High Court Of Gauhati
Bhikamchand Betala & Sons vs. ITO
Section 43(5)
Asst. Year 1995-96
D. Biswas & Smt. A. Hazarika, JJ.
IT Appeal No. 41 of 2003
21st August, 2007
Counsel Appeared
G.N. Sahewalla with A.K. Goswami, S. Senapati, Md. Aslam & Ms. M. Jain, for the Assessee : U. Bhuyan, for the
Revenue
JUDGMENT
Smt. A. Hazarika, J. :
This is an appeal under s. 260A of the IT Act, 1961. By this appeal, the appellant has challenged the legality and validity of the order dt. 24th Jan., 2003, passed by the Tribunal, Gauhati Bench, Guwahati, in ITA No. 118/Gau/1999 for the asst. yr. 1995-96.
2. The facts of the present appeal may be briefly stated at the very outset. The appellant is an assessee under the IT Act, 1961 (for short “the Act”), assessed to tax by the ITO, Ward 1(5), Guwahati. The status of the assessee is that of HUF and the assessment year under consideration is 1995-96. During the assessment proceeding a claim was made by the assessee of share business loss amounting to Rs. 3,99,860. On various grounds mentioned in the assessment order dt. 31st March, 1998, the AO concluded that the transaction in shares as claimed by the assessee cannot be treated as genuine. Accordingly, the share business loss of Rs. 3,99,860 was not allowed and the same was added back to the total income of the assessee for the said year.
3. The assessee preferred an appeal before the CIT(A), Guwahati, questioning the addition of the aforesaid amount to its income. The appellate authority, vide order dt. 30th Oct., 1998, allowed the said appeal of the assessee by holding that the disallowance of the loss of share business amounting to Rs. 3,99,860 was based on a wrong perception of the facts. The AO was directed to allow the loss so claimed.
4. Against the aforesaid order, the Revenue came up in appeal before the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati (“the Tribunal” for short). The said appeal was registered as ITA. No. 118/Gau/1999. The Tribunal, vide its order dt. 24th Jan., 2003, allowed the said appeal of the Revenue. Though the Tribunal held that there was no cogent material to show that the said share transactions were not genuine, the Tribunal observed that the assessee had purchased the shares from M/s R.K. Associates on principal to principal basis and resold the shares to the same M/s R.K. Associates without taking physical delivery of the shares and also paid only the difference amount of purchase and sale value to the said M/s R.K. Associates. In view of the provisions contained in s. 43(5) of the Act, the Tribunal took the view that the loss of Rs. 3,99,860 so suffered by the assessee was speculation loss and accordingly, modified the appellate order dt. 30th Oct., 1998.
5. The above order of the Tribunal is under challenge in the present appeal. The appeal was admitted by this Court on 25th April, 2003, on the following substantial questions of law :
“1. Whether the Tribunal was justified in applying the provisions of s. 43(5) when broker being the agent of the appellant was in custody of the shares on behalf of the appellant ?
2. Whether the Tribunal was justified in holding the transaction to be speculative when the shares were directed to be sold to avoid further loss as the value of shares of steel companies were in downward trend ?”
I have heard Mr. G.N. Sahewalla, learned senior counsel assisted by Md. Aslam and Ms. M. Jain, learned counsel for the appellant. Also heard Mr. U. Bhuyan learned standing counsel, appearing for the respondent IT Department. Mr. Sahewalla, learned senior counsel, submitted that the Tribunal erred in holding the loss in share transaction amounting to Rs. 3,99,860 as speculation loss. According to him, after recording the finding that there was no cogent material to show that the share transactions were not genuine, there was no justification for the Tribunal to proceed further to hold the said loss as speculation loss. He asserted that the Tribunal has committed a manifest error in holding the said loss suffered by the assessee as speculation loss as it was nobody’s case that the transactions entered into by the assessee were speculative transactions and the loss suffered was speculation loss. Countering the arguments of Mr. Sahewalla, learned senior counsel, Mr. U. Bhuyan, learned standing counsel for the Revenue, has submitted that there is no infirmity in the order of the Tribunal and the Tribunal was correct and justified in treating the said share transaction loss as speculation loss. Referring to the provisions of Expln. 2 to s. 28, s. 43(5) and s. 73 of the Act, learned standing counsel asserted that the said transactions came within the ambit of the meaning of speculative transaction and, therefore, the Tribunal was justified in treating the said loss as speculation loss. Before proceeding further, it would be apposite to note down the relevant provisions of the Act relating to speculative transaction and speculation loss : “Sec. 28, Explanation 2. : Where speculative transactions carried on by an assessee are of such a nature as to constitute business, the business (hereinafter referred to as the ‘speculation business’), shall be deemed to be distinct and separate from any other business. Sec. 43. In ss. 28 to 41 and in this section, unless the context otherwise requires— …………….. (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 : (a) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (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; or… Provided that for the purposes of this clause— shall not be deemed to be a speculative transaction. Sec. 73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of other speculation business… Explanation.—…”
10. Now, let us have a look upon the decisions relied upon by the respective counsel. Mr. Sahewalla, learned senior counsel appearing on behalf of the assessee, has relied upon the following decisions : (i) CIT vs. Kamani Tubes Ltd. (1994) 207 ITR 298 (Bom); (ii) CIT vs. Mangal Chand (2002) 172 CTR (Raj) 112 : (2002) 255 ITR 329 (Raj); and (iii) CIT vs. Shantilal (P) Ltd. (1983) 35 CTR (SC) 395 : (1983) 144 ITR 57 (SC): (1983) 3 SCC 561. In CIT vs. Kamani Tubes Ltd. (supra), the Court after referring to various decisions of the apex Court as well as the High Courts, held that a transaction cannot be described as a “speculative transaction” within the meaning of s. 43(5) of the IT Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation. The Court further held that in deciding the character of the transactions, what is important to consider is the distinctive character of such transactions. In each case it is the total effect of all the relevant facts and circumstances that determines the character of the transaction. Moreover, the burden of proving that the transactions carried on by an assessee were of such a nature as to constitute “speculation business” is on the taxing authorities. If the authorities come to a conclusion without making necessary investigation in that regard such an inference cannot be sustained. The Court thus held that the ITO was not justified in disallowing the deduction by referring to s. 43(5) of the Act.
In the case of CIT vs. Mangal Chand (supra), the Court held that if the assessee has concluded the transaction by taking delivery of shares and has sold the same by giving delivery along with blank transfer forms it is immaterial whether the shares were not registered in the name of the assessee or dividend were not paid to the assessee. The Court further held that delivery of blank transfer form along with share certificates results in completing transaction between the transferee and transferor notwithstanding that the same may not be registered in the register of members, thus the transactions of purchase and sale of shares were conducted by actual delivery of scrips. Therefore, such transactions were not speculative transactions within the meaning of s. 43(5) and the consequential loss was not speculative loss. In CIT vs. Shantilal (P) Ltd. (supra), the apex Court held that a transaction cannot be described as a “speculative transaction” within the meaning of sub-s. (5) of s. 43 of the IT Act, 1961, where there is breach of contract and on a dispute between the parties damages are awarded as compensation by an arbitration award. There is no dispute with the above proposition arrived at by the Courts in the aforesaid cases referred to and relied upon by learned counsel appearing for the appellant. However, on the facts of the present case, the aforesaid cases do not help the assessee and the Tribunal has rightly held that the loss suffered by the assessee was speculation loss. In support of his submission, Mr. Bhuyan, learned standing counsel, relies on the following decisions : (i) Hoosen Kasam Dada (India) Ltd. vs. CIT (1964) 52 ITR 171 (Cal); (ii) CIT vs. Maya Ram Jia Lal (1986) 53 CTR (P&H) 314 : (1986) 162 ITR 520 (P&H); (iii) V. N. Sarsetty vs. CIT (1987) 60 CTR (Kar) 68 : (1987) 163 ITR 727 (Kar); (iv) Abdul Gani Haji Habib vs. CIT (1969) 72 ITR 6 (Cal); and (v) CIT vs. Jagannath Mahadeo Prasad and CIT vs. Gauri Dutt Bhagwan Dass and Co. (1969) 71 ITR 296 (SC).
In Hoosen Kasam Dada (India) Ltd. (supra), the Court held that, under Expln. 2 to s. 24, a transaction in which a contract for purchase and sale of any commodity is settled otherwise than by delivery, is a speculative transaction irrespective of whether the parties initially intended to give delivery or not and the Tribunal rightly held that, under the proviso to s. 24(1), the loss in contracts in which delivery was not given could not be allowed to be set off. The Court further held that the definition contained in Expln. 2 has severely restricted the meaning of the expression “speculative transaction” and in a sense simplified it for the purpose of computation of income-tax. Thus, where there is no delivery under a settlement contract, it is a speculative transaction. On the other hand, however, speculative transaction might be, if there is delivery, it cannot be considered as a speculative transaction for the purpose of s. 24. In CIT vs. Maya Ram Jia Lal (supra), the assessee, which carried on business in the sale of wool-tops and manufacture of yarn, entered into contracts with various parties for the supply of goods to them. Since the assessee could not fulfil the contract in time, the assessee settled the contracts by paying compensation to the parties. The assessee claimed the compensation paid as a business loss. The ITO took the view that the compensation paid for the non-fulfilment of the contracts was speculative in nature within the meaning of s. 43(5) of the IT Act, 1961, as there were no written agreements between the assessee and various parties. The AAC upheld the claim of the assessee. The Tribunal found that in respect of almost all transactions, the settlement was made long after the date of delivery as contemplated in the contracts, that the claim of the assessee was based on breach of contract and did not come within the meaning of a contract “settled” as used in s. 43(5) and that the loss was allowable as a trading liability. The Court on the reference made, after detailed deliberation held that compensation paid by the assessee to the various parties for non-fulfilment of the contracts was a speculative transaction within the meaning of s. 43(5).
While arriving as above, the Court in Maya Ram Jia Lal (supra) relied upon the two decisions of the Supreme Court rendered in Nirmal Trading Co. vs. CIT (1979) 13 CTR (SC) 178 : (1980) 121 ITR 54 (SC) and Jute Investment Co. Ltd. vs. CIT (1979) 13 CTR (SC) 188 : (1980) 121 ITR 56 (SC) for the proposition that if the delivery of the goods is not made and it is not shown that there was any dispute between the contracting parties, then it is to be held that the settlement arrived at between the parties would be deemed to be a settlement by a contract which transaction has to be held to be speculative and thereby, in Maya Ram Jia Lal (supra) held that as no delivery was made and it is also apparent that the contracts between the parties were settled by payment and, therefore, such payments cannot be allowed and have to be disallowed being a speculative nature as they clearly come within the ambit of s. 43(5) of the Act. In Maya Ram Jia Lal (supra), the Court further held that to find out whether a transaction is speculative or not, the following are the criteria.
18. If the dispute is settled between the parties then it is not a speculative transaction, but if the contract is settled and under the settlement of the contract, damages are paid, it would be a speculative transaction.
19. In the case of V. N. Sarsetty (supra), the assessee entered into a contract with the buyer for supply of cotton within the stipulated time. The buyer was given option to extend the time for delivery of goods but not delivered within the stipulated time even after repeated demands and extension of time for performance of contract. However, the goods could not be delivered within time. Thereafter, the assessee paid Rs. 35,000 by way of loss on account of non-delivery of goods in full settlement of the contract. The amount so paid to the buyer by way of loss for non-delivery of goods in full settlement of contract, held, is not damages for breach of contract but the transaction is speculative transaction and the payment so made to the buyer is speculative loss.
20. In the case of V. N. Sarsetty (supra), the Court relied upon the decisions in Bhandari Rajmal Kushal Raj vs. CIT (1974) 96 ITR 401 (Mys) and CIT vs. Shantilal (P) Ltd. (supra).
21. In Abdul Gani Haji Habib (supra), the Court relying upon the decisions in Hoosen Kasam Dada (India) Ltd. (supra), D.M. Wadhwana vs. CIT (1966) 61 ITR 154 (Cal) and Sahu Jain Ltd. vs. CIT (1964) 52 ITR 857 (Patna), held that the transactions which were settled by payment of differences must be treated as speculative transactions even though the assessee did not intend when the contracts were entered into to settle them by payment of differences inasmuch as the intention of the parties has no place in the scheme of s. 24.
22. In CIT vs. Jagannath Mahadeo Prasad and CIT vs. Gauri Dutt Bhagwan Dass & Co. (supra), the question that arises in the appeals was whether speculative loss can be set off against profit from any other business activity under s. 10 in spite of the first proviso to s. 24(1) of the Indian IT Act, 1922. After elaborate discussion, the apex Court held that the assessee is not entitled to set off speculative losses against profits from other business activities of the same year, for the purpose of computing the income, profits and gains under s. 10(1) of the Indian IT Act, 1922; the second proviso to s. 24(1) of the Act prior to the amendment of the section by the Taxation Laws (Extension to Jammu and Kashmir) Act, 1954, or the first proviso after that amendment applies. It provides in unmistakable and unequivocal terms that any losses sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits or gains in any other business consisting of speculative transactions.
23. On the above authorities cited by Mr. Bhuyan, learned standing counsel, we have to overrule the arguments advanced on behalf of the assessee that in spite of holding by the learned Tribunal that no cogent material could be brought on record by the Revenue to show that the share transactions were not genuine and merely by observing that the assessee purchased the shares from M/s R.K. Associates on principal to principal basis and resold the shares to the same M/s R.K. Associates without taking the physical delivery of the shares and also paid only the difference amount of purchase and sale value to the said M/s R.K. Associates and thereby holding that loss of Rs. 3,99,860 so suffered by the assessee was speculation loss is based on wrong perception of laws and not justified. Therefore, the contention made on behalf of the assessee that as there was no initial intention on his part to settle the contract in question, by payment of difference but he was only forced by the subsequent circumstances to do so, the transactions were not speculative in nature, cannot be accepted in the facts and circumstances of the case.
24. In the result, the argument advanced by the assessee failed and we answer the question formulated by this Court in the affirmative and in favour of the Revenue. The loss of Rs. 3,99,860 held to be speculation loss and, therefore, there shall be no deduction of tax on the aforesaid amount.
[Citation : 294 ITR 10]
