Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that ‘blank transfer’ of shares as recognised by s. 108(1A) of the Companies Act, 1956 would amount to ‘actual delivery’ within the meaning of the term used in s. 43(5) of the IT Act, 1961 ?

High Court Of Rajasthan

CIT vs. Mangal Chand

Sections 43(5), COMP 108

Asst. Year 1982-83

Rajesh Balia & Sunil Kumar Garg, JJ.

IT Ref. No. 63 of 1995

13th February, 2001

Counsel Appeared

Sandeep Bhandawat, for the Revenue : Vineet Kothari, for the Assessee

JUDGMENT

Rajesh Balia, J.:

Heard learned counsel for the parties. This reference relates to the asst. yr. 1982-83 and arises out of appellate order of the Tribunal in IT Appeal No. 665/Jp/1986. The Tribunal at the instance of CIT has referred the following two questions of law for opinion of this Court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that ‘blank transfer’ of shares as recognised by s. 108(1A) of the Companies Act, 1956 would amount to ‘actual delivery’ within the meaning of the term used in s. 43(5) of the IT Act, 1961 ?

2. Whether, the Tribunal was right in holding that loss of Rs. 2,73,053 was required to be set off against business income of the assessee ?”

2. Having heard the learned counsel for the parties and going through the finding recorded by the Tribunal as per the statement of the case, we find that the expression used in recording finding has not been used rightly which has resulted in framing of question not giving out the real controversy and would require to be re-framed. The question relates to the consideration of loss of Rs. 2,73,053 suffered by the assessee on account of transaction carried on by him in respect of sale and purchase of shares. The assessee has claimed that the assessee’s firm has purchased through M/s Bharat Bhushan & Co., New Delhi, certain shares and also sold the same share through the same firm. The assessee has purchased shares for Rs. 15,16,506 and sold the same for Rs. 12,43,058 of M/s Rathi Alloys. The AO found that the assessee has not actually paid the purchase price Rs. 15,16,506 to M/s Bharat Bhushan & Co. and nor he has received actual amount of Rs. 12,43,058 from the said dealer, but the assessee has only paid the difference of purchase price and sale price amounting to Rs. 2,73,053. From the above, the AO drew inference that the assessee has only paid loss suffered. The AO also observed that it was not clear as to whether the delivery of the shares actually purchased was given to the assessee or not. He also observed that the shares purchased were not transferred in the name of the assessee and no dividends had been received by the assessee. From these three facts, the AO drew inference that delivery of shares was not given to the assessee. Ultimately, the AO held that the loss suffered by the assessee on account of aforesaid transaction was speculation loss within the meaning of s. 43(5) of the IT Act, 1961 (‘the Act’) and could not be set off against the principal income of the assessee from the business and profession, but could be set off only against the speculation profit earned in subsequent year. It, therefore, disallowed the claim of the assessee for adjusting the aforesaid loss in the income of the assessee from its business and profession. Aggrieved with the said order, the assessee preferred an appeal before the CIT(A). The CIT(A) recorded a categoric finding that shares were actually delivered to the assessee and it is on actual delivery that the amount of purchase in the name of M/s Bharat Bhushan & Co. was credited in the books of account of the assessee, by debiting the share account. The finding recorded by the CIT (A) is reproduced hereinbelow : “All the purchases and sales have been made through registered broker Bharat Bhushan & Co. and all the amount of purchases and sales had been credited and debited in the account of M/s Bharat Bhushan & Co. In shares business through regd. broker, there is a general system that firstly the broker issues contract note regarding purchase and sale of shares and at the time of actual delivery of shares, the broker issues the vouchers (purchase voucher). In the case of appellant also, copies of contract note and purchase vouchers had been filed. In the purchase voucher the date of contract note has also been given. The appellant had entered into contract note for purchase of shares of Rathi Alloy on 11th Aug., 1981 and the delivery of the shares had been received through purchase voucher from the registered broker on 8th Jan., 1982 and the shares account had also been debited on 8th Jan., 1982 and credited the account of M/s Bharat Bhushan & Co. on 8th Jan., 1982 when the actual delivery of the shares had been taken. The learned ITO himself confused in not understanding the date of contract note and the date of actual delivery of the shares. When the delivery of the shares had been made through vouchers, there was no question of any doubt regarding actual delivery of shares. From the above, it is clear that the appellant had taken actual delivery of the shares through purchase voucher issued by M/s Bharat Bhushan & Co. and this had also been confirmed by M/s Bharat Bhushan & Co. vide letters dt. 20th Jan., 1982 and 21st Feb., 1982.”

Along with this finding, the CIT(A) also held that shares were not actually entered in the register of members in the name of the assessee by lodging transfer form along with share certificate with the company, but the same were entered in the name of ultimate transferee from the assessee. The blank transfer forms having received by the assessee along with share certificate were delivered to buyer from him and the same were lodged by him with the company for registering transfer and, therefore, there was no question of getting any dividend in his own name from the company. It was further held merely because dividends have not been received by the assessee and shares so purchased were not registered in the name of the assessee in the register of members with the company, no inference against actual delivery taken by the assessee could be drawn when the shares were in fact actually delivered to the assessee through delivery vouchers. With these findings, the finding recorded by the AO that the loss was speculation loss, was set aside and the same was allowed to be set off against other profit and gains of business of that very year. That finding has been affirmed by the Tribunal on further appeal by the Revenue. The Tribunal recorded its findings as under :

“We shall now apply the above principles to the facts of the case wherein purchases and sales of shares were effected by the assessee through registered broker M/s Bharat Bhushan & Co., New Delhi and all the amounts of purchases and sales had been credited and debited in the account of M/s Bharat Bhushan & Co. Firstly, the broker issued contract note regarding purchase and sale of shares and at the time of actual delivery of the shares (as is evident from the correspondence produced on file) then the broker issued vouchers giving date of contract, description of shares, distinctive ‘ numbers, rate amounts and other relevant details. The appellant had taken actual delivery of the shares through purchase vouchers issued by M/s Bharat Bhushan & Co. and this had also been confirmed by M/s Bharat Bhushan & Co. vide letters dt. 20th Jan., 1982 and 21st Feb., 1982. There is a note in the purchase voucher to the effect ‘we are not responsible for keeping blank shares after taking delivery, according to the association rules’. All these shares had been delivered in the blank shape i.e., blank transfers, recognised by s. 108(1A) of the Companies Act. This aspect of the matter has been discussed in detail in the written submissions made by the learned counsel for the appellant. Thus, all transactions of shares purchased have been done in the shape of blank transfers according to the provisions of law. It was not, therefore, necessary according to the provisions of the Companies Act for the appellant to get the shares transferred in his name. The appellant had taken the delivery of the shares as blank transfers and had also given the delivery at the time of selling the shares as blank transfers. Since the delivery of shares were blank transfers, the question of getting any dividend from the company by the appellant also does not arise since the company sends dividend to the person in whose name shares are ultimately registered as per s. 206 of the Companies Act. The actual delivery of shares having taken place in the purchase and sales of share, the matter regarding difference having been paid is of no relevance in the determination of the point at issue.”

3. These findings of the Tribunal as well as CIT(A) clearly reveal that actual delivery of shares has been given to the assessee by M/s Bharat Bhushan & Co. and those shares had been actually delivered to the transferee by the assessee along with blank transfer forms and had ultimately been registered in the name of transferee from the respondent-assessee who lodged with the company the share certificates along with transfer form, the instrument of transfer, duly executed by or on behalf of the transferor and the transferee and duly stamped after filling his name for the purpose of registering the shares in his name. The question referred to does not bring out the fact about the actual delivery of share certificates to the assessee through delivery vouchers, but gives an impression that there is no finding about the delivery of share certificate. The real question in our opinion that arises for consideration on the basis of finding recorded by the Tribunal is : “Whether, the actual delivery of share certificate along with blank transfer form, but without same having been registered in the name of assessee would bring the case within the purview of s. 43(5) for holding it to be speculative transaction and not a business transaction.” The second question in our opinion is superfluous inasmuch as it is consequence of answer to the first question. If material available on the record is correctly perceived, we see no difficulty in finding answer to the question about the nature of share transaction carried on by the assessee. Sec. 43(5) of the Act in light of which the facts and circumstances are to be considered to find whether loss in question was speculative loss reads as under : “43(1) to (4)…… (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— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing ormerchanting 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 (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; shall not be deemed to be a speculative transaction;” A perusal of aforesaid provisions goes to show that apart from the question falling in the proviso, settlement of a transaction of sale and purchase otherwise than by actual delivery of the commodity, including stock and shares in respect of any transaction is essence of determining whether the transaction is to be termed as speculative transaction or non-speculative transaction.

6. The law has been well settled by judicial pronouncement that actual delivery for the purpose of sub-s. (5) of s. 43 means actual delivery as opposed to notional delivery. The definition of ‘delivery’ in s. 2(2) of the Sale of Goods Act which has been held to include both actual and constructive and symbolical delivery has no bearing on the definition of ‘speculative transaction’ in the Explanation. We would do not better than to reproduce the statement of law made by the Hon’ble Supreme Court in the case of Davenport & Co. (P) Ltd. vs. CIT 1975 CTR (SC) 228 : (1975) 100 ITR 715 (SC) overriding the view taken by the Supreme Court in its earlier decision in the case of Raghunath Prasad Poddar vs. CIT 1973 CTR (SC) 359 : (1973) 90 ITR 140 (SC). While dealing with Indian IT Act, 1922, the Supreme Court has held as under : “Sec. 6 of the Indian IT Act, 1922, enumerates the heads of income chargeable to income-tax. Sec. 24(1) of the Act provides that where an assessee sustains a loss under any of these heads in any year, he shall be entitled to have the loss set off against his income, profits or gains under any other head in that year. This general provision is qualified by the first proviso which permits the set off of a loss in speculative business against the assessee’s profits and gains, if any, in a similar business only. Explanation 1 says that where the speculative transactions are of such a nature as to constitute a business, a business shall be deemed to be distinct and separate from any other business. Explanation 2 defines a speculative transaction as a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. The words ‘actual delivery’ in Expln. 2 mean real as opposed to notional delivery. For IT purposes speculative transaction means what the definition of that expression in Expln. 2 says. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of ‘delivery’ in s. 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolic delivery has no bearing on the definition of ‘speculative transaction’ in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Expln. 2 if actual delivery of the commodity or the scrips has taken place; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative transaction which are otherwise legal but gives a special meaning to that expression for the purpose of income tax only”.

7. In this regard, the following observations have been made by the Calcutta High Court in the case of D.M. Wadhwana vs. CIT (1966) 61 ITR 154 (Cal) : “… The Explanation to s. 24(1), however, does not prevent persons from entering into contracts in which the buyers and sellers may not actually hand over the goods physically. The Explanation is only designed at segregating for income tax purposes loss sustained in transactions of a certain kind. It may be that such transactions are not speculative in the light of s. 30 of the Contract Act….In enacting the Expln. 2 of s. 24(1) of the IT Act, the legislature did not intend to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, the loss, if any, would be a loss in a speculative transaction which could be allowed to be set off only against a profit in a transaction of the same nature….The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the goods, but only to brand them as ‘speculative transactions’ so as to put them in a special category for income-tax purposes.” Thus, the Court made it abundantly clear that the actual delivery means real as opposed to notional delivery and where the actual delivery of the commodity or the scrips has taken place, there is no room to construe that transaction as speculative transaction. We do not find any support for the contention raised by the Revenue that because shares have not ultimately been registered in the name of the assessee and dividends have not been paid to the assessee in respect of shares alleged to have been purchased and sold by the assessee, it is a transaction which has been settled otherwise than by actual delivery, hence, speculative in nature. The two circumstances have no relevance whether delivery of shares has in fact taken place. It is immaterial whether ultimately the shares are registered in the name of the assessee, if he has concluded the transaction by taking delivery of shares and had sold the same by giving delivery along with blank transfer forms. In all such cases invariably both the circumstances pressed into service by the Revenue will exit.

It is relevant to notice provisions of the Companies Act also. A ‘member’ of a company has been defined in s. 41 of the Companies Act, 1956 to mean firstly the subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company and on its registration, shall be entered as members in its register of members; secondly every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company; and thirdly, every person holding equity share capital of a company and whose name is entered as beneficial owner in the record of the depository shall be deemed to be a member of the concerned company.

10. Sec. 108 deals with transfer of shares and debenture which reads as under: “108. Transfer not to be registered except on production of instrument of transfer.—(1) A company shall not register a transfer of shares in, or debentures of, the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debenture : Provided that where on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit: Provided further that nothing in this section shall prejudice any power of the company to register as shareholder or debenture holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law. (1A) Every instrument of transfer of shares shall be in such form as may be prescribed, and— (a) every such form shall, before it is signed by or on behalf of the transferor and before any entry is made therein, be presented to the prescribed authority, being a person already in the service of the Government, who shall stamp or otherwise endorse thereon the date on which it is so presented, and (b) every instrument of transfer in the prescribed form with the date of such presented stamped or otherwise endorsed thereon shall after it is executed by or on behalf of the transferor and the transferee and completed in all other respects, be delivered to the company,— (i) in the case of shares dealt in or quoted on a recognised stock exchange, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority under cl. (a) or within twelve months from the date of such presentation, whichever is later; (ii) in any other case, within two months from the date of such presentation.”

From the scheme of s. 108, it appears that a definite mode has been prescribed before a transferee can beregistered as member of the company in the register of members. It requires that a company shall not register a transfer of shares in or debentures of, the company, unless proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name and address and occupation, if any, of the transferee, has been delivered to the company along with certificate relating to the shares or debentures or if no such certificate is in existence, along with the letter of allotment of the shares or debentures. Clause (a) of sub-s. (1A) requires that every instrument of transfer has to be in prescribed form and is to be stamped and date has to be endorsed by appropriate authority on which it is presented before him for stamping and endorsement. Clause (b) of sub-s. (1A) further requires that such duly stamped and endorsed form is valid only for a specified period as prescribed, within which it has to be produced before the prescribed authority. The law is well-settled that so far as transferee is concerned, delivery of all blank transfer forms along with share certificates results in completing transaction between transferee and transferor notwithstanding the same may not beregistered in the register of members. The effect of non-registration may be on the right of transferee to receive dividends on such shares from the company. The company under the relevant provisions of the Companies Act and rulesframed thereunder pays and issues dividend warrants or interest vouchers only in the name of persons who are registered as its member in register of members or the persons are shown holding debentures as per the record of the company. Until such alteration in the company’s record takes place, however, the interaction between company and its shareholders or debentureholders as per its records, does not affect the genuineness of transaction of transfer which, infact, has taken place between its shareholders/debentureholder and other persons and subsequent transfers which have otherwise taken place in accordance with law of transfer of movable property.

In this connection reference may be made to the case of Howrah Trading Co. Ltd. vs. CIT AIR 1959 SC 775. The question had arisen under corresponding provision under the Companies Act, 1913. The Court said that thetransfer of shares of a company takes place either by a fully executed document such as is contemplated by the regn. 18 of Table A of the Companies Act, 1913 or by what are known as ‘blank transfers’. In such blank transfers, the name of the transferor is entered and the transfer deed signed by the transferor is handed over with the share scrip to the transferee who, if he so chooses completes the transfer by entering his name and then applying to the company to register his name in place of the previous holder of the share. The company recognizes no person except one whose name is on the register of members, upon whom alone calls for unpaid capital can be made and to whom only the dividend declared by the company is legally payable. Of course, between the transferor and thetransferee, certain equities arise even on the execution and handing over of ‘a blank transfer’ and among these equities is the right of the transferee to claim the dividend declared and paid to the transferor who is treated as a trustee on behalf of the transferee. These equities, however, do not touch the company and no claim by the transferee whose name is not in the register of members can be made against the company, if the transferor retains the money in his own hands and fails to pay it to him. The Rajasthan High Court in the case of CIT vs. Smt. Suraj Bai (1972) 84 ITR 774 (Raj) : TC 35R.208 has held that gifts of shares of companies are complete for the purpose of GT Act on the date of delivery of the share certificate along with transfer deeds to the donees, though the date of registration of shares in the name of donees in the register of the company is later. The gift is complete when the beneficial interest in the shares is transferred from the donor to the donee. The other High Courts have expressed the similar view. Reference in this connection may be made to the following decisions :

In the case of Arjun Prasad vs. Central Bank of India AIR 1956 Pat 32, the Court said : “As between the parties to the transaction, and where the right of no third parties is involved, a registered shareholder by duly executing a transfer in blank and by handing over the share certificate to his creditor by way of security transmits his title to the shares, both legal and equitable…”. In the case of the Bank of Hindustan Ltd. vs. Kowtha Suryanaravana Rao AIR 1957 Mad 702, the Court said : “A blank transfer deed may pass property in shares as between the purchaser and the seller, and transfer of shares in that sense….” In view of aforesaid proposition as per the findings of the Tribunal which are findings of facts, the transfer of shares between the assessee and his seller has taken place by actual delivery of share certificate and blank transfer forms duly executed by the transferor, resulted in transfer of shares conducted by taking actual delivery, so far as seller and the assessee are concerned. So also when the assessee instead of getting the shares registered in his name resold the same to another buyer and delivered to him share certificates along with blank transfer forms duly executed by transferor in the first instance, transaction between the assessee and buyer from him was also conducted by actual delivery of scrips. In such case s. 43(5) could not have been invoked by holding such transaction to be speculative transaction. As a result, the aforesaid question of law as reframed by us is answered in affirmative, i.e., to say, in favour of assessee and against the Revenue. No order as to costs.

[Citation : 255 ITR 329]

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