1. The appellant company has filed both these appeals against separate orders of the CIT (Appeals), Calcutta both dated 11-7-88 on seven grounds in ITA No. 2546 (Cal.) of 1988 and only one ground in ITA No.2547/Cal/1988.
2. The issue involved in all these grounds is common. That issue is in respect of incurring losses in the trading of shares of different companies.
3. The appellant company has claimed the loss of (i) Rs. 1,49,300 on the sale of the shares of J.K. Synthetics, (ii) Rs. 67,200 on the sale of shares of Tata Tea Ltd., (iii) Rs. 39,150 on the sale of shares of Texmaco, (iv) Rs. 11,682 on the sale of shares of Hindustan Motors Ltd., for the assessment year 1985-86 and Rs. 31,350 for the assessment year 1986-87, (v) Rs. 1,47,350on the sale of shares of M/s. Escorts Ltd. and (vi) Rs. 95,230 on the sale of shares of M/s. Juari Agro. The appellant company purchased the shares of the above mentioned companies at a higher rate earlier and sold them at a lower rate later and thus incurred losses as claimed and as mentioned above. The ITO disallowed the losses claimed by the appellant-company by holding that the losses incurred are bogus. The appellant-company's contention is that the ITO completely ignored the relevant evidence in connection with the purchases and sales of shares. He has arrived at a conclusion that the claim of losses is bogus on mere surmises and conjectures.
4. The appellant-company being aggrieved by the order of disallowing the claims of losses of the appellant-company by the ITO went in appeal before the CIT(Appeals) .The CIT(Appeals) agreed with the action adopted by the ITO in disallowing the claims of losses made by the appellant-company by giving his own reasons. The CIT(A) has confirmed the disallowance made by the ITO. The appellant-company being further aggrieved preferred these appeals before the Tribunal.
5. In the light of the evidence and material facts on record the only question which has arisen for our consideration is whether the losses claimed by the appellant-company in the trading of shares is genuine or the losses claimed by it is bogus. To give finding to this question it is necessary to look into and consider the evidence produced by the appellant-company before the ITO as well as to look into the bye-laws and regulations of the Calcutta stock exchange Association Ltd. because much has been argued on behalf of the department in this respect.
Hence, it has become necessary to look into whether the transactions of purchase and sale of shares made by the appellant-company are within the purview of bye-laws and regulations of die Calcutta stock exchange Association Ltd. or not 6. Firstly it is necessary to go through the observations made by the ITO. The ITO has mentioned in the assessment orders that the appellant-company has effected the transactions in shares with three brokers viz., (i) M/s Surendra & Co., (ii) M/s. Sushil Kr. Maheswari & Co. and (iii) M/s. Rajendra & Co. According to the ITO M/s. Rajendra & Co. was the proprietary concern of Sri S.C. Dabriwala, one of the directors of the appellant-company. He has noted that good number of shares were purchased by the appellant -company from other two brokers where in turn purchased by them from M/s. Rajendra & Co. The ITO also observed that good number of shares sold by the appellant-company to the other two brokers were ultimately sold by them to M/s. Rajendra & Co., and that in such circumstances the transactions would have been made directly with M/s. Rajendra & Co. He further observed that the only reason for such happenings is to lend the transactions a colour of creditability. From this it should be taken that the ITO did not dispute the existence of the transactions and creditability of the transactions. The mere fact that the shares purchased and sold by the appellant-company from the brokers M/s. Surendra & Co. and M/s. Sushil Kr. Maheswari & Co. ultimately were traceable to M/s. Rajendra & Co. is of no consequence.
7. The ITO further observed that the assessee sold the shares even before taking deliveries of the shares purchased by it. There is nothing wrong in it. A person can sell the shares even without possessing them also. That is called short selling. The ITO then observed that the shares dealt in were "clearing on hand delivery shares" and as such, the transactions could be closed legally by payment of differences. The ITO is not correct in his observing so.
Hand delivery share transactions cannot be settled by paying differences. Such procedure is possible only in other security and shares which are not classified as hand delivery shares.
8. The ITO also observed that the purchases were made at peak price and sales were effected at lowest price. The ITO has made such observation after noting the fluctuations in the prices of the shares on the dates of purchases and sales. A question arises that, can the ITO say what would be the peak price or the lowest price of a particular share on a particular day, say on 1-6-90. When a broker enters the floor of the Stock Exchange on a particular day, he is guided by the prices prevailing on the earlier days and he has to decide at what rate to purchase or to sell the shares. He cannot know or does not know whether he is purchasing at peak price or selling at the lowest price until the time for the transaction is over. The trading in Calcutta Stock Exchange is from 12 noon to 2-30 p.m.
9. The ITO further observed that the sales of shares without any possession of them amounts to speculative transactions and the loss resulting in them is inadmissible against other income. The definition of 'speculative transaction' at Section 43(5) of the IT Act, 1961 is as under:- Speculative transaction means a transaction in which a contract for the purchase or sell of any commodity, including stock and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
So, the ITO is not correct in making such observation about the speculative transactions as narrated above.
10. The ITO stated that in some cases delivery against purchase was not taken even after the close of the clearing immediately following the date of purchase and no cases of over-charges were accounted for. He did not bring any material or evidence on record to prove this contention that the assessee did receive carry over charges but did not account for the same in his books of account. This allegation appears to have been made purely on surmises and conjectures.
11. He further stated that in case of certain transactions delivery, against purchases and sale was simultaneous and debit for purchase and credit for sale was passed on the same day and in such circumstances there was in real sense no physical delivery of shares and no passing of consideration but only exchange of bills and cheques. This conclusion of the ITO is self-contradictory. In one breath he says that delivery was given and taken and that payments were given and taken. In another breath he said that there is no physical delivery in the real sense. What does the ITO mean physical delivery in real sense is ununderstandable.
12. The CIT( Appeals) alleged that in respect of the transaction of 33,000 shares of J.K. Synthetics, arrangements were made with the two brokers to have the shares passed through their books of account for consideration of some commission but he has not brought on record or pointed out any material from the record that the assessee paid commmission to the two brokers.
13. The CIT(Appeals) alleged that in respect of the transaction of 24,000 shares of Tata Tea Ltd. the transaction was not genuine and loss claimed was not real because of the deliveries were given and taken on the same date, i.e., 29-11-83 and entries for payment and receipt were made on 1-12-83 and that the purchases and sales were made at peak rate and lowest rate respectively. Themain co-incidence in the dates cannot be of any consequence when actual delivery was given and taken and payments & receipts were made through account payee cheques. These are not mere peak transactions or entries. How can any person know at the particular moment on the day of the transaction the price movements of a particular company's shares when he purchases and sells, watching the rates quoted at a particular point of time, either he purchases or sells. Only at the end of the day he can know whether the prices paid or received by him is the peak or the least 14. The CIT(Appeals) further alleged that, in respect of transaction of 25,800 shares of Escorts Ltd., Surendra & Co. received a commission of25paiseper share for giving the resemblance of genuineness to he transaction. He has not brought any evidence on record nor pointed out to any evidence on record brought by the ITO in this respect. This is his fertile imagination only.
15. The CIT (Appeals) confirmed the disallowance of Rs. 39,150 on sale of 9000 shares of Texmaco on the ground that delivery given and taken was on the same date and payments and receipts were made on the same date. Our observations above in regard to the transaction of shares of Tata Tea hold good here also.
16. In respect of transaction of 9900 shares of Hindusthan Motors Ltd. the CIT(Appeals) stated that the shares passed from Rajendra & Co., whose proprietor is a director of the assessee-company to three parties including the assessee and then back to the original assessee Rajendra & Co. within a short time and so the transactions are arranged in such a manner that the assessee can claim loss in share transactions.
Neither the ITO nor the CIT (Appeals) had established with any material on record the so-called assessment between the assessee and the parties. When the transactions are supported by contracts bills, delivery of shares and payments & receipts by account payee ;cheques, how can this be termed as sham 17. The important factor to be noticed in the action of the CIT(Appeals) is in respect of transaction of 16100 shares of Hindusthan Aluminium Ltd. Wherein the assessee incurred a loss of Rs. 79,863. The ITO disallowed the loss on the ground at the purchase from and the sale to is one and the same broker, i.e., M/s. Sushil Kumar Maheswari & Co.
Here also the shares reverted back to the original holder. Yet the CIT(Appeals) held that the ITO was not justified in disallowing the loss because the ITO did not bring any material on record to suggest that the transaction was not genuine.
18. In the assessment year 1986-87 while allowing the loss of Rs. 2000 in respect of the transaction of shares of National Engineering & Industries Ltd., the CIT (Appeals) accepted the contract notes and bills available in respect of the transaction. When such is the case, how can he disregard the evidence in the form of contract, sale and purchase bill, payments and receipts by account payee cheques and delivery of shares in respect of all other transactions wherein he confirmed the disallowance in respect of the share transaction in other companies.
19. The learned departmental representative Sri M. Pal contended that except in the case of shares of Hindusthan Motors Ltd., the duration between the date of payment and date of delivery is more than 15 days and so the contracts for purchase entered into by the assessee became void as per bye-law 331(v) (Chapter XIX) of the bye-laws of the Calcutta Stock Exchange Association Ltd. and so the assessee cannot claim any loss out of void contracts. The said rule says as under:- A member shall not enter into the following contracts and any such contract if entered into in contravention of the provisions in that behalf contained in these bye-laws and regulations shall be void:- (ii) Contracts for a period beyond the current and ensuing clearing in cleared securities; (v) Contracts for the purchase or sale of securities, the period for payment or delivery which is beyond 14 days ; and (vi) Contracts (other than a specific bargain) for the purchase or sale of securities dealings in which are not permitted on the exchange.
These provisions have been put on the member or members under the head-note "void contracts" under Chapter XIX.20. The assessee's learned counsel Sri G.N. Singh has drawn our attention to bye-law 197 reading as under:- The exchange does not recognise as parties to any bargain in the market any parties other than its own members and every member is directly and primarily liable to every other member with whom he effects a bargain for its due fulfilment in accordance with the rules, Bye-laws and regulations of the exchange whether such bargain be for account of the member effecting it or for account of a principal.
This Bye-law pertains to the members only parties to bargains regarding dealings by members under Chapter XIII. This bye-law is silent regarding the dealings between the members and non-members. Sri Singh urged that the said bye-law of the Calcutta Stock Exchange Association Ltd. governs the bargains or transactions or dealings or contracts mentioned in Bye-law No. 48 between the members of the Stock Exchange only. that does not apply to the transaction between a member of the Stock Exchange and a non-member Like the assessee, that bye-law 332 provides for penalty on the member and that Bye-law 253 provides in arbitration in case of disputes and differences between the members and non-members and that the contract form contained the arbitration clause.
21. The learned departmental representative Sri Pal is not correct in saying that the contracts entered into by the assessee for purchase of shares became void as per Bye-law 331. We have examined the said bye-law and the contracts. The contract of purchase did not stipulate the period for payment or delivery beyond 14 days. So, they have not become void as per Bye-law 331(5). They are not for a period beyond the current and ensuing clearing in cleared contracts. Hence, they are outside the powers of Bye-law 331(2) also.
22. The learned departmental representative Sri Pal has fairly admitted that there is no evidence on record of the ITO as to the payment of commission alleged by the ITO or the CIT (Appeals).
23. The case of Chemicals & Aromatics v. IAC [1986] 18ITD 298 (Bom.) relied on by the learned deptt. representative is clearly distinguishable on facts and not applicable to the assessee's case before us.(SC) and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC) are also distinguishable on facts and are not applicable to the assessee's case. In McDowell & Co. Ltd.'s case (supra) the Court found that payment of excise duty was. the primary and exclusive obligation of the manufacturer and if payment is made by the purchaser under a contract or an arrangement, the Excise Duty so paid was part of the consideration of the sale. In the assessee's case the lower authorities have not established with any material on record any contract or an arrangement between the assessee and the brokers from whom purchases are made and the brokers to whom sales were made to meet any legal obligation of the assessee under any Act. In the case of Associated Rubber Industry Ltd. (supra) Anil Holdings Ltd. was set up and created by it. The shares were transferred to it and the dividends were debited to it. In the assessee's case there is no such creation of another legal entity.
25. In the light of the above discussed facts, the relevant evidence on record and by taking into consideration the arguments advanced on behalf of both the parties we are of opinion that the Revenue has vainly tried to take benefit of bye-laws and regulations of the Calcutta Stock Exchange Association Ltd. In fact, the bye-laws relied on on behalf of the Revenue do not support their contention. The relevant evidence on record does not allow us to draw the inference that the share transactions effected by the assessee-company by way of purchasing and/selling of shares are not genuine. We have discussed in detail that the ITO has not pointed out any instance that on a particular day the rates of sales of shares were higher than the rates at which the assessee-company has sold the shares. Therefore, there is no room to come to a conclusion that the transactions effected by the assessee-company are either bogus or stage managed. Therefore, we are unable to accept the arguments advanced by the learned departmental representative Sri M. Pal.
26. We have gone through the bye-laws and regulations of the Calcutta Stock Exchange Association Ltd. particularly the bye-laws pointed out by the learned departmental representative Sri M. Pal and the learned representative for the assessee-company Sri G.N. Singh. We do not find any error either in technicality or in legalities of the transactions.
It cannot be forced to come to such a conclusion on the basis of the evidence before us. Therefore, there are no good reasons why the arguments advanced on behalf of the assessee-company by Sri Singh should not be accepted to hold that the loss incurred by the assessee-company in the share dealings is the genuine loss and the same is allowable by way of deduction from the income of the assessee-company. With this view of the matter we are unable to agree either with the ITO or with the CIT(Appeals) on the issue in question.
27. In the result, the appellant-company succeeds and the appeals are allowed.