1. This appeal has been filed by the Revenue on 10th Sept., 1999, against the order of the CIT(A)-I, New Delhi, dt. 22nd June, 1999, in the case of the assessee in relation to assessment order under Section 143(3) for asst. yr. 1996-97.
2. In this appeal, the Revenue has disputed the order of the CIT(A) that the loss claimed by the assessee on purchase and sale of share could not be treated as speculation loss. Facts of the case leading to this appeal briefly are that the assessee-company was a member of the National Stock Exchange of India Ltd. and carried on the business of share broker. That apart, the assessee also carried on the business of purchase and sale of shares on its own behalf. During the year under consideration, the assessee declared brokerage income of Rs. 32,57,942.
At the same time, the assessee disclosed loss in share trading at Rs. 34,73,739 and adjusted the same against share brokerage income and income of the assessee from capital gains and other sources. The learned AO referred to the provisions of Explanation to Section 73 and asked the assessee as to why the loss of Rs. 34,73,739 on share trading be not treated as deemed speculation loss. The assessee replied that purchase and sale of shares was the main business of the assessee-company as distinct from the expression "part of the business of the company" mentioned in Explanation to Section 73. As the main business of the assessee consisted of sale and purchase of shares, Explanation to Section 73 did not apply. Alternatively, the assessee argued that if it were to be treated as having been caught by Explanation to Section 73, then the whole business of the assessee shall become speculative business thereby leading to the similar tax liability as had been computed by the assessee.
3. The learned AO held that during the year the assessee-company had carried out two distinct businesses, (i) purchase and sale of shares on behalf of the clients on brokerage; and (ii) purchase and sale of shares for self-trading. The first business was that of a share broker and the second business was that of share dealing. These two businesses had separate characteristics and, therefore, could not be treated as one and the same business. In support of this contention, the learned AO placed reliance on the judgment of Hon'ble Punjab High Court reported in Kanahaya Lal Puran Mal v. CIT (1966) 60 ITR 354 (Punjab).
The learned AO also did not find merit in the contention of the assessee that loss had arisen to it mainly on account of valuation of stock-in-trade. If the closing stock of shares were valued, but at the cost price instead of market price that would not make difference except in reduction of the amount of loss booked by the assessee. The learned AO referred to the judgment of Hon'ble (Calcutta) High Court in the case of CIT v. Sun Distributors & Mining Co. Ltd. (1993) 68 Taxman 223 (Cal) wherein it had been held that the loss disclosed as a result of the valuation of the shares in the business of purchase and sale of shares must be treated as loss arising from speculation business. The learned AO, therefore, rejected both the contentions of the assessee, viz., the whole of the business should be treated as speculation business or the loss arisen on account of valuation of stock-in-trade should be .treated as business loss. The AO also relied upon the Supreme Court judgment reported in CIT v. Pangal Vittal Nayak & Co. (P) Ltd. into on behalf of the constituents could not be set off against the loss from speculation business carried on by the assessee. On these reasoning the AO treated the loss of Rs. 34,73,739 as speculation loss.
4. During the course of hearing, before the learned CIT(A), the assessee argued that the AO had not even considered the spirit under which Explanation to Section 73 was inserted w.e.f. 1st April, 1977.
The assessee argued that speculative transaction was already defined under the provisions of Section 43(5). However, Explanation to Section 73 was inserted on the recommendation of Wanchoo Committee as a counter to tax avoidance devices being resorted to by way of transactions of sale/purchase of shares of intra-group companies. For that reason the Explanation to Section 73 was made applicable only to the companies and not to other traders in shares. The assessee relied upon the judgment of the Hon'ble Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. and Ors. . Relying on that judgment, the assessee argued that the expressions used in a taxing statute should be understood in the sense which is harmonious with the objective of the statute. From the background facts of the enactment of Section 73 it was clear that Explanation had been appended to Section 73 to counter tax avoidance devices. The assessee in the present case was not a manufacturer and it had incurred loss in sale and purchase of shares in the ordinary course of trading. The assessee's transactions were not limited to any particular group of companies. The assessee became a member of the National Stock Exchange and for the purpose the assessee deposited 30,000 shares of Flex Industries Ltd. with National Securities Clearing Corporation Ltd. as per requirements of National Stock Exchange. The major loss had arisen to the assessee on account of depreciation in the value of the shares of Flex Industries. The assessee not having entered into any tax avoidance device, the assessee's case was covered by the ratio of the judgment of Hon'ble Supreme Court in the case of Gwalior Rayon Silk Mfg. Co. Ltd. & Ors.
(supra). The assessee also argued before the learned CIT(A) that if at all Explanation to Section 73 was to be applied, the same had to be applied to brokerage business also because that too consisted in sale and purchase of shares. Facts of the case of the assessee were distinct from Kanahaya Lal Puran Mal v. CIT (supra). In that case, the assessee had carried on speculative business on his own behalf and claimed the loss against share brokerage income. That was a case of Section 43(5) and not Explanation to Section 73. In respect of the Supreme Court judgment (supra) also, the assessee was a speculator without application of Explanation to Section 73. Thus, in both the judgments the business of the assessee was divided into two parts because one part consisted of speculative transactions within the meaning of Section 43(5). The assessee also, sought to distinguish the judgment of Hon'ble Calcutta High Court reported in (1993) 68 Taxman 223 (Cal) (supra). That was the case of an assessee mainly engaged in the business of manufacturing, and sale and purchase of shares was not their main business.
5. Without prejudice, the assessee argued that if Explanation to Section 73 was to be applied, the whole business should be treated as speculation business. Without prejudice, the assessee argued since the shares of Flex Industries Ltd. had been offered as security against the assessee's membership of National Stock Exchange, the loss incurred on those shares had direct nexus with the brokerage business and, therefore, the same should be set off against the brokerage income of the assessee. Without prejudice, the assessee also objected to allocation of 25 per cent of expenses towards the speculation business to be excessive and without any basis. Relying upon the judgment of the Hon'ble Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. , the assessee argued that as there was a single indivisible business, no expenses could be allocated against the deemed speculation loss. At any rate, allocation of 25 per cent of the expenses was excessive. Without prejudice, the assessee further argued that income under the head "Capital gains" should also be treated as part of the income from sale and purchase of shares. According to the assessee, that income also should have been adjusted against the share trading loss. Similarly, the assessee contended that dividend income should also have been adjusted against share trading loss.
6. The learned CIT(A) held that facts of the assessee's case were distinguished from various judgments relied upon by the AO because the same had not been delivered in the context of Explanation to Section 73. The learned CIT(A), therefore, held that Explanation to Section 73 was not applicable to the case of the assessee. The CIT(A) agreed with the alternative plea also of the assessee that both loss in sale and purchase of shares and income by way of brokerage should be dealt with under one head. The learned CIT(A) agreed further that loss arising on the holding of shares placed with NSCCL should be charged against the brokerage amount. In addition, the CIT(A) held that no expenses should be allocated to the business of sale and purchase of shares; the dividend income of Rs. 1,54,070 and capital gain income also should be adjusted against the loss arising from the business of sale and purchase of shares. Aggrieved, the Revenue is in appeal before us.
7. Ground of appeal No. 1 in Revenue's appeal is omnibus ground that learned CIT(A) erred in deleting the addition of Rs. 38.09 lakhs made by the AO while invoking Explanation to Section 73 of the Act. Ground of appeal No. 2 is to the effect that the learned CIT(A) erred in not accepting that the assessee carried on two distinct businesses: one as a sharebroker and another as share trader. The ground of appeal No. 3 is directed against the CIT(A) not appreciating that the assessee did not have income under the head "Capital gain" (sic), "Income from house property", "Interest on securities" and "Income from other sources".
Since the Revenue has taken the omnibus ground against the deletion of addition ,of Rs. 38.09 lakhs, it is not necessary to deal with other grounds separately as the same are covered by this principal ground.
8. During the course of hearing before us, the learned Departmental Representative argued that from the judgment of Hon'ble Punjab High Court (1996) 60 ITR 354 (Punjab) (supra), it was quite clear that the assessee carried on two distinct and separate businesses of share broker and share trader. He argued that this position was further reinforced from the judgments of Hon'ble Calcutta High Court reported in 85 ITR 212 (Cal) (sic) and CIT v. Park View Properties (P) Ltd. that speculation loss cannot be adjusted against brokerage income. The learned Departmental Representative assailed various findings of the learned CIT(A) in para 9 of the impugned order on this basis.
9. The learned counsel for the assessee argued that Explanation to Section 73 was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1977, in response to a specific recommendation of Wanchoo Committee to counter tax avoidance device often resorted to by business houses for dealing in shares controlled by them. The Committee suggested that dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business. Since the deeming provisions of Explanation to Section 73 were enacted for a specific purpose, the provisions of Explanation should not have been applied in a case where there was no suggestion of any tax avoidance scheme. The learned counsel strongly relied upon the decision of Tribunal Delhi SMC-I Bench in the case of Aman Portfolio (P) Ltd. v. Dy. CIT 10. The learned counsel then argued that if at all the assessee's business of purchase and sale of shares was to be treated as speculation business, that equally applied to the assessee's share broking business. For both the business activities the assessee purchased and sold shares with the only difference that while in the former the assessee earned brokerage, in the latter the assessee earned profit or, as the case may be, incurred loss. He emphasized that as far as the provisions of Explanation were concerned, it was nowhere specified that the provisions were restricted to share trading. As a matter of fact, the expression "trade" or "trading" did not occur anywhere in the Explanation. The Explanation simply referred to the business that consists in purchase and sale of shares. The learned counsel pointed out the difference between the phrases "consist of" and "consist in". According to the Webster's Dictionary of the English Language, "consist of" meant "to be made up or composed", "the programme consists of three plays." As against that the phrase "consist in" meant "to reside or lie". The advantage "consists in" its simplicity. The learned counsel argued that if this distinction was kept in mind, it was apparent that assessee's business of share broker consisted in sale and purchase of shares in the same manner the assessee's business of share trading consisted in. Hence, either in the case of assessee Explanation to Section 73 did not apply at all and if it applied it applied both to share trading as well as share brokerage business of the assessee. The result was, therefore, the same. The loss incurred by the assessee in share trading had to be adjusted against the share brokerage income earned by the assessee. The learned counsel argued that the learned AO misdirected himself by relying on the judgment reported in (1966) 60 ITR 354 (Punjab) (supra) and (supra) without realizing that those judgments had been given in relation to actual transactions of speculation in shares.
In the case of the assessee there was no speculation and only by way of deeming provisions the result of purchase and sale of shares was to be treated as speculation profit or speculation loss. The learned counsel relied upon the decisions of the Tribunal in the case of Dy. CIT v.Aakrosh Investment & Leasing (P) Ltd (2004) 90 TTJ (Mumbai) 36 : (2004) 90 ITD 287 (Mumbai). He referred to the finding of the Tribunal where the shares are held as part of trading asset, dividends on such shares would form part of income from business of the assessee. He argued that same logic as in respect of dividend should be applied to as in respect of brokerage. If dividend earned by the assessee was to be considered as part of share trading, brokerage also was result of trading in shares only. The only difference was that while in the former the assessee traded on his own behalf, in latter he traded on behalf of the constituents. But, in both the cases, the assessee's business consisted in purchase and sale of shares.
11. In his rejoinder, the learned Departmental Representative argued that the judgment of Hon'ble Supreme Court in the case of Gwalior Rayon (supra) was not applicable in relation to Explanation to Section 73.
There was no ambiguity as far as the language of Explanation to Section 73 was concerned and, therefore, there was no basis to look at the objective or intention of the legislature for enactment of Explanation to Section 73.
12. We have considered the rival submissions. We do not see force in the argument of the assessee that there must be suggestion of tax avoidance scheme before the provisions of Explanation to Section 73 may be invoked. Reliance in that respect has been placed on the judgment of Hon'ble Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co.
Ltd. and Ors. (supra). In that judgment the Hon'ble Supreme Court emphasized that if the language is plain and unambiguous one can only look fairly at the language used and interpret it to give effect to the legislative intention. It is well-settled position in law that rules of interpretation can be put into service only where the language of the statute is ambiguous or capable of more than one meaning. In the case of CIT v. Sodra Devi the Hon'ble Supreme Court have held that unless there is any ambiguity it would not be open to the Court to depart from the normal rule of construction, i.e., the intention of the legislature should be primarily gathered from the words which are used. The same view has been reiterated by the Hon'ble Supreme Court in the case of Smt. Tarulata Shyam and Ors. v. CIT . Insofar as provisions of Explanation to Section 73 are concerned, the language is quite clear. It has to be applied to all cases, other than excluded category, where any part of the business of a company consists in the purchase and sale of shares of other companies. The categories of cases to be excluded have been specified by the statute itself and there is hardly any basis to add yet another category of exclusion, i.e., non-tax avoidance cases. That would amount to, in our humble opinion, rewriting the legislation which is not permissible. The learned counsel of the assessee has relied upon the decision of the Single Member reported in (2005) 92 TTJ (Del) 351 (supra). That decision is contrary to the Division Bench of the Delhi Tribunal in the case of SRJ Securities Ltd. v. Asstt. CIT (2003) 81 TTJ (Del) 484. As a matter of fact, the decision of Single Member in the case of Aman Portfolio Ltd. has been published in (2005) 92 TTJ (Del) 351 along with the following Editorial Comments : "This decision seems to be novel where the benefit of Section 73 read with Explanation has been given to the assessee on the basis of the object and the intention of the provision as derived from the circular issued by the Board, disregarding the clear language used in the statutory provisions. No doubt, decisions applied by the Tribunal support such interpretation.
Reference may however be made to the Supreme Court decision in the case of Keshavji Raoji & Co. v. CIT (1990) 182 ITR 1 (SC) holding that as long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the legislature. In Doypack Systems (P) Ltd. v. Union of India observed "The words in the statute must, prima facie, be given their ordinary meanings. Where the grammatical construction is clear, manifest and without doubt, the construction ought to prevail unless there are some strong and obvious reasons to the contrary.... It has to be reiterated that the object of interpretation of a statute is to discover the intention of Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. That intention, and therefore, the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand.... Artificial and unduly latitudinarian rules of construction which with their general tendency to "give the taxpayer the breaks", are out of place where the legislation has a fiscal mission. "In Doypack Systems (P) Ltd. (supra) it was further observed that "contemporanea expositio is a well-settled principle or doctrine which applies only to the construction of ambiguous language in old statutes.... It is not applicable to modern statutes." Further, a Division Bench of the Delhi Tribunal in the case of SRJ Securities Ltd. v. Asstt. CIT (2003) 81 TTJ (Del) 484 after exhaustively considering the various aspects, has held in similar facts that loss suffered by assessee, a share broker-cum-dealer, on purchase and sale of shares on its own account was speculation loss within the meaning of Section 73 read with Explanation and assessee's main income not being interest on securities, income from house property, capital gains or income from other sources and assessee not being in the business of banking or granting of loans and advances, and the business of share broker and share dealer being separate and distinct businesses, the loss could not be set off against commission earned from brokerage business. This decision is binding on the Single Member case; otherwise, the matter could have been referred to a larger Bench." 13. After consideration, we find ourselves in agreement with the observations of the learned Editor.
14. We now address ourselves to the second limb of the argument of the assessee that if the provisions of Explanation to Section 73 are to be applied they should be applied both to the income from share trading as well as income from share brokerage. The expression used in Explanation to Section 73 is "consist in the purchase and sale of shares of other companies." It is remarkable that the conjunction "and" has been employed between purchase and sale. The business should consist in purchase and sale of shares in conjunction. In the case of share brokerage business the transactions ordinarily comprise of either a contract of purchase of shares on behalf of the constituent or a contract of sale of shares on behalf of the constituent. The contract of purchase or, as the case may be, of sale is executed independent of each other. It is not necessary for a constituent selling certain shares through a particular share broker to purchase also from the same broker and vice versa. The business of a sharebroker does not consist in purchase and sale of shares conjointly. It would, therefore, appear that the provision is intended to apply to the business where shares are purchased with the intention to sell them at profit. The same view has been taken in the decision of Tribunal Delhi reported in (2003) 81 TTJ (Del) 484 (supra). As a matter of fact, the same decision has been taken by Hon'ble Punjab High Court in the case of Kanahaya Lal Puran Mal (supra) where it was held that the loss suffered by the assessee in his own business could not be set off against the profits earned by the assessee by way of commission earned on transactions entered into on behalf of the constituents. We do not see any material difference between the facts of that case and the facts of the assessee before us.
Similarly, in the case of CIT v. Pangal Vittal Nayak & Co. (P) Ltd. (supra), the assessee who had speculated on its own was precluded to set off its losses in speculation against commission income earned on the speculative transactions of the assessee's constituents. Hon'ble Supreme Court clearly held that there was no element of speculation whatever in the commission income received by the assessee and that the commission was independent of any fluctuation in the market and that the commission was earned not as a profit from the speculation, but from the business as a broker. In our humble opinion, both the judgments are clearly against the claim of the assessee that its business of share trading and its business of share brokerage should be considered together for the purpose of Explanation to Section 73.
15. During the course of hearing before us, the learned counsel placed reliance on the decision of Tribunal, Bombay, in the case of Aakrosh Investment & Leasing (P) Ltd. (supra). We find that judgment to be against the contentions of the assessee and in favour of the Revenue.
We are also at loss to understand as to how dividend earned on one's own stock-in-trade of shares can be treated at par with brokerage income earned on the business transactions of the third parties. The assessee also placed reliance on the decision of Tribunal, Mumbai, in the case of Samba Trading & Investment (P) Ltd. In that case the assessee disclosed profit in share business, but loss in speculation of shares. But there was no claim in that case that loss in share business should be set off against brokerage income.
16. We are now left with the other reasons given by the learned CIT(A) for deletion of the addition of Rs. 38.09 lakhs made by the AO after invoking the Explanation to Section 73 of the Act. It has been held that the loss arising on the holding of 30,000 shares pledged with NSCCL should have been charged against the brokerage amount. We find this contention to be entirely illogical. It is admitted fact that in the case of the assessee the loss has arisen on account of depreciation in the market value of shares vis-a-vis cost of acquisition even though the assessee continued to be the owner of the shares. The assessee has been able to work out loss for the reason only that those shares have been treated by the assessee as his stock-in-trade. If those shares are to be treated as an investment made by the assessee as part of its brokerage business, there is no loss incurred by the assessee in the first instance to be charged against the brokerage amount. We, therefore, do not see any force in that contention of the assessee.
There is also the question of expenses to be allocated to the business of sale and purchase of shares, the dividend income and brokerage income. We find that this issue has not been addressed to in proper manner by the learned AO as well as the learned CIT(A). We, therefore, remand this issue to the file of the learned AO for decision afresh after allowing the assessee reasonable opportunity of being heard.
17. In the result, the order of the learned CIT(A) is set aside and the matter is restored to the file of the learned AO for the limited purpose of allocation of expenses between deemed speculation loss and other income of the assessee.
18. For statistical purposes this appeal shall be treated as partly allowed.