Full Judgment
CIT(A)-II, New Delhi has erred in accepting the plea of the assessee that the trading in the purchase and sale of shares of other companies is not a speculative transaction and as such the loss of Rs. 2,10,650 arising from these transactions as liable to be set off against business income. The Ld. CIT(A) has overlooked the deeming provisions of explanation to section 73 of the I.T. Act, 1961." 2. The Ld. D.R. has pointed out that the assessee purchased shares of three companies namely M/s. Oswal Agro Mills, M/s. H. M. M. Ltd. and M/s. Reliance Industries Ltd. on 6-12-1987, 10-12-1987 and 19-12-1987 and the same have been sold on 11-12-1987, 19-12-1987 and 19-12-1987 respectively without making any payment for receiving or selling the shares. There has been no transfer in the name of the assessee nor any delivery has been taken by the assessee and accordingly, the Assessing Officer has treated the transaction purely as speculative transaction in which the assessee company has suffered a loss of Rs. 2,10,650. The Ld. D.R. has argued that the decision of the Assessing Officer may be sustained and that of the CIT(Appeals) may be reversed. In support of this, he has submitted that the case of the assessee is covered by the explanation to section 73 of the I.T. Act, 1961 which deals in losses in speculative business. Reliance has been placed on the following judgments :- 1. Shakuntala Devi Killa v. CIT [1993] 202 ITR 108/71 Taxman 284 (Gauhati) 3. CIT v. Arvind Investments Ltd. [1991] 192 ITR 365/58 Taxman 216 (Cal.) It has also been argued by the Ld. D.R. that the assessee has not given any proof for taking delivery except that there is a mention in the statement of broker Shri M. K. Singhal.
3. On the other hand, the Authorised Representative present has pointed out that the Department should not be permitted to rely upon the explanation to section 73 of the Act before the Tribunal for the first time as the Assessing Officer has not invoked such an explanation in the assessment proceedings. For this reliance has been placed on the judgment of the Hon'ble Bombay High Court in the case of Sidhivinayak Chemicals (P.) Ltd v. Asstt. CIT [1995] 52 ITD 226. Even otherwise it was argued that the business of the assessee company was sale and purchase of shares and any case even if the said transactions are treated as speculative transactions by applying the explanation to section 73 of the Act then the rest of the business which the assessee company has carried out during the relevant year should also be treated as speculative and the loss of Rs. 2,10,650 may be allowed to be set off against the income from rest of the business carried out by the assessee. For this reliance has been placed in the case of Samba Trading & Investment Ltd. v. Asstt. CIT [1996] 58 ITD 360 (Mum.). It has also been pointed cut by the AR that the statement of Shri M. K.Singhal, the broker was recorded by the Assessing Officer on 5-3-1989 and the said broker in his statement has clearly indicated that actual physical delivery of share was handed over to the assessee company for one day. The Assessing Officer has not found any contradiction in the statement of the said broker. The Assessing Officer at no stage asked the respondent company to file proof of delivery. He has thus argued that there was no justification in the action of the Assessing Officer in treating the loss of Rs. 2,10,650 as loss on speculative transaction and urged that the order of the CIT(A) may be upheld.4. Both the parties have been heard. Cases relied upon by them have been considered and material placed on record has been perused. From the order of the Assessing Officer it is seen that explanation to section 73 of the Act has not been invoked by him during the course of asst. proceedings. The Department has not been in a position to show that the assessee company is not an investment company and it does not deal in purchase and sale of shares. Since the explanation to section 73 does not apply to an investment company, the case law relied upon by the revenue in the case of Arvind Investment Ltd. (supra) is of no help. Also as the Assessing Officer has not invoked the explanation to section 73 during the course of asst. proceedings before him the ground raised by the revenue on these basis cannot be sustained.
5. In all other cases relied upon by the revenue, a transaction can be treated as speculative transaction where the delivery of shares has not been taken by the assessee. It is not the case of the revenue that the assessee has not been in a position to give the name and addresses of the sellers and purchasers but the whole case of the revenue is that the assessee could not prove before the Assessing Officer that it has taken the delivery of the shares. It is not disputed that Shri M. K.Singhal the stock broker was present before the Assessing Officer and his statement was recorded under section 131 of the I.T. Act, 1961. The said Shri M. K. Singhal in his statement before the Assessing Officer has relied to the question as under :- "Delivery of shares was taken by me and handed over to the assessee for one day. When the assessee company failed to make payments in full, the delivery was recalled and sold in the market." 6. From the above, it is seen that the delivery was handed over by the broker to the assessee company for one day but when the assessee company failed to make the payments in full, the delivery was recalled.
The CBDT has issued circular No. 704 dated 28-4-1995 reported in 213 ITR page 7 (St.). According to the circular, the Board is of the opinion that it is the date of broker's notes that should be treated as the date of transfer in cases of sale transaction of securities provided such transactions are followed by delivery of share and also the transfer deed. Similarly in respect of securities the holding shall be reckoned from the date of broker's note for purchase on behalf of the investors. We also find from para 6 of the CIT (A)'s order that copy of investment account, copies of vouchers, delivery notes and contract notes were filed and the assessee has even given the distinctive number of shares which fact has not been disputed by the revenue. Though the broker who appeared before the Assessing Officer confirmed of having made delivery to the assessee, yet there is no material on record to show as to whether it was accompanied with, the transfer deeds signed by the original holder of the shares. Besides this, the broker has also stated that he recalled the delivery within one day. Neither in the statement of the broker nor in the material on record, it has been shown that all the three transactions were handled on different dates for the purpose of making delivery. The purchases are alleged to have been made on 6-12-1987, 10-12-1987 and 11-12-1987 and the sales are stated to have been transacted on 11-12-1987, 19-12-1987 and 19-12-1987. In a situation when the delivery of all the shares in question is stated to have been handed over for one day and-on the contrary it is found that the date of last purchase and first sale are the same, then it does not inspire confidence as to whether the delivery could be handed over for one day. Also the assessee has not brought any material to show the dates on which it has received the delivery or that it has been received on different dates.
A peculiar statement has been made by the broker wherein it has been stated that when the assessee failed to make the payments in full, the delivery was recalled and sold in the market. In such a situation the recalling would make the delivery ineffective. The recalling of delivery by the broker amounts to revoking of delivery to the assessee company which would result into bringing back the share scrips so stated to have been handed over. Sub-section (5) of section 43 of the I.T. Act, 1961 defines speculative transaction as under :- "Speculative transaction' means a transaction in which a contract for the purchase or sale 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." As per definition the actual delivery of shares scrips has to take place both for purchase as well as sales so as to come out from the ambit of speculative transaction, but in a case where the delivery is recalled would mean nothing has delivered. In such a situation recalling amounts to have delivered nothing. If a person takes delivery of purchase and makes delivery for sale, then such a transaction settled is not considered as speculative transaction but where the delivery of purchase itself has been revoked, it leaves no scope for making delivery for sale. In the case of the assessee, since the delivery has been recalled, in our considered opinion there remains no delivery so as to bring the assessee out of purview of speculative transaction as defined under section 43(5) of the I.T. Act, 1961. The action of the CIT(A) in not treating the loss on such transaction as speculative loss does not appear to be tenable and accordingly reverse the decision of the CIT(A) and uphold the order of the Assessing Officer.