Judgment:
1. These are two appeals preferred by the assessees aggrieved by the claim of loss on account of hedging of shares being rejected by the revenue authorities.
2. Shri Hari Har Lal appearing for the assessee, submitted that, Master Anupam and Master Dcvashish had 13,374and 17,374 equity shares each of M/s. Birla Jute Company Ltd. Out of this, they each had sold 7,500 shares on 19-8-1980 at Rs. 32.20 and Rs. 32.15 per share respectively.
They re-purchased identical quantity of the same company's share on 28-8-1980for Rs.34.72 and Rs. 34.71 per share respectively. They both sold like quantity of shares of the said company on 29-8-1980 at Rs. 33.60 per share. The like quantity of shares were re-purchased on 5-9-1980 at Rs. 35.20, Rs. 35.25 and at Rs. 35.10 per share respectively. Master Anupam and Master Devashish as a consequence of the above transactions, suffered to total loss of Rs. 31,050 and Rs. 30,450 respectively. The said loss was claimed as a loss on account of hedging transactions as per Section 43(5) of the Income-tax Act. Shri Hari Har Lal pleaded that, the sale was made with the intention of protecting the capital invested on the shares of Birla Jute Company, because, the share values were dropping down. On realizing that, the share values were showing upward trend, the assessee purchased them at a slightly higher value. The share values again started vacillating and the assessee's to arrest its loss of capital, down-loaded the shares.
The shares in about a week from the second sale, indicated upward movement and the assessee's with a view to increase its capital worth, re-purchased these shares. The lots as sold and as purchased were not identical. Master Anupam had on the second occasion purchased the 7500 shares in lots of 4500 and 3000 shares. Shri Hari Har Lal submitted that, the sale note and the bought notes in the case of the above four transactions are placed at pages 2 to 7 of the paper book along with the confirmation of the broker. He pleaded that, the revenue has not doubted the transactions, but, has rather accepted them to be genuine.
He contended that, the revenue had proceeded to reject the claim of the assessee on the ground that, these were speculative transactions. The counsel pleaded that, the transaction of sale and purchase were through the Stock & Share Brokers, M/s. Pannala Kejriwal of Calcutta, because, the said shares were dealt in by the Calcutta Stock Exchange. He made reference to the memo of confirmation along with the copy of the account of the assessee's in the books of the broker (pages 2-7 of the paper book). He submitted that, the CIT (A) rejected the claim of the assessee on the ground that, the contract of sale and purchase did not bear the signatures of the natural guardian. He submitted that, the broker had acted on the advice of the guardian and that, the revenue had no evidence on its record to the contrary. He contended that, no broker would act on his own and, therefore, the basis of rejection of the claim of the appellants is improper. Shri Hari Har Lal at this juncture made reference to the Board's circular dated 12-9-1960, issued with reference to Clause (c) of the proviso to Explanation 2 to Section 24 of the Income-tax Act, 1922, a copy of which he had placed on our records. He submitted that, by this circular, the Board had clearly accepted the position that, investor when enters into hedging transaction from within his holdings, they would not be treated as speculative transactions, but as hedging transactions only. He further contended that, the Board's circular has clarified that, the transactions outside the holdings of an assessee alone shall not be accepted by it as hedging. He contended that, in the instant case, the appellant's had sizable holding of the Birla Jute Company shares, from which, they had made these transactions of sale and re-purchase. He submitted that, the provisions of Section 43(5) of the Income-tax Act, 1961 are identical in every aspect of the term with those contained in Section 24 of the Income-tax Act, 1922. He therefore contended that, the circular as was issued under the 1922 Act would still hold the field and the claim of the appellant's should be accepted.
3. Shri Girdharilal, the departmental representative submitted that, the claim of the appellants are not tenable because, it is a clear case of buying of loss. He submitted that, the time gap between sale and purchase in the first instance is just three days and it is followed by a sale, the next day itself. The second re-purchase is shown to have taken place after seven days. He submitted that, there is no evidence of giving delivery of shares and taking delivery of shares. He further contended that, there is also no evidence that, the appellants had deposited the shares with the brokers for the purposes of sale. He accordingly contended that, it is a case of mere adjustment without there being any delivery, which transaction is clearly speculative in nature.
4. We have given our very careful consideration to the rival contentions and also to the materials that have been placed on our record and to the circular of the Board dated 12-9-1960.
5. The particulars of shares of Birla Jute Company held, shown as sold and purchased, together with values and dates are reproduced below for the sake of facility.Name Particulars of Shares on hand, sold & purchased Amount with dates and amount per share of loss in Rs. Total Qty. Date of Value Qty.
Date Value sold sale per bought bought perAnupam 13374 7500 19-8-1980 32.20 7500 28-8-1980 34.72 18,900Poddar 7500 29-8-1990 33.60 4500 5-9-1980 35.20 3000 5-9-1980 35.25 12,150Devashish 17374 7500 19-8-1980 32.15 7500 28-8-1980 34.71 19,200Poddar 7500 29-8-1990 33.60 7500 5-9-1980 35.10 11,250 Rs. 30,450 6. Section 43(5) of the Income-tax Act has defined speculative transaction to be a transaction in which a contract of purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. The proviso (b)to Section 43(5) states that, a contract 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, then such a contract shall not be regarded as speculative in nature.
7. The undisputed fact in the instant cases before is that, the shares in question when sold was not transferred in favour of the purchaser and similarly, when the shares have been re-purchased, there was no transfer in favour of the appellants. The transfer of shares, within the meaning of that term has to be appreciated from the point of view of transfer of ownership. The shares are normally movable property and as per the Sale of Goods Act, the contract of sale of movable property is complete, the moment, the physical delivery takes place. But, under the Indian Companies Act, a share is treated as transferred in favour of a person, only when his name is recorded in the shareholders register, which is preceded by the Board of Directors approving the transfer of the shares from one to the other in a meeting of the board of directors. In the instant cases, the time difference between the first sale and the re-purchase is just nine days. The time difference between the first re-purchase and the second sale is just a day and the final re-purchase has taken place in seven days. The assessee has not provided the share scrip numbers and it is in fact not the case of the assessee that, the share scrips as was held at the beginning of the year and was held after the transactions of sale and re-purchase as any different, which could indicate, the fact of delivery. It is also not the case of the appellants that, the share scrips, though may be bearing the same numbers, but the transfer was recorded in the company's statutory registers, on all of the occasions. Therefore, from the appreciation of the evidence on record, it transpires that, the transaction give the colour of being speculative in nature.
8. The proviso (b) to Section 43(5) of the Act would apply, if the evidence on the record, could lead to the conclusion that, the transaction was a hedging one. The claim of the appellants are to the effect that, since, the sale was out of their existing holding, it was with the intention of protecting or guarding against the loss in the holdings of the stocks. The re-purchase, followed by the cycle of sale and repurchase was the continuation of the guarding against loss in the holdings and, therefore, the transactions are hedging in nature. From the reading of the section and the proviso (b) of Section 43(5) of the Act, it is evident that, a transaction resulting from a real contract, with actual delivery and it is established that it was so carried out with the sole purpose of guarding against losses on one's holdings of shares as result of price fluctuation, then, such a transaction would be termed as a hedging transaction. This is so evident because, a contract with no delivery would be speculative in nature. The Board's Circular dated 12-9-1960, relied upon by the assessee, in this connection is reproduced below for the sake of facility and for appreciating the controversy.
Suggestion by the tax paying public : - "Bona fide hedging transactions by a dealer or investor in shares should be allowed provided that the hedging transactions are upto the amount of his holdings even though these transactions may extend to other types of shares not held by him.
Board's decision :- "The Board are unable to accept this suggestion. It cannot be accepted that a dealer or investor in stocks and shares can enter into hedging transactions in scrips outside his holdings. The material words in Clause (c) of the proviso to Explanation 2 to Section 24(1) are "to guard against loss in his holdings of stocks and shares through price fluctuations". Therefore, hedging transactions having reasonable relations to the value and volume of dealer's or investor's holdings are excepted from the ambit of speculative transactions; but transactions in scrips outside his holdings are not.
9. The above portion of the Board's circular which is relevant for deciding the issue, presupposes that all other conditions as to the nature of the transaction being that of hedging is satisfied and if the transactions are from out of the holdings, then only, such a transaction would be excepted as not a speculative transaction but a hedging transaction. As pointed out earlier, the assessee's reliance on this circular of the Board is based on the first sale was from out its holdings. It is not established on record that, there was actual delivery of the shares, which is the basic ingredient of a transaction being treated as not a speculative transaction. The evidences on record indicate that, the appellants if at all had paid only the difference between the prices. Therefore, since the basic or fundamental requisites of a hedging transaction, viz., actual delivery followed by the transaction being bona fide for guarding against loss to his holdings consequent to the price fluctuation, not having been established, the Board's circular could not be applied.
10. For the reasons outlined above, we are of the opinion that, the appellants have failed to establish that the transactions are hedging transactions and hence, the appeals are dismissed.