1. This appeal is filed by the assessee and is arising out of the order of Commissioner (Appeals)-V, Mumbai dated 30-10-1996.
1. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by confirming the business loss of Rs. 7,60,765 arising out of speculative transactions by holding that the transactions were not in the ordinary course of his business and that there was nothing in law to deny the benefit of Clause (c) of proviso to Section 43(5).
2. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by treating the business loss of Rs. 1,93,114 arising from the business of shares being as speculative loss by holding that the deliveries were not affected without disputing the genuineness of the transactions in number of scripts for purchase & sales.
3. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by treating the business loss of Rs. 94,228 arising from the business of shares being as speculative loss by holding that the deliveries were not affected without disputing the genuineness of the transactions in number of scripts for purchase & sales.
4. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by confirming that the difference in Badla charges paid at Rs. 1,23,390 was speculation loss.
5. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by upholding the action of learned assessing officer by confirming the disallowance of interest of Rs. 1,89,180 by treating that the moneys were not borrowed in the course of business.
6. That whether on facts and circumstances of the case, the learned Commissioner (Appeals) was justified by upholding the disallowance of a payment of Rs. 28,756 made on account of penalty on non-payment of dues to the stock exchange as per the rules are not connected with the business transactions carried out.
3. The relevant facts in this case, briefly stated, are that the assessee is registered stockbroker with Bombay Stock Exchange of India and is claiming to be doing the business of brokerage as well as jobbing work. In respect of jobbing work, the assessee claimed before the assessing officer that to guard the losses, he has to frequently buy and sell the shares in the market on his own account and on clients account. During the assessment proceedings, the assessing officer observed that the assessee has debited an amount of Rs. 11,36,353 in the profit & loss account, which included loss on account of Jobbing activity Rs. 7,60,765, loss on account of Trading Rs. 1,93,114, loss on account of Badla Rs. 1,20,390 and loss on account of short deliveries Rs. 94,228. In respect of loss on account of Jobbing business, the assessing officer found that as this amount has got adjusted with the business income of brokerage, the assessee was asked to explain as to why this loss should not be treated as speculation loss, as this transaction out of which the loss has resulted, is without actual delivery of shares. Therefore, the contention of the assessing officer was that as per Section 43(5) the assessee has suffered loss on purchase and sale of shares without actual delivery being effected. In response to assessing officer's query, the assessee explained his case that he has to resort to purchase and sale of shares to guard his losses; therefore, as per Clause (c) of proviso to Section 43(5), the assessee being a stock broker, the transactions of such nature do not call for being treated as speculative transactions. The assessing officer provided an opportunity to the assessee to explain the case as to how he has entered into transactions which can be said to have been done to guard the losses. In reply thereto, the assessee could not adduce any single contract note pointing out in respect of which he has entered into transaction of purchase and sales of shares. By making this finding, the assessing officer came to the conclusion that Clause (c) to proviso to Section 43(5) is not applicable to the case of the assessee; therefore, this loss is in the nature of speculation loss.
Accordingly, the assessing officer disallowed the same. Further, since the assessee filed the return of income belated, this was also not carried forward. In respect of losses on account of trading, badla and short deliveries also, the assessing officer treated the transactions of the assessee as speculation loss.
4. In appeal before the learned Commissioner (Appeals), there was no change in facts and no other material was brought by the assessee so as to exclude himself from the purview of Section 43(5). Consequently, the learned Commissioner (Appeals) confirmed the action of assessing officer.
5. The assessee preferred an appeal before us. We have heard the parties and perused them carefully.
6. As regards ground No. 1, the learned authorised representative started his arguments strenuously by pointing out that assessee is registered stock broker and member of Bombay Stock Exchange of India and engaged in the brokering business. Besides this, the assessee is also engaged in the business of jobbing and trading of shares. In this connection, the learned authorised representative referred to Section 280 and stated that the assessee is deriving income from both businesses and falls under the definition of Section 28(1). In support of his claim that since assessee has to guard the loss he entered into transaction of purchase and sale of shares, therefore, Clause (c) of proviso to Section 43(5) was applicable to this case, meaning thereby, the learned authorised representative's argument was that these transactions are in the nature of hedging transactions, which has been carried on by the assessee to guard the loss of the shares which he has purchased. The learned authorised representative stated that in several judicial pronouncements, concept of hedging transactions has been accepted and has been held to be the business loss. The assessee in this regard has placed reliance on the judgment of CIT v. Mohanlal Ranchhoddas , C.N. M.P. Investments (P) Ltd. v. Asstt.
CIT (Del) and ITO v. Pali Ram Bhadarmal (2006) 152 Taxman 43 (Jodh-ITAT) (SMC). Relying upon these judgments, the learned authorised representative tried to make his point that as per judicial decisions in these cases, hedging transactions has been held to be business loss and since in the present case, the assessee is doing the business of purchase and sales of shares as hedging transactions should not be treated as speculative transactions. The learned authorised representative further added that onus lay upon the department to single out any transactions which can be said to be the speculative transactions and not in the nature of hedging transactions. For this proposition the learned authorised representative relied on the judgment in 243 ITR 233 (All) (sic) wherein it has been held that onus is on the department to prove that transactions are not hedging transactions.
7. On the other hand, the learned Departmental Representative referred to the detailed order of assessing officer as well as Commissioner (Appeals) and pointed out that authorities below have discussed in detail the application of Section 43(5) in case of assessee and the exemption being sought by the assessee by virtue of Clause (c) of proviso to Section 43(5) could not be justified as the assessee neither in front of lower authorities nor before the Bench could cite any example by referring any single contract which he can claim that he has entered. into transaction for guarding the loss from the price fluctuations. In this regard, the learned Departmental Representative relied on the judgment in SRJ Securities Ltd. v. Asstt. CIT (2003) 86 ITD 583 (Del) and has pointed out that in this case the assessee is a broker and loss on account of trading in shares were held to be speculative transactions and adjustment of the same with the brokerage income has been denied. With regard to the case laws relied on by the learned authorised representative, the learned Departmental Representative's argument was that in those cases, no doubt, hedging transactions have been accepted as a business transactions, but in the present case, the transaction has not been proved to be of hedging in nature, therefore, these case laws relied on by the learned authorised representative does not come, to help the case of the assessee.
8. We have considered the rival submissions and have gone through the orders of authorities below and material placed on record. The question before us for decision is whether the loss suffered by the assessee of Rs. 7,60,765 in respect of transactions of purchase and sales of shares has to be regarded as speculative transactions or to be granted relief by virtue of Clause (c) of proviso to Section 43(5)? For better understanding, we reproduce Clause (c) of proviso to Section 43(5): (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; 9. If we interpret Clause (c) which the assessee claims to be in his favour, we find that, no doubt, if a transaction is entered by the assessee to guard the losses cannot be treated as speculative transactions, but then question remains to be answered is whether these transactions have been entered into by the assessee as a hedge to guard the losses in respect of his investment, stock-in-trade or any purchase by a contract note. In this respect, the assessing officer as well as Commissioner (Appeals) has recorded a categorical finding that assessee could not adduce any contract note in respect of which he can claim that these transactions have been entered into to safeguard the loss of that contract note. Section 43(5) has been enacted in Chapter IV, where assessee's income under the head 'Business' is to be computed.
Therefore, no doubt, the assessee's claim that he is engaged in the business of trading in shares may fall under Section 28(i) as claimed by the learned authorised representative in his arguments, but while treating the income as business income, Section 43(5) cannot be ignored. The effect of Section 43(5) has to be given and only in case where the Clause (c) of proviso to Section 43(5) is applicable, the transactions can be treated as non-speculative transactions. Section 43(5) has been enacted where transactions settled without actual delivery of shares and Clause (c) of proviso to Section 43(5) has been added only to safeguard the existing investment, purchase, stock-in-trade, which has come to the possession of the assessee by actual delivery and in order to save erosion in their value, the assessee is given leverage to sell and buy the shares to guard the losses of his existing purchase. In light of this interpretation, in spite of opportunity being given, assessee has not brought any facts or evidence to show in respect of which stock or purchase the assessee was going to guard the loss. In written submission before the authorities below as well as before us, the learned authorised representative argued that assessee first purchased the shares and then sells it and in this case his selling transactions is only to guard the loss in respect of purchase. It is not the case that assessee sells first and buys it later again. We are unable to accept this contention of the learned authorised representative as by way of this definition, the assessee's case certainly falls under speculative transaction as either the assessee purchases first or sells later, or sells first or purchases later, in both the cases, transactions can be treated as speculative transactions unless he proves that the transactions has been entered to guard the loss of the shares. In this case, the assessee has not been able to make out his case. The learned authorised representative's argument that at present there is amendment in Section 43(5) in which sale-purchase transaction F & O has been kept out of the purview of speculative transaction. This argument of the Id. AR also does not help, as in the relevant assessment year we are concerned with the Clause (c) of proviso to Section 43(5) only as stood then. The learned authorised representative's argument relying on the judgment of Allahabad High Court that onus is on the department also do not favour, as in that case assessee was not given an opportunity to explain his case, but that is not so in the present case. In the present case, the assessee was given opportunity to explain his case especially in the light of Clause (c) of proviso to Section 43(5). Therefore, we come to the conclusion that the transaction in respect of assessee has suffered a loss of Rs. 7,60,765 cannot be held to be business loss and the assessing officer was justified in holding this loss as speculation loss. Therefore, this ground of appeal of assessee is dismissed.
10. As regards ground No. 2, the assessing officer disallowed the trading loss of the assessee amounting to Rs. 1,93,114 as a business loss holding it as speculation loss by observing that the sell/purchase transaction in respect of which this loss has been suffered either has been settled during same settlement period or were carried forward to subsequent settlement period without actual delivery of shares. The learned authorised representative in support of his argument stated that this loss has been incurred by the assessee on the purchase and sale of shares in respect of which delivery have been received, but could not be transferred in the name of assessee as transfer deed remains valid for one year and if assessee receives the delivery and later on sells it at a loss without transferring the shares in his name, cannot be termed as speculative transactions. In support of his claim, the learned Departmental Representative relied on the judgment in CIT v. Mangal Chand (2002) 255 ITR 329 (Raj) (sic) and argued that in these two cases wherein it has held that if assessee gets the delivery and sells it again without transferring the shares in his name, cannot be regarded as speculative transaction.
11. The learned Departmental Representative, on the other hand, pointed out that as per the finding of the assessing officer as well as Commissioner (Appeals), the shares have been purchased and sold during same settlement period or in the next settlement period. There is no finding with regard to delivery of shares so claimed by the assessee in the assessment proceedings.
12. We have considered the rival submissions and have gone through the order of authorities below. We find that contention of the learned Departmental Representative is correct and claim of the learned authorised representative that this loss has been incurred by the assessee on account of delivery of shares does not emanate. By the nature of transactions of the assessee and as per the facts narrated by us earlier, it only reveals that assessee has been engaged in the buying and selling of shares without effecting actual delivery. The learned authorised representative has not adduced any single evidence by distinctive numbers and bill by which he can claim that delivery of shares has been received. Therefore, we are unable to accept the argument of the learned authorised representative and dismiss this ground of the assessee.
13. As regards ground No. 3, the loss of Rs. 92,228 was incurred by the assessee on account of short deliveries of shares received from the clients. The learned Departmental Representative's argument that if this loss has been settled by the assessee on account of non-delivery of shares, then loss has to be on account of client and not on assessee's own account and this loss has also been incurred by the assessee in the course of speculation activity. The learned authorised representative's argument was that in view of the assessee's massive business and large number of clients, sometimes short delivery of shares are received and loss is suffered by the assessee. Therefore, this loss should be treated as business loss. As we have discussed the nature of business of the assessee in detail, we accept the argument of the Id. departmental Representative that this loss is on account of client for not effecting the delivery. Therefore, this loss has rightly been held to be speculation loss by the assessing officer. Therefore, this ground of appeal of the assessee is also dismissed.
14. As regards ground No. 4, loss on account of badla charges suffered by the assessee, the learned authorised representative's argument was that badla charges is nothing but interest which the assessee has to pay to the Stock Exchange in the course of settlement of shares with the Stock Exchange. Therefore, this loss cannot be treated as speculation loss. The learned Departmental Representative's argument in this respect was that since this badla charges have been paid by the assessee also in respect of speculation business, therefore, this charges should also be treated as speculation loss.
15. After considering the rival submissions and the facts of the case, we find that badla charges is nothing but interest in nature which is paid by the broker for non-delivery of shares. Therefore, in this respect, we accept the contention of the learned authorised representative that this badla charges should have been allowed by the assessing officer against the business income of the brokerage.
Therefore, this ground of appeal of the assessee is allowed.
16. As regards ground No. 5, the assessing officer observed that assessee has borrowed money from the bank and has diverted to the purchase of flat amounting to Rs. 10,5 1,000 and assessee was having own capital loss of Rs. 3,65,000 only. Therefore, the drawing inference that assessee has utilized the borrowed funds for the purchase of personal assets disallowed proportionate amount of interest from the business income amounting to Rs. 1,89,180. The learned authorised representative's argument that assessee has purchased the flat in 1986 whereas assessing officer has taken the figure from Balance Sheet of 1992. The learned authorised representative further added that even otherwise amount invested in the flat should be considered as business assets in view of the fact that assessee is engaged in the business of brokering business which is a show off business and assessee is required to invest to instill a confidence among the clients towards his creditworthiness. Therefore, disallowance of interest was not justified.
17. On the contrary, the learned Departmental Representative's argument was that if authorised representative's explanation for treating the purchase of flat as business assets is accepted then even day-to-day fooding expenditure of the broker should be claimed as business expenditure. The learned Departmental Representative also pointed out that in respect of earlier year also disallowance of interest has been done by the assessing officer, which has been accepted by the assessee.
18. After hearing the rival contention, we are unable to accept the argument of the learned authorised representative for treating the purchase of flat as business assets and as a matter of fact, the assessee has also not appealed against the earlier year's disallowance of interest. It was also not disputed that assessee's capital was not sufficient to purchase the flat. Therefore, we are of the view that assessing officer was justified in disallowing the interest. Therefore, this ground of appeal of the assessee is dismissed.
19. As regard ground No. 6 assessing officer made an addition of Rs. 28,756 paid by the assessee to the Stock Exchange on account of auction charges and stamp duty. While making the addition, the assessing officer has done so by observing that there was an infringement of rules of the stock exchange and expenses incurred by the assessee being penal in nature cannot be allowed.
20. The learned Departmental Representative relied on the order of authorities below and the learned authorised representative's argument was that these expenditure on account of auction charges has been incurred by assessee in the ordinary course of business of brokerage.
21. We find that explanation of assessee is acceptable in the sense that in the brokering business, massive transactions are done, brokers often resort to violation and penalties are imposed but these payments certainly do not fall in the rigorous provisions of the Act where this expenditure cannot be held to be disallowable. Therefore, we hold that this expenditure should be allowed to the assessee against the business income.