may include stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips. However, certain exceptions to the definition of “speculative transaction” are provided in proviso to s. 43(5). Clauses (a), (b) and (c) of the proviso enumerate the contracts which are not deemed to be speculative transactions. For the present case, cl. (b) of the proviso is relevant and it provides that a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holding of stocks and shares through price fluctuations shall not be deemed to be speculative transaction. Proviso (b) contemplates a transaction which is entered into to safeguard the fall in price of the holding of stocks or shares. It is a hedging contract to protect oneself against loss on account of adverse price fluctuations. The prerequisites for being classed as hedging contract and to fall within the ambit of the said proviso are : (i) a contract in respect of stocks or shares, and (ii) entered into to guard against loss in the holdings of stocks and shares through future price fluctuations.

9. The question about the existence of the contract and the intention to enter into such a contract, on which the answer to the question whether a transaction is a hedging transaction or not rests, is primarily one of fact, necessarily to be determined on appreciation of facts surrounding the transaction. Alternatively put, the conclusion that a transaction is a hedging transaction is arrived at on the basis of primary and relevant facts and not by mere application of a principle of law. The finding of the Tribunal on the question is not liable to be interfered unless it is found that the Tribunal has taken into consideration any irrelevant material or has failed to take into consideration any relevant material or that the conclusion arrived at by it is perverse in the sense that no reasonable person, on the basis of the facts before the Tribunal, could have come to the same conclusion to which it has come to.

10. In the present case the two appellate authorities have recorded concurrent findings of the fact about the existence of the contract between the parties and the intention of the parties to enter into the transaction namely, to guard against loss in the holding of stocks and shares through future price fluctuations. In the light of the facts found by the CIT(A) and the Tribunal, which have not been challenged by the Revenue by means of a specific question, we find it difficult to hold that the aforenoted conclusions reached by the Tribunal are based on no evidence or are perverse or patently unreasonable. We are, therefore, of the opinion that the view of the Tribunal that the transaction in question fell within the ambit of proviso (b) to sub-s. (5) of s. 43 cannot be faulted.

11. For the foregoing reasons we are of the opinion that the order of the Tribunal does not give rise to any question of law, much less a substantial question of law. We, therefore, decline to entertain the appeal and the same is accordingly dismissed with no order as to costs.

[Citation : 260 ITR 132]

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