1. The Department is aggrieved of the order dated 25th March, 1986 of the learned CIT(A), Jodhpur for the assessment year 1982-83.
2. The assessee M/s Mangalchand Bhanwarlal & Co., Sardarshahar is a registered firm which derives income from the purchase and sale of cement and commission agency. The cement is "Vambanad Brand" while cement of Travancore Cement Co., Kottayam. In the branch office at Delhi, it was selling metal powder in wholesai.e., Apart from that is the share dealing, whose nature is in dispute in the assessment year in question. The ITO noticed that in share dealings, the assessee had suffered a loss of Rs. 2,73,053. He took the view that this was not the regular business of the assessee and that it was merely a speculation loss. The contention raised by the assessee before the ITO was that it was business carried on by the assessee through the stock broker M/s Bharat Bhushan & Co. The ITO found that shares worth Rs. 15,16,506 were purchased on different dates and shares worth Rs. 12,43,058 were sold and thereby the loss in question was suffered by the assessee. The assessee filed the copy of the account of M/s Bharat Bhushan & Co. in its account books. The ITO took the view that the sum of Rs. 15,16,506 was not paid by the assessee to M/s Bharat Bhushan & Co., Delhi and that only the difference between . the purchase price and the sale price representing the loss in question was paid to M/s Bharat Bhushan & Co. He also noticed that the transaction for the purchase of shares of M/s Rathi Alloys was entered into on 11th Aug., 1981 and the amount of these shares was debited to the assessee's account only on 8th January, 1982. He also observed that as per this voucher it was not clear as to whether the delivery of the shares actually purchased was given to the assessee or not. The ITO also observed that the shares purchased were not transferred in the name of the assessee and no dividends had been received by the assessee. The ITO, therefore, took the view that the loss claimed was speculation loss which could not be allowed to be set off against its business income. He, therefore, held that the loss in question could be set off against the assessee's speculation profit earned in subsequent years. He, therefore, debited the amount of Rs. 2,73,053 in question to the assessee's total income.
3. In appeal, the learned Commissioner (A) after going through the various papers relied upon on behalf of the assessee as also after considering a number of decisions, took the view that the case of the assessee fell outside the purview of the speculation transaction as denned in Section 43(5) because actual delivery of the shares had taken place. He also held that the assessee had done the business of shares during the assessment year 1981-82 when a loss of Rs. 1,49,053 had been accepted as business loss by the ITO vide his assessment order dated 21st March, 1984. He also observed that the nature of the assessee's business in shares during the assessment year 1982-83 in question was the same as in the assessment year 1981-82. He also held that all transactions of shares purchased had been done in the shape of blank transfers according to the provisions of law. He, therefore, held that the question of getting any dividends from the company by the assessee did not arise, in view of Section 206 of the Companies Act. He further found that M/s Bharat Bhushan & Co. was assessed to income-tax. After considering the entire material he held that the loss in question was a business loss and not a speculative loss and that the same was allowabi.e., 4. That is how the Department has come up in appeal before us. On behalf of the Department reliance was placed on the order of the ITO.It was said that dealing in shares was not the assessee's business and that no delivery of the shares took place nor the shares were transferred in favour of the assessee, nor any dividends received by it and the purchase money was also not paid but only the difference between the purchase price and sale price and, therefore, it was a mere speculative loss in terms of Section 43(5). The fact that similar loss had been allowed to the assessee during the assessment year 1981-82, it was argued, did not operate as res judicata and that in any case the question which was considered by the ITO for the assessment year 1981-82 was not the same as he was considering only whether it was a revenue loss or a capital loss. Reliance was placed on behalf of the department on the following decisions : (i) Davenport&Co. (P.)Ltd. v.CIT [1975] 100 ITR 715 (SC); [id NirmalTrading Co. v. CIT [1980] 121 ITR 54 (SC); (iii) Swadeshi Cotton Mills Co. Ltd. v. CIT [1989] 180 ITR 651 (All.); (iv) CIT v. Ganesh Das Ram Swaroop Kakani [1990] 181 ITR 93 (Raj.). The learned Departmental Representative also drew our attention to a DO letter No. 2155, dated 28th February, 1985 by the LAC to the ITO, A Ward, Churu during the assessment proceedings for the assessment year in question, which was to the following effect : The assessee has declared an income of Rs. 89,914 for the assessment year 1982-83. I find that in Delhi branch assessee claimed a loss of Rs. 2,73,053 in share account. The normal business of the assessee is that of dealings in white cement and metal paint. During the account period the assessee, however, purchased shares of various companies for Rs. 15,16,506 through M/s Bharat Bhushan & Co. share broker and sold the same during the account period for Rs. 12,43,453 through the same share broker thereby incurring a loss of Rs. 2,73,053.
2. The following information is essential to ascertain the real nature of these transactions : (i) Whether the shares purchased were transferred in the name of the assessee and necessary entries were made to this effect in the share register of the respective companies.
(it) Whether the assessee received any dividend on purchase of such shares and, if so, details thereof be obtained.
(iii) Whether the payment for their purchases was made through crossed cheque or draft and, if so, details of the cheques issued and their date of realisation be obtained.
I, however, find from the account of M/s Bharat Bhushan & Co., New Delhi placed on file that the assessee neither made the payment for the purchase of various shares nor received payments of their sale but he paid only the difference of Rs. 2,73,053 to the share broker M/s Bharat Bhushan & Co. through cheques. Since the assessee paid only the difference, the transactions of purchase and sale of shares could only be in the nature of speculation. You should, therefore, examine the books of accounts in details from this angle and submit a report. This report should also include the results of scrutiny of other items made by you.
It appears, the assessee claimed a loss of over Rs. 11akh in share transactions in the preceding year under similar circumstances and same was allowed. A similar enquiry in respect of share transactions of preceding year may also be made and send a report.
I would like to have your report positively by 10th March, 1985 so that assessments do not get delayed, this being a time barring case.
On the other hand, Shri M.C. Gupta, the learned counsel for the assessee strongly relied upon the order of the learned Commissioner (A). He submitted that the assessee had started dealing in share during the assessment year 1981-82 as a business with the oral mutual consent of the partners in consonance with terms of the deed dated 17th April, 1978 of partnership. He pointed out that the assessment year 1982-83 in question was the second year of share dealing whereafter it was stopped. He submitted that for the assessment year 1981-82 full enquiries had been made by the ITO and that the question examined was the same and not any different and no action under Section 263 was taken or could be taken against the said assessment order. He submitted that ITO for the assessment year 1981-82 as well as for 1982-83 was the same and he could not purport to take a different view. In this connection reference was made by him to the following decisions: (i) CIT v. Dalmia Dadri Cement Ltd. [1970] 77 ITR 410 (Punj. & Har.), (it) CIT v. Belpahar Refractories Ltd. [1981] 128 ITR 610 (Ori.) and (iii) CIT v. Manaklal Porwal [1986] 160 ITR 243 (Raj.).
Reference was also made to the decision of the Calcutta High Court in CIT v. Jessop & Co. Ltd. He submitted that the decision of the Rajasthan High Court in the case of GaneshRam Swaroop Kakani (supra) was not applicable on facts. He pointed out that in the case of Smt.
Manaben Bipinbhai v. ITO [1988] SOT 1.739 (Ahd.) the facts were very much similar and the Tribunal had held that the ITO could not change his mind and not treat the sale of shares as business income and treat it as capital gain. Referring to the letter dated 28th February, 1985 of the IAC to the ITO, Shri Gupta submitted that firstly this letter constituted an inter-departmental communication and secondly its copy had not been given to the assessee and in any case the considerations mentioned in that letter did not hold valid on facts. Shri Gupta reiterated the factual findings of the learned Commissioner (A) regarding existence of business of share dealings and the actual delivery taking place as also other findings. In reply the learned Departmental Representative submitted that though the prescribed time limit for taking action under Section 263 with reference to the assessment order dated 21st March, 1984 for assessment year 1981-82 may have run out, time was still available for action under Section 147(a).
He also submitted that the papers on which reliance had been placed on behalf of the assessee were all self-serving letters / documents.
5. We have considered the rival submissions, the entire material on the record as also the decisions referred to above. Section 43(5) defines speculative transaction to mean to 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. Proviso (b) to that sub-section provides that a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stock and share through the price fluctuations shall not be deemed to be a speculative transaction. Explanation 2 to Section 28 is to the effect that where speculative transactions carried on by assessee are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Section 73 provides that 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 another speculation business. There are other provisions in Section 73(2) regarding set off with which we are not concerns I In the case of Davenport & Co. (P.) Ltd. (supra) the Supreme Court held that the words "actual delivery" means real as opposed to notional delivery and that a transaction which is otherwise speculative would not be a speculative transaction if actual delivery of the commodity or the scrips has taken place and that on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative if there is no actual delivery of the commodity or the scrips. Thus the Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for the purposes of income-tax. In the case of Nirmal Trading Co. (supra) the Supreme Court found that the transactions were settled by handing over delivery orders and payments by cheque. On those facts it was held that there was no evidence that actual delivery of the goods was ever effected either to the appellant or to subsequent purchasers from the appellants. In the case of Swadeshi Cotton Mills Co. Ltd. (supra) the Allahabad High Court was considering the case where admittedly the assessee was not a dealer in shares and securities and it is on those facts that it was held that the loss suffered by the assessee on the sale of securities was not deductible as a business loss. In the case of Ganesh Ram Swaroop Kakani (supra) a transaction wherein the assessee paid money instead of taking delivery of the commodity was held to be speculative and it was further held that in terms of Section 43(5), such a loss was not deductible as a business loss.
6. A perusal of the partnership deed dated 17th April, 1978 shows that though the business of the assessee firm was to be mainly that of purchase and sale of cement and commission agency, the partners could agree to carry on any other business from time to time by mutual consent. It is an admitted fact that this partnership deed was not amended. However, the case put forward before us on behalf of the assessee was that in terms of the provision in the partnership deed referred to above, the partners had orally agreed to carry on the business in share dealings and that business was commenced in the assessment year 1981-82. We find from the assessment order dated 21st March, 1984 that the ITO specifically mentioned there that the assessee also dealt in the purchase and sale of shares. It appears that for that assessment year, in reply to a letter dated 6th February, 1984 the assessee stated in the letter dated 17th February, 1984 (page 126 of the assessee's paper book) that the loss in shares was a business loss.
In his letter dated 6th February 1984, the ITO had enquired as follows: In branch office you have shown loss under share accounts. Please furnish complete details of purchases and sales of shares. Any documentary evidence in respect of loss suffered under this account may please be furnished. Please explain the circumstances under which it is revenue loss. Complete addresses of the parties from whom shares were purchased and sold may be furnished.
The assessee had given details of the dates of the contract notes issued by the member acting for the constituent as a broker and agent for the purchase of shares, dates of purchase vouchers and delivery of shares, name of the company, number of shares, rate, purchase cost (page 117 of the assessee's paper book) for that year along with photostat copies of the contract notes (pages 118 to 125). As a general rule, the principle of res judicata is not applicable to the decisions of the IT authorities and an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. This rule is subject to limitation, for there should be finality and certainty in all litigations including litigation arising out of the IT Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due enquiry if no fresh facts are placed and if all material evidence had been considered in the earlier decision.
In the case of Belpahar Refractories Ltd. (supra) it was held by the Orissa High Court that even though rejudicatais not applicable in the income-tax proceedings, the earlier decision on the same question cannot be reopened if the basic facts of the case are the same as on the earlier occasion. It is in this context that the jurisdictional High Court of Rajasthan had held in the case of Manaklal Porwal (supra) that if additional evidence had been produced, which warranted a conclusion different from that arrived at earlier, the previous findings could be departed from. Ahmedabad Bench 'C of the Tribunal in the case of Smt. Manaben Bipinbhai (supra) found that the assessee was recognised by the ITO as the sole proprietor of the concern dealing in sale and purchase of shares in two assessment years and its income was assessed as business income, but in the third assessment year the ITO changed his mind and brought the assessee's income to tax under capital gains. It was held that the ITO's action could not be sustained. In the letter dated 7th February, 1985 (copy at pages 134 & 135) the assessee wrote to the ITO that the assessee had also done the business of shares in the last year through registered broker which had been accepted.
Having regard to these facts we take the view that the assessee could carry on share dealing business in terms of the partnership deed and that in fact such business was carried on by the assessee during the assessment year 1982-83 in question as was done even in the preceding assessment year 1981 -82 and that the basic nature of the controversy for the present assessment year was not any different from that in the assessment year in question and, therefore, the ITO could not purport to take a view different from the one taken for the assessment year 1981-82. In any case even if the ITO had taken into consideration the D.O. letter dated 28th February, 1985 of the IAC, we find that even in the light of the enquiries conducted with reference thereto, the position which emerges is not any different even though the assessee is right in saying that it was an inter-departmental communication from the IAC to the ITO of which a copy was not forwarded to the assessee and which letter does not also find mention in the assessment order.
7. The next controversy is that the amount of Rs. 15,16,506 representing the purchase price of the shares was not paid by the assessee to the share broker and that what the assessee only paid was difference of Rs. 2,73,053 representing the loss claimed. However, we find from the copy of the account of the share broker that payments had been made to it by the assessee from time to time through account payee cheques. The purchases and sales had been made through a registered broker (who himself is an income-tax assessee) and the amounts of the purchases and sales had been credited and debited in the account of the share broker. The account of the share broker was finalised up to the end of the accounting period in question and as such the outstanding amount was paid by the assessee before the end of the year and no balance remained payable to the share broker. In this connection page 112 of the assessee's paper book is relevant.
8. The next point is regarding the transaction dated 11th August, 1981 for purchase of shares of Rathi Alloys, the amount in respect of which was debited to the assessee's account on 8th Jan., 1982. The brokers issued contract notes regarding purchase and sale of shares and at the time of actual delivery of the shares (with this aspect we will deal a little later) the broker issued the purchase vouchers. In the purchase vouchers the dates of the contract notes had also been given. The delivery of the shares had been received through purchase vouchers from the broker on 8th January, 1982 and on the same day the share account had also been debited and credited to the account of the broker. This objection of the ITO was, therefore, rightly not accepted by the learned Commissioner (A). The ITO had also raised an objection that only the number of shares had been given in thepurchase vouchers.
However, we find that in the purchase voucher the nanes of the parties to whom the shares who sold, the date of issuing, the date of transaction, description regarding name of the company, numbe of shares, their distinctive numbers, rate and total amounts of shares's mentioned. The date of transactions was that on which the contract note was issued by the broker. Therefore, this observation of the ITO alsodoes not militate against the case of the assessee.
9. Another objection raised was that shares were not transferred in the name of he assessee. In the purchase vouchers, the following note was not apperded : "We are not responsible for keeping blank shares after taking delvery according to association rules". In the case of a blank transfer, it is only the seller who fills his name with signature and the buyer's nane and signature or the date of sale are not filled in.
This enables the buyer to sell it again in the same way without having to bother about payment for transfer, stamps and new deed. Blank transfers are not prohibited under any provisions. It is with reference to the blank transfers that the assesee had also referred to the provisions of Section 108(1A) of the Companeis Act, 1956. Every instrument for transfer of shares can be delivered at any time before the date on which the register of members is closed. We fine from the detailed copy of the shares that from the date of delivery of the shares and date of selling them, there was no mention of the closure of the register of members. Therefore the fact that the assessee did not get the shares transferred in its name was not material. In this connection we would like to refer to a certificate dated 13th March, 1985 (paper No. 132) from Delhi Stock Exchange Association Ltd., which supports the assssee's case.
10. The next point relates to dividends not having been received by the assessee. This point would be academic after it is seen that the shares were blank transfers taken by the assessee and it had also given blank transfers on sale thereof. The question of getting dividends would arise only if the shares were transferred in the name of the assessee.
The assessee's name was not registered in the company's Registers. This was perfectly in accordance with Section 206 of the Companies Act, 1956. Even otherwise dividends are declared at the time of the closure of the register of the members. Since this was not done the question of declaring the dividend also would not arise. We, therefore, hold that the learned Commissioner (A) was quite Justified in accepting the assessee's submission in this regard.
11. This brings us to the all important question of actual delivery of the shares. The shares were delivered to the assessee through delivery notes which the assessee had produced before the ITO and which were produced by the assessee along with its letter dated 27th August, 1984 and again along with letter dated 30th March, 1985. The delivery notes contain the dates of transactions, quantity, names of the companies from whom shares were purchased, distinctive numbers, rate and the total amount. The assessee had also received letter dated 20th January, 1982 and 21st February, 1982 (pages 113 and 115 of the paper book) fron the broker in which it had been mentioned that the shares had been delVered. Reference may be made to the letter dated 21st February, 1982 which the broker wrote to the assessee that they had delivered shares aganst the assessee's purchases vide contract numbers mentioned therein and that cheques may be given against the above deliveries. In reply to the letter dated 21st February, 1982, the assessee wrote on 21st March, 1982(page 114 of the paper book) that the assessee was making early arrargements for the payment of the shares purchased by it. In the assessmentorder the ITO had only entertained a doubt whether actual delivery vas made. There is no categoric finding. In the letter dated 21st February 1982, the share broker wrote to the assessee for payment and the assesste wrote on 25th February, 1982 (page 116) that at that time it could not make immediate arrangement for the payment of the shares purchased by it and that since the rates of most of the shares were going down, he assessee was planning to sell them and, hence, they were arranging to send the shares to the share broker for disposal.
Thus, it is clear that the assessee had taken actual delivery of the shares through purchase volchers issued by the share broker and which fact was also confirmed by the share broker himself. All the shares had been delivered in the blank, i.e., , blank transfers which are duly recognised by Section 108(1A) of he Companies Act, 1956. At the time of selling the shares also, the delivery was given by the assessee to the purchasers as blank transfers. The assessee had made payment of Rs. 1,40,000 by account payee cheque on 2nd March, 1984 against purchase of shares, i.e., before selling any shares and thus it could not be said that only the difference had been paid. The dates of the cheques and the amount are mentioned in the copy of the account books and all these cheques were account payee cheques, in the basis of the above facts and material on record, we, therefore, hold that in terms of Section 43(5) and the case laws, actual delivery of the shares was not only taken by the assessee but also given. Therefore, the learned Commissioner (A) was right in holding in favour of the assessee on this point.
12. We find that the learned Commissioner has dealt with the matter in great detail not only with reference to the facts, but also with reference to the relevant case laws in the light of the points raised in the assessment order and the contentions raised on behalf of the assessee. Before parting we also wish to place on the record our appreciation of the assistance rendered on behalf of the Department by Svs. S.K. Kundra, the learned Sr. Deptl. Representative and Shri H.C.Gupta, the learned counsel for the assessee. In fact, on the resumed date of hearing of this appeal, valiant efforts were made by Shri Khandelwal to assail the order of the learned Commissioner (A) and to support the order of the ITO with the help of facts, materials and case laws as mentioned and considered above. However, as already mentioned above, we find that the order of the learned Commissioner (A) is well reasoned and supportable on facts and eminently just. We, therefore, find no force in this appeal.