1. The only ground taken by the assessee in this appeal is whether the loss of Rs. 2,94,832 is a speculative loss as held by the IT authorities. The loss consists of two amounts : 2. Rs. 1,54,420 on account of reduction in the value of the stock of shares held on 31st March, 1997.
2. The assessee is a sharebroker and also indulges in purchase and sale of shares on own account. The above two figures relate to the own trading. The AO invoked the Explanation below Section 73 and treated the loss as speculation loss and held that they cannot be set off against the non-speculation profit for the year and can be only carried forward to the subsequent years to be adjusted against the speculation profits for those years. The CIT(A) having confirmed the view taken by the AO, the assessee is in further appeal before the Tribunal.
3. A pure legal argument was taken before me on behalf of the assessee based on the object for which Explanation below Section 73 was inserted. It was pointed out that the Explanation was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1977, and that the Circular No. 204, dt. 24th July, 1976, stated that "the object of this provision is to curb the devise sometime resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control". The contention is that in the present case, there is admittedly no such device and no business houses or controlling groups are involved, the case being one of a simple sharebroker who also traded on own account and, therefore, the Explanation ought not to have been invoked. A reference was made to the following judgments of the Supreme Court in which the object with which a statutory provision was introduced was considered very material in deciding whether provision is attracted to a particular factual situation :Asstt. Director of Inspection (Inv.) v. Kum. A.B. Shanti (2002) 255 ITR 258 (SC)Allied Motors (P) Ltd. v. CIT It is pointed out that in all these cases, it was held that the interpretation of the statutory provision must conform to the object for which it was introduced and, if this principle is applied to the present case, it must be held that the Explanation to Section 73 cannot be invoked as there is no device or manipulation by any controlling group of companies to reduce their taxable income.
4. Learned Departmental Representative submitted that, since the Explanation is clear, it should be applied without any reference to the circular or the object mentioned in the circular. He submitted that there is no room for any intendment and the present appeal cannot be decided on the basis of the supposed intention of the law.
5. In my opinion, there is considerable merit in the case of the assessee. When Section 73 was introduced, it did not have the Explanation. The Explanation was inserted only w.e.f. 1st April, 1977, by the Taxation Laws (Amendment) Act, 1975. The Explanation applies only to a company. It does not apply to assessable entities other than companies. Even amongst companies, it is not applicable to a case of a company whose gross total income consists mainly of income chargeable under the head interest on securities, house property, capital gains and other sources. It is not also applicable to a company whose main business is that of banking or the granting of loans and advances. It is only in the case of other companies that the Explanation applies.
The Explanation consists of a deeming provision. It deems to actual purpose of the sale of shares, the profits or losses arising out of which would be otherwise dealt with as business profits or losses in the normal way under the normal provision of the IT Act, to be the result of speculation. The result would be that Sub-section (1) of Section 73 would apply and any loss arising out of the speculation business would be set off only against profits from another speculation business. There is no definition of the words "speculation business" appearing in the Explanation. The definition of "speculation transaction" in Section 43(5) is only for the purposes of Sections 28 to 41 of the Act. I may, however, take guidance from that definition as to the true meaning of what a speculative business is. A speculative transaction in shares is one where the parties do not intend to physically give and take delivery of the shares but one in which they wager upon the increase or fall in the price of the shares without actual intention to give or take delivery of the scrips. The transaction is periodically or ultimately settled only by payment of the difference. The legislature apparently thought that the actual purchase and sale of shares by certain companies should be deemed to be speculative transactions as there was evidence to show that some companies were adopting a device to manipulate the prices of the shares, which are dealt with amongst controlling groups, to reduce their taxable income. That was the reason why the Explanation was inserted. While inserting the Explanation, care was taken to leave out of its sweep, companies which do not have any income under the head "business" on the footing that these companies would be predominantly investment companies carrying on genuine investment business for the benefit of the members or the shareholders and should, therefore, be spared from the rigour of the Explanation. Banking companies or finance companies who, in the course of their business, may have share dealings were also excluded presumably on the assumption that these companies are not likely to indulge in manipulations as their predominant business was that of money lending. Further, these companies were under the control of the Banking Regulation Act and strict supervision was exercised by the RBI over the dealings of such companies, and any manipulation by them by indulging in speculation could be separately dealt with. Apparently, the need to exercise control was felt only in the case of business houses where there were controlling groups which controlled companies under the same group. Instances might have come to the notice of the Government that such business houses were manipulating the share dealings in such a manner that the taxable income of the companies controlled by them were reduced. Therefore, it was thought fit to introduce a provision to the effect that, even if share dealings by these companies were real in the sense that there was actual physical delivery and such dealings cannot be described as speculative transactions stricto senso, still in view of the revenue loss and the unethical nature of the practice, these transactions should not be recognised for income-tax purposes. It was thought proper to deem those share dealings as speculative dealings, on par with speculative transactions proper, by a deeming provision introduced in the Explanation to the effect that even these dealings would be considered as if there was no physical delivery of the scrips. The loss which arose in such transactions, would be set off only against the profits of the same breed and will not be permitted to be adjusted against the normal business profits.
6. It is in the above context that the circular issued by the CBDT explaining the provisions of the Explanation assumes significance as contemporanea expositio. In my view, the interpretation of the Explanation to Section 73, should be governed by the judgment of the Supreme Court in K.P. Varghese v. ITO and Anr.; (1981) 131 ITR 597 (SC). Section 52(2) stated that if the fair market value of an asset held by the assessee, on the date of the transfer exceeds the full value of consideration declared by an amount of not less than 15 per cent of the declared value, then the consideration for the sale would be taken to be the fair market value on the date of sale. The marginal note to the section read "consideration for transfer in cases of understatement". The argument of the Revenue was that once the ITO is satisfied that the difference exceeded 15 per cent of the declared value, he can invoke Section 52(2) and take the market value of the asset as representing the real sale price and proceed to compute the capital gains on that basis, without proving understatement in any manner. The argument of the assessee was that it was incumbent upon the ITO to prove actual understatement of the sale price by cogent evidence, and only if such proof is furnished, can the section be invoked. The Supreme Court laid down the following propositions regarding the rule of interpretation to be followed in the case of such provisions : (a) the strict literal interpretation must be avoided, if it would result in absurdity or mischief; (b) the language of such a provision should be construed having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs; (c) a fair and reasonable construction of such provision would be to read into it a condition that it would apply only where there is an actual understatement of consideration; (d) any circular issued by the CBDT at the time of introducing the provision or closely thereafter, explaining the object of the provision would be in the nature of contemporanea expositio furnishing a legitimate aid in the construction of the provision. In that case, the CBDT had issued two circulars, one in 1964 and another in 1974, directing the ITOs not to invoke Section 52(2) in cases where understatement of consideration cannot be established; (e) not only is the principle of contemporanea expositio applicable on the basis of the circulars, such circulars are also legally binding on the Revenue, even if they are not in accordance with the correct interpretation of Sub-section (2) of Section 52 and they depart or deviate from such construction.
The Madras High Court, in CED v. Smt S.T.B. Ameena Khaleli, (1983) 143 ITR 679 (Mad) was concerned with Section 46(1) of the Estate Duty Act, 1953. This sub-section provided for an abatement of the debt incurred by the assessee and allowable as a deduction, if the value of the consideration given for the debt consisted of either property derived from the deceased or consideration given by a person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased. With reference to this provision, earlier the Madras High Court had held in A. Kandaswami Pillai v. CED, (1969) 73 ITR 564 (Mad) that the policy behind the provision was obvious, namely, to avoid evasion of estate duty and further observed that the section appeared to overstep that mark and in its abundant caution appeared to do injustice by disallowing even debts not intended to escape tax. This observation was made with reference to the argument of the accountable person that the section would apply only where there is an intention on the part of the donor (deceased) at the time of making of the gift to get back the property comprised therein at a later date in the form of a borrowing. In the later judgment, the earlier judgment in A. Kandaswami Pillai (supra) was noticed and it was observed as follows : "Broadly stated, the idea behind both clauses in Section 46(1) is based on the apprehension of the legislature that the requirement under Section 44 of the Act, that a debt must be for full consideration and must be incurred bona fide, could be easily defeated by the deceased by making an unconditional gift to the would-be creditor and then borrowing the amount of the value of the gift from the donee, with the diminution in the deceased's purchasing powers. In other words, the policy behind the provision is to counteract or render nugatory any attempt at avoidance or evasion of estate duty in this manner." "We would not like to understand the proviso to Section 46(1)(b) as merely enunciating a rule of evidence. On the contrary, we hold that the proviso has to be read as part and parcel, or the summum bonum of the entire object of Parliament contained in Section 46(1)(b) as respects the extent of the abatement of the debt and the extent of the cutting down of the abatement, both put together." Thus, in the case of a tax avoidance provision, despite the clear language, the Courts have not applied the law on the basis of the plain language of the provision and have not hesitated to look into the object or policy behind the provision to ascertain the true meaning of the section and the above two decisions clearly show that a tax avoidance provision has been applied only where the situation warranted, namely, where there was attempt on the part of the tax payer to circumvent the law with the motive of reducing his tax liability.
The Courts have eschewed a wooden approach, by applying the language of the provision as it is without being sensitive to the mischief it is likely to cause to a bona fide or genuine transaction.
7. If the above principles laid down by the Supreme Court and the Madras High Court are applied to the present case and to the Explanation below Section 73, I find that they fit in. The Explanation is a provision against tax avoidance, as already seen, which deems certain actual transactions in shares as speculative transactions. It is a basic rule of construction that a deeming provision shall be construed strictly. Be that as it may, the construction of the section cannot exclude considerations such as the object for which it was introduced. I have already adverted to the object of the provision which even according to the circular is to curb the device resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of such companies which are under their control. The Taxation Laws (Amendment) Act, 1975, was originally introduced as Taxation Laws (Amendment) Bill, 1973, which was popularly known as "Black Money Bill". It is also well known that this Bill was introduced as a result of the recommendations made by Justice Wanchoo Committee suggesting ways and means of curbing proliferation of unaccounted income. The statement of objects and reasons [(1973) 89 ITR (St) p. 107] of the Bill states as under : "The main objectives of the amendments proposed to be made are to unearth black money and prevent its proliferation; to fight and curb tax evasion; to check avoidance of tax through various legal devices, including the formation of trusts and diversion of income or wealth to members of family; to reduce tax arrears and to ensure that in future, tax arrears do not accumulate, to rationalise the exemptions and deductions available under the relevant enactments, and to streamline the administrative set-up and make it functionally efficient;" The particular provision with which we are concerned took effect from 1st April, 1977. However, even before it took effect, the circular was issued on 24th July, 1976, and this I consider to be of significance in the sense that the AOs were sought to be guided, even before they could invoke the Explanation, by pointing out to them that the Explanation shall not be invoked indiscriminately, but should be invoked only if there is any manipulative devise adopted by business houses as mentioned in para 19.2 of the circular. It is also of significance that the Explanation applies only to companies and that too only to a limited category of companies. Other assessable entities are excluded.
All this is a clear pointer, in my humble opinion, to the position that, only if there is reason to believe that a device is being adopted by the companies to reduce their taxable income, shall the Explanation be invoked. The intention of the legislature is also made clear by excluding other categories of assessable entities from the sweep of the provision. For instance, an individual or a partnership firm is excluded from the operation of the Explanation. The reason is not far to seek. It is the considered opinion of the legislature that a provision was needed to be introduced only to check the malpractice adopted by business houses controlling companies by manipulating the share dealings inter se. Further, such transactions, even in the case of certain categories of companies were permitted and were treated as normal business transactions so that the loss that arises out of such transactions could be adjusted against the normal business profits. The ban is applicable only to a very limited category of companies.
Therefore, it is all the more necessary to apply the provision only where a device is adopted by the company concerned to reduce its taxable income by indulging in such share transactions which are apparently real, and may even involve actual delivery, but are carried out with the object of reducing the taxable income. In the scheme of Section 73 fortified by the Explanation, there is no scope for ignoring genuine transactions in shares which have been carried out without any motive of reducing the taxable income of the company.
8. In the present case, there is absolutely no material brought on record by the IT authorities to show that the assessee is a company controlled by a business house and that the share transactions have been effected with a view to manipulate and reduce its taxable income.
In other words, there is no evidence to show that the requirements of para 19.2 of the circular issued by the CBDT are satisfied. I am, therefore, of the view that the IT authorities were not justified in treating the loss of Rs. 2,94,834 as a speculative loss by invoking the Explanation to Section 73. I direct the AO to treat it as a normal business loss and allow the same as claimed by the assessee.
9. In the view I have taken on the basis of the judgment of the Supreme Court in the case of K.P. Varghese (supra), I do not consider it necessary to discuss the authorities cited on behalf of the assessee.