1. This is an appeal filed by the assessee and it is directed against the order of CIT(A), dt. 19th Sept., 2000 for asst. yr. 1997-98.
2. Grounds of appeal attached with Form No. 36 are lengthy and narrative. However, at the time of hearing learned Counsel of the assessee urged that grounds may be taken as per prayer found placed in grounds of appeal which are as under: 1. The addition of Rs. 20,38,775 on account of loss in sale and purchase of shares while treating the same as speculation loss be allowed.
2. The disallowances of Rs. 2,44,330 on account proposed public issue be allowed in full.
3. Disallowance of foreign travel expenses of the director of Rs. 6,20,841 be allowed in full.
4. Disallowance of Nasta expenses of Rs. 71,872 being 25 per cent of Rs. 2,87,487 debited under the head office expenses be allowed in full.
5. Such and further relief which the appellant may be entitled as the nature and circumstances of the case may require and which Your Honour deem fit.
4. Ground No. 1 relates to an addition of Rs. 20,38,775 being loss accrued in respect of sale and purchase of shares which is treated to be speculation loss as per para 2 of the assessment order. The observations of AO while treating the loss as speculation are as under: On going through P&L a/c it was noted that during the year under consideration assessee has done transactions of sale and purchase of shares by treating this transaction in two categories in the books of account.
Trading transactions wherein loss on account of trading is debited at Rs. 20,38,775. In the another part assessee held stock of shares with cost of Rs. 82,250 which were treated as investment and market value of investment as on December, 1997 was shown at Rs. 20,250, therefore, there is a loss of Rs. 62,000. This total loss in business of sale and purchase of shares comes to Rs, 21,00,775.
Before discussing the issue it would be worthwhile to reproduce the Explanation to Section 73 which reads as under: Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
From the plain reading of this Explanation, it is clear that other than banking companies or companies whose principle business is of granting loans, for the purpose of Section 73, part of the business consisting of purchase and sale of shares of other companies shall be deemed to be speculation business. Therefore, to the extent assessee's business consists of purchase and sale of shares by whatever name the business would be treated as speculative business and it would be distinct from the business of earning brokerage as a share broker. This has been held by Calcutta High Court in the case of CIT v. Arvind Investment Ltd. . In the above refered case assessee-company was having only business of dealing in shares and securities but even then Court has observed in this order that part includes 'All' therefore entire business shall be treated as speculative business. Court has further observed that: ...The Explanation to Section 73 introduces a legal fiction. The section applies only to a company. It does not apply to individuals, firms, HUF or AOP. The Explanation also does not apply to an investment company or a company whose principal business is banking or money-lending.
If the business of a company which does not fall within the excluded categories consists of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business for the purpose of Section 73 to the extent to which the business consists of the purchase and sale of such shares....
...The phrase 'to the extent to which the business consisted of purchase and sale of such shares' also does not indicate that the legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not be treated as speculation business....
In view of this clear-cut legal position vide show cause letter dt.
6th Jan., 2000, assessee was asked vide para 7 that why this trading loss of Rs. 21,00,775 be not treated as speculative loss. Assessee has replied that they are having daily average turnover of Rs. 4.25 crores and during the working hours there are errors in executing the orders by the staff members and to save the goodwill company has squared up these accounts by treating the same as own trading transactions therefore, it is normal business loss closely connected with the broking business and therefore provisions of Section 73 are not applicable and loss should be allowed as business loss under Section 28 of IT Act. On going through the details furnished by the assesses it is found that these are speculative transactions in various scrips which were settled without delivery of shares. The claim of assesses that mistakes were bound to take place is not tenable in view of the fact that in the immediately preceding financial year, gross brokerage receipt Was of Rs. 12.74 lakhs as against gross brokerage receipt in Current year of Rs. 85.89 lakhs meaning thereby that approximate l/7th of the current turnover was handled by the company in the preceding year. But there is not a single mistake during the financial year on account of which assessee had to take the transactions in its own account. In the current financial year there is systematic pattern where short sales were carried forward and settled without delivery and same time there is net profit in various settlements. For example, in the settlement No. 11 there is net profit of Rs. 84,09,230. It is highly improbable that client may not acknowledge the transactions where even by mistake, profit is going to accrue to him. The number of scrips involved and frequency of transactions indicate that assessee-company was doing speculative business or the business of share trading on its own account and the speculation loss has been set off against the brokerage income. In case of corporate assessee even if transactions had been settled with delivery, the loss is a speculative loss by the legal fiction of Explanation to Section 73 of IT Act. In the present case this is a clear-cut case of speculative loss of Rs. 20,38,774. Moreover, merely by stating that mistakes were there while feeding the transactions in the computer and not supporting the claim with the help of primary record, question of accepting the explanation does not arise. There is no evidence to distinguish that loss was incurred by assessee's own gambling at the system or it was the mistake due to the communication gap. The legislative intention also was at that brokerage income which is non-speculative in nature should not be allowed to be set off by speculative losses. Irrespective of treatment of investment in the books the loss of Rs. 62,000 due to fall in value of shares held is also a speculative loss under Section 73 of IT Act. In this manner total loss in business of sale and purchase of shares of Rs. 21,00,775 is treated as speculative loss and the same is disallowed.
An appeal was filed before CIT(A). It was pleaded that the business of assessee-company is of share broker. The daily average turnover of the assessee-company comes to Rs. 4.25 crores and the assessee-company has to take same transactions of purchase and sale of shares in its account due to various reasons which were described in detail before AO vide letters dt. 12th Jan., 2000 and 12th Feb., 2000. Copies of these letters were also filed before CIT(A) and it was submitted that the transactions entered by the assessee in respect of purchase and sale of shares directly flowed from the share broking business. Thus, it was pleaded that loss incurred was allowable as trading loss. It was argued that company's business activity does not comprise of purchase and sale hence deeming fiction of Explanation to Section 73 is not applicable to the assessee's case. Alternatively, it was argued that income from brokerage should be set off against loss arising out of purchase and sale of shares which is treated as speculation business because they are related to the same source. Reliance in this regard was placed on the decision of Calcutta High Court in the case of CIT v. Nirmal Kumar & Co.
contained in para 3.2 of impugned order, learned CIT(A) has upheld the order of AO in this regard vide observations as per para 3.3 which is reproduced below for the sake of convenience: 3.3 I have given a careful thought to the submissions made before me by the counsel and have also gone through the contents of the letter dt. 12th Jan., 2000 and 12th Feb., 2000 which gives detailed submission as to why the transaction in purchase and sale of shares should not be considered as speculation loss.
3.4 Coming to the loss of Rs. 62,000 as computed by the AO, it would suffice to say that the account of Rs. 82,250 has been shown by the company by way of investment, the cost of market value of which is Rs. 20,250. This is not a stock-in-trade of the company and no loss has been claimed by the appellant under the head 'Capital gains' either. In this view of the matter, to treat the amount of Rs. 62,000 as a loss much less speculation loss is unwarranted. Since the appellant has not claimed the same in the return filed, the question of disallowance of Rs. 62,000 does not arise.
3.5 As regards Rs. 20,38,775 the appellant submitted that the transaction of purchase and sale of shares in its own account are due to various reasons as mentioned in letter dt. 12th Jan., 2000 and 12th Feb., 2000 submitted before the AO. 3.6 Before me, copy of the letter dt. 12th Feb., 2000 has been filed. In the said letter, the appellant has described the activity in the stock exchange in a general manner and has stated as to how there can be a loss in the name of a share broker. But the fact remains that it is only a general statement without any factual information giving the necessary transactions which were purported to have been caused due to bad delivery or due to mistake of the employees etc. In fact, before me also no such transactions have been shown and no evidence has been filed in support of the contention as raised in letter dt. 12th Feb., 2000. Except that a bald statement, there is nothing on record to show that these transactions in purchase and sale of shares had to be undertaken by the company due to bad delivery, etc. is averred by the learned Counsel. Merely on his say so the contention that he has not traded in shares cannot be accepted. On the contrary, in the P&L a/c for year ended 31st March, 1997, the appellant has shown purchase of shares of Rs. 1,14,29,005.60 and sales of Rs. 93,90,230.70. Besides this, the appellant has shown income of Rs. 85,89,857.32 under the head other income which comprises of income from brokerage of Rs. 85,37,855.84, interest on FDR of Rs. 37,404.78, underwriting commission 14,437.50 and kasar of Rs. 159.20. From the P&L a/c, it is clear that the assesses has purchased and sold shares of other company in which it has incurred of loss of Rs. 20,38,775. This loss is covered by Explanation to Section 73 and is, therefore, held to be speculation loss as the said Explanation is applicable to the instant case. I am, therefore, of the opinion that the loss on account of trading in shares and that income from brokerage are two different transactions and the loss in trading of shares is not a adjunct of brokerage income. Therefore, the case relied upon by the learned Counsel in the case of Nirmal Kumai & Co. is not applicable to the instant case which is different on facts.
3.7. In brokerage income, there can be no element of speculation.
The brokerage is earned and received independently due to fluctuation in the market and no risk is involved in the earning of brokerage and so it must be treated as business profit and not as a profit from the speculation business. The two are separate and distinguished factors and any speculation loss, therefore, cannot be adjusted from out of business profit of brokerage as held in the case of CIT v. Pangal Vittal Nayak & Co. (P) Ltd. .
Following the same and on the facts found as above, the loss of Rs. 20,38,775 is held to be speculation loss.
5. As many as 4 paper books have been filed before us which were referred to by the learned Counsel of the assessee during the course of hearing.
6. Paper book I is the compilation of statement of total income along with its enclosures and copies of notices issued by AO during the course of hearing and the replies given by assessee in that regard.
7. Paper book II contains copies of audited accounts, details of client-wise brokerage for transactions transferred to trading account, details of brokerage received during the year from those clients and details of trading account showing debit and credit for the transactions taken up by assessee on itself.
8. Paper book in comprises of audited balance sheet and P&L a/c for years ending 31st March, 1995 to 31st March, 2002.
9. Paper book IV comprises of xerox copies of parties bill along with assessee's purchase bills due to non-acceptance of Sauda by concerned parties, xerox copy of settlement sheet and chart showing foreign tour by director.
10. It was pleaded by the learned Counsel of the assessee that the business of assessee-company is that of only a share broker. He contended that assessee has never engaged in the activity of sale and purchase of shares at its own. During the year under consideration the assessee had become agent of National Stock Exchange (NSE) and it was provided with two computer terminals to deal with the transactions.
Earlier to this, the assessee was acting as a broker without the facilities of doing the transactions on computer. During the year under consideration the turnover of assessee-company had increased manifold due to membership of NSE. To substantiate this, he referred to p. 20 of paper book-III wherein the assessee-company for asst. yr. 1996-97 had earned a total sum of Rs. 12,74,540 in the shape of public issue brokerage/commission and underwriting commission (Rs. 11,62,100 and Rs. 1,12,440, respectively). As against said income for asst. yr. 1996-97 it had earned a cumulative sum of Rs. 85,89,857 for asst. yr. 1997-98 from these activities. He referred in this regard to p. 27 of the paper book No. III. He also referred to the audited accounts for asst. yrs.
1995-96, 1996-97 to contend that not even a single share was purchased or sold by the assessee-company to show that the assessee-company had never engaged in the business activity of sale and purchase of shares at its own. He contended that for the year under consideration as the volume of business activity of assessee had increased a lot, due to communication gap, etc., certain clients disowned certain transactions of purchases of shares, therefore, to honour those transactions with NSE, the assessee had purchased those shares. However, by the end of the year none of those shares were kept by the assessee and those shares were disposed during the year itself. Such contentions were raised to contend that the intention of assessee had never been to engage in sale and purchase of shares at its own. It was only due to compulsion, the assessee had to fulfil its obligation with regard to certain transactions of purchases of shares as the same were disowned by the clients of assessee-company due to communication gap, etc. The balance sheet and P&L a/c of various years were referred to show that all these transactions were not entered into by the assessee at its own but these transactions were with regard to its clients and these transactions were disowned by its clients. Therefore, in order to be in the business assessee had fulfilled those transactions as in absence of fulfilling those transactions the assessee may have been treated to be in default and thus could be debarred from carrying on its activities as a broker of shares.
11. Reading following portion of para 3.6 of the order of CIT(A), learned Counsel pleaded that these observations of CIT(A) are factually wrong: But the fact remains that it is only a general statement without any factual information giving the necessary transactions which were purported to have been caused due to bad delivery or due to mistake of the employees etc. In fact, before me also no such transactions have been shown and no evidence has been filed in support of the contention as raised in letter dt. 12th Feb., 2000. Except that a bald statement there is nothing on record to show that these transactions in purchase and sale of shares had to be undertaken by the company due to bad delivery, etc. is averred by the learned Counsel. Merely on his say so the contention that he has not traded in shares cannot be accepted.
He invited our attention to the following contents of the letters dt.
12th Jan., 2000 and 12th Feb., 2000 furnished by the assessee before AO along with various details: 7.- We have not carried out any speculation or even no purchase or sales have been done on own account with intention for ourselres.
These transactions are incidental to our broking business. To make it more clear the transactions are such where client on whose behalf transactions were done, did not agree for such transaction due to human errors like, not listening correctly regarding buy or sale orders. (Our transactions are mainly done telephonically only).
Hence we have to take these transactions in our account. Many a time at final hours parties could not be contacted and we had to clear the transactions considering other facts like wide fluctuations, margins and pay in difficulties, when parties did not agree for same. We have to take these types of transactions also in our account. Hence our transactions being incidental to broking business are not hit by Section 73 (Explanation) and same are allowable as expenses/losses incurred necessarily and exclusively for business purpose.
1.0 We are enclosing herewith details of trading account for the accounting year 1996-97 (relevant asst. yr. 1997-98) along with copies of the bills. We have given detailed reply vide our earlier letter stating that there is a trading loss this year which is only part of our broking business. We would like to inform you that we are having recognised broker with National Stock Exchange, and having yearly turnover of Rs. 1063.86 crores and accordingly, the daily average turnover comes to Rs. 4.25 crores. The daily working hours is very limited and always considered as peak hours. We are having two terminals and handled by two persons but at a time these two persons have to give reply on phone to various customers (not less than 10 clients). Even they are responsible to give reply to clients who are personally present at the office. This is simultaneously with operation of TERMIAL on the market is volatile they have to consent on terminal. Even this being in electrical operation and light planation (sic) is inevitable certain time Sauda could not be made to NSE within time and hence we are responsible for such standing Sauda in the market and we have to bear ( rate difference in the market. It is our practice that terminals are strictly operated by a person who is having direct access to the terminal of NSE and none other. Thus, this particular person is concentrating his mind in following two aspects: (2) Taking instructions from the clients and also operating the terminal and carrying out the Sauda. At that particular moment, there could be a feeding mistake and it is tantamount to losses/profit. The example of which is given herein below: The operating person receiving the message to purchase 2,000 Reliance shares at Rs. 200 simultaneously he receives second message from the customers to purchase 10,000 Reliance shares. Sometimes, the Sauda may interchange or instead of purchasing the shares code number of shares might be fed wrongly he may treat it as a sale and hence proper treatment of the instructions of the customers may not be given. However, due to relationship with the customers and to maintain business expediency, we have to own up this mistakes and though there is a huge loss, we have to bear those losses. These types of losses if we are not able to bear it, then, goodwill will be spoiled and it will affect the business, thus, the trading loss.
You may see from the trading that transaction involved in the trading activity is very small though its nomenclature of trading account is nothing but the receipt of loss in brokerage and allowable under Section 28 itself. Thus, there is no question of applying Section 73, particularly Explanation to Section 73. Even if we are depositing such amount to our client account they are not going to pay us and ultimately we have to write off thus instead of giving this type of accounting treatment we are debiting to trading account only. The accounting treatment has not much bearing while finalization of accounts.
Further, at some particular time, the client may not take delivery, we have to purchase shares even at the higher rate from the open market and give the delivery to the NSE. Thus, though there is a loss, we have to do this type of activities (which) are closely connected with our broking business and though we do not have any intention, we have to bear this type of losses. Thus, Section 73 is not at all applicable in all such transactions.
He further submitted all the bills raised to the clients, giving the particulars regarding transactions were duly submitted to AO which are comprising in paper book IV thus it was shown to AO that the transactions were being entered on behalf of assessee-company's clients from whom the assessee earned substantial brokerage income. To establish that the above observations of CIT(A) are factually wrong he referred to the following affidavit sworn by Shri Dhiraj Manilal Thakkar, director of the assessee-company: I, Dhiraj Manilal Thakkar, director of Parkar Securities Ltd., do hereby solemnly state, affirm and confirm as under: 1. That during the course of assessment proceedings before the AO in letter dt. 12th Feb., 2000, the appellant-company had produced trading account along with copies of bills. [Please refer page No. 61 of the paper book].
2. That the learned CIT(A) has made an observation contrary to the facts available on record in his appellate order in para 3.6 that but the fact remains that it is only a general statement without any factual information giving the necessary transactions which were purported to have been caused due to bad delivery or due to mistake of the employees, etc. In fact, before me also no such transactions have been shown and no evidence has been filed in support of the contention as raised in letter dt. 12th Feb., 2000'. The said observation of the learned CIT(A) is not correct in view of the fact that the appellant-company had already submitted the trading account along with copies of bills to the learned AO vide letter dt. 12th Feb., 2000.
This affidavit is filed in support of para 2.5 of the grounds of appeal annexed with Form No. 36 appeal memo filed before the Hon'ble Tribunal.
Whatever stated above is true and correct to my best of knowledge and belief.
Thus he pleaded that the above observations of CIT(A) are contrary to record. 12. To contend and show that the transactions entered into by the assessee regarding sale and purchase of shares were relating to its clients, he referred to a chart placed at p. 120 in paper book No. II which is as below:_____________________________________________________________________________________________Credit Particulars Amount Debit Particulars Amount_____________________________________________________________________________________________13-8-1996 Sett. No. 32 15685.30 Sett. No. 29 1420143.40 Trf. from Dipik Israni Trf. from Dipak Israni27-8-1996 Sett. No. 34 823329.70 20-8-1996 Sett, No. 33 46485.80 Trf. from Dipak Israni Trf. from Shreeji Investment29-1-1997 Sett. No. 04 141985.70 17-9-1996 Sett. No. 37 36535.10 Trf. from Ankush Trf. from Pushpa Caplease Tej Finance19-3-1997 Sett. No. 11 8527394.00 29-10-1996 Sett. No. 43 11839.30 Trf. from Ankush Trf. from N.A. Modi Caplease 12-11-1996 Sett. No. 45 109669.4031-3-1997 Closing 2038774.90 21-1-1997 Sett. No. 03 211704.50__________________________________________________________________________________________________________________________________________________________________________________________ He took us through these statements, copies of which are produced in paper book No. IV to show that all these transactions were entered by assessee in the-bills raised by it to its respective clients who had disowned these transactions and assessee being a member of NSE had to honour these transactions as in case of failure the assessee could be debarred to carry on its broking activities with NSE. He contended that all these bills are part of account books and record maintained by assessee in conformity with rules of NSE and, therefore, the same is contemporary evidence which could not be ignored or discarded in absence of any contradictory or adverse material. He contended that where there is an entry in the account books of the assessee, and it is supported by relevant documents, the Department cannot act unreasonably and reject that explanation. Before the Department rejects such evidence it must show a commensurate weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The Department cannot by merely rejecting a good explanation convert good proof into no proof. He in this regard referred to the decision of Hon'ble Supreme Court in the case of Shreelekha Banerjee and Ors. v. CIT . He contended that assessee had forgone brokerage for the abovementioned transactions from its clients who disowned certain transactions. He in this regard referred to the list placed at p. 118 of paper book II, the contents of which are as under:Details of clientwise brokerage for transaction transferred to Trading a/c___________________________________________________________Sett. No. Code No. Name of client Amount Rs.___________________________________________________________1996/029 3013 Dipak Israni 53751996/032 3013 Dipak Israni 29751996/033 3029 Shreeji Investment 68551996/034 3013 Dipak Israni 19301996/037 3045 Pushpa Tej Finance 78351996/043 3015 N.A. Modi 19981996/045 3086 Anada Share Consultancy 541461996/052 3029 Shreeji Investment 31751997/001 3017 Kantaben Bhagirath 23201997/002 3019 Kasmira R. Shah 1001997/003 3012 Ankush Caplease 220541997/004 3012 Ankush Caplease 119751997/005 3197 Nimish Vora 27581997/005 3178 Sakari Stock Finance 9071997/005 3183 Mansi Consultancy 71291997/006 3045 Pushpa Tej Finance 56891997/009 3012 Ankush Caplease 263661997/011 3017 Kantaben Bagirath 40791997/011 3012 Ankush Caplease 175111997/011 3249 Bharat Bhudarji 6865 Total 192042 13. He further contended that the clients who had disowned certain transactions were good clients and assessee has earned a brokerage of Rs. 34,34,765 from these clients during the year under consideration and details in this regard as furnished at p. 119 of paper book-II are as under: Details of brokerage received during the year from following clients:____________________________________________________Code No. Name of client Amount Rs.____________________________________________________3012 Ankush Caplease 340500 Referring to the brokerage earned he contended that the assessee had taken a decision of prudent businessman not to lose these clients, therefore, the transactions which were disowned were taken by assessee at its own in business interest. The intention of assessee was never to deal in the sale and purchase of shares at its own. He contended that as pointed out earlier at the end of the year not even a single share was held by assessee as the shares pertaining to disowned transactions were disposed of at the earliest opportunity by the assessee. Had there been an intention to deal in the share, the assessee could have retained those shares for an appropriate time to get better value.
14. He further contended that the total turnover of the assessee for the year under consideration in respect of which assessee has earned brokerage is Rs. 1063.35 crores on which assessee has earned gross brokerage income of Rs. 85,37,855. He pointed out that turnover of transactions disowned by above-mentioned clients (sales Rs. 93.90 lakhs and purchase Rs. 1.14 crores) constitute only 1,36 per cent of the total transaction of Rs. 1063.35 crores. Thus, he contended that it cannot be inferred that the assessee is engaged in the business of sale and purchase of shares.
15. He referred to the provisions of Section 2(13) of IT Act, 1961 which defines--"business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
16. He further referred to Expln. 2 to Section 28 according to which--Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business.
17. He also referred to Section 29 which describes that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.18. Then he referred to Section 43(5) which defines speculation transaction as under: speculative transaction' means a 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: Section 70--Set off of loss from one source against income from another source under the same head of income.
Section 71--Set off of loss from one head against income from another. Section 72--Carry forward and set off of business losses, Explanation.--Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
21. Referring to Explanation to Section 73 he contended that pre-requirement for application of Explanation is that purchase and sale of shares of other companies should be part of the business of an assessee. In other words if sale and purchase of shares of other companies is not a part of business of an assessee, then that sale and purchase of shares cannot be deemed to be speculation business within the meaning of Explanation to Section 73.
22. He contended that the circumstances under which the assessee dealt with in shares were well explained before the AO as well as before the CIT(A). The transactions were not entered into by the assessee at its own volition or intention to carry on business of sale and purchase of shares of other companies. It was under compulsion, the assessee had to deal in such transactions as the valuable clients of assessee had disowned certain transactions. The transactions are valid transactions for which the delivery was taken and given in accordance with rules of SEBI. Contemporary evidence was produced before AO to prove that the transactions were done by the assessee on behalf of its clients and only due to their refusal, the assessee had to deal in those transactions. To support the contention that it has never been the intention of assessee to deal in sale and purchase of shares of other company, he submitted before us a chart in respect of period since commencement of business by the assessee till asst. yr. 2002-03.__________________________________________________________________________________________Asst. yr.
Current Closing Closing stock + purchase - sales in Brokerage asset stock P&L a/c income (Rs.)__________________________________________________________________________________________1995-96 Nil Nil Nil 6,73,555__________________________________________________________________________________________1996-97 Nil Nil Nil 18,20,540__________________________________________________________________________________________1997-98 Nil Nil Seh. 'K' 85,37,855 Sales Rs. 9390230.70__________________________________________________________________________________________1998-99 Nil Nil Nil 37,11,872__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Thereafter the assessee surrendered its card to the National Stock Exchange andstopped the business immediately.__________________________________________________________________________________________ Referring to above chart he contended that it was only during the year under consideration such eventuality occurred and the chart clearly displays that assessee has never purchased and sold shares as its business activity. He further referred to Circular No. 204, dt. 24th July, 1976, the contents of which are as under: 19.1 Section 73 provides that any loss computed in respect of speculation business carried on by an assesses will not be set off except against the profits and gains if any, of another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to be carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The amending Act has added an Explanation to Section 73 to provide that the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from any speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business.
19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.
19.3 This provision will come into force w.e.f. 1st April, 1977 and will apply in relation to the asst. yr. 1977-78 and subsequent years.
Referring to Clause 19.2 of the above circular, he contended that object of the provisions of Section 73 is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. Thus, he contended that such being not a situation in the case of assessee, Section 73 has no application.
23. To substantiate that Explanation to Section 73 is not applicable, he relied upon the following decisions: (i) Mysore Rolling Mills (P) Ltd, v. CJT (1992) 103 CTR (Kar) 33 : (1992) 1951TR 404 (Kar)--to contend that the Explanation is attracted only when part of the business of the assessee-company consisted of the purchase and sale of shares of other companies; it is only in such a situation that such dealing in shares is deemed to be carrying on a speculation business. Any kind of venture will fall within the definition of "business". The venture or the adventure will have to be in the nature of trade, commerce or manufacture.
Basically, the concept of business involves a frequent activity of a particular nature. The facts of each case will have to be examined to arrive at a conclusion as to whether the transaction in question is speculative venture or business. The nature of the assessee's business in general, the purpose behind the particular transaction, the effect of the transaction, etc., are all to be considered.
Unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the Courts cannot infer that the transaction was a speculative venture only because the assessee derived subsequently the benefit of tax reduction. In fact, the crucial time and the stage is the time when the assessee purchased the shares and if possible to find out the intention behind such a purchase, and not to draw an inference of speculation from the fact that subsequently the shares were sold at a low price.
(ii) CIT v. Sri Venkateswara Rice & Oil Mills (1987) 62 CTR (AP) 26 : (1985) 154 TTR 756 (AP)--to contend that transactions made under compulsion which are beyond the control of the assessee would not make the transaction a speculative transaction in the absence of any evidence to show that the transaction was speculative. In the said case the assessee was carrying on business in the manufacture and sale of groundnut oil and in the course of its business activity assessee entered into a number of contracts for the purchase as well as sale of commodities dealt in. In respect of a small moiety of the contracts each year, delivery did not take place and assessee's explanation was found to be true. Because of the non-supply of railway wagons the assessee had to commit a breach in the execution of a few contracts entered into by it. In the circumstances it was held that losses occurred to assessee for such breach cannot be held losses arising in respect of "speculative transactions" within the meaning of Section 43(5).
(iii) CIT v. Kamani Tubes Ltd. (1994) 207 ITR 298 (Bom)--to contend that payment of price difference to supplier following refusal to accept contract transaction is not a speculative transaction and, therefore, cannot be treated as loss from speculative business. In this case it has been held that even if in a given case, a particular transaction is held to be a speculative transaction within the meaning of Section 43(5) such a finding would not resolve the controversy regarding applicability of Expln. 2 to Section 28 and Section 73 without a further finding that the assessee carried on business in such a speculative transaction. It is only where the speculative business carried on by an assessee are of such a nature as to constitute business that Expln. 2 to Section 28 gets attracted and such business which is referred to as "speculative business", is deemed to be distinct and separate from other businesses and Section 73 becomes applicable to the set off and carry forward of loss from such business. There is perceptible difference between the "speculative transaction" and "speculative business".CIT v. Nirmal Kumar & Co. (supra)--The assessee was dealing in PDOs. The brokerage that it earned from dealing in PDOs was shown as profit. The PDO loss that was incurred was found by the Tribunal to be inseparable. In fact, the ITO himself had treated all these transactions as inseparable in the earlier assessment years. The ITO could have dealt with these transactions as speculative or the ITO could have treated them as business transactions. In either event, the loss had to be set off against the profit. The ITO in the earlier assessment years had treated all these transactions as business transactions. No reason has been given to depart from the view taken by the ITO in the earlier years.
It was noted that it was not the case of the ITO that the brokerage income was earned out of the transactions which were actually settled by delivery of jute goods and loss arose out of transactions in which goods were not ultimately delivered. Had that been the case, different consequences might have followed. Thus the Tribunal Was held to have come to a correct decision.
where a commission agent advances money for interest to constituents in the normal course of such agency, bad debts arising on advances not repaid is allowable as a trading loss. Citing this decision, he contended that if loss accrued to assessee is considered to have accrued in the course of its business activity, then loss arising therefrom should be allowed as business loss.
(vi) CIT v. Shah Pratapchand Nawpaji (1980) 15 CTR (AP) 223 : (1983) 139 TTR 149 (AP)--to contend that where an assessee carrying on commission agency business settles amount in connection with loss on forward contracts entered into by him on behalf of his constituents, the amounts not recovered by him from constituents constitute a business loss and not a speculative loss because the transaction arise in the normal course of his business of commission agency. The assessee in the said case was found by the Tribunal not carrying on speculative business and the loss suffered by the assessee was not loss in speculation business but a loss arising from its business as commission agent as the normal trade practice of commission agent was to pay off losses on behalf of their constituents and to recover same from the latter in due course and such payment of accommodation were necessary both in the assessee's interest and in the interest of its constituents. Hence, the loss incurred by the assessee was considered to be a business loss based on the facts.
(vii) Rajputana Trading Co. Ltd. v. CIT --When the loss or liability for which deduction has previously been allowed to the assessee arose out of speculative transactions, the original of such loss or liability is known and ascertainable. If such loss or liability is to be treated as profits in the circumstances given in Section 10(2A), it would be most illogical and irrational to treat the so-called profits as having a neutral source and not springing out of the same category of speculative business which led to the assessee incurring that loss or liability. In the cases of the present kind, there is a fairly direct and proximate relationship between the income as deemed to be arising under Section 10(2A) and the speculative business which the assessee was carrying on. If once a particular item of loss is categorized as speculative loss, then, in that case, if such loss is to be deemed to be income or profit from the business, profession or vocation by virtue of Section 10(2A), it follows by necessary implication that such income or profit can only be income or profit arising from speculative business.
24. Concluding his arguments learned Counsel pleaded that in view of above-mentioned facts and position of law, the loss arising to assessee from sale and purchase of shares should not be treated to be speculative loss as envisaged in Explanation to Section 73. The loss should be treated as ordinary business loss entitled to be set off against other income of assessee, 25. On the other hand, learned Departmental Representative relied on the order of AO. He also relied on the case law relied upon by the learned CIT(A) and also the decision of Calcutta High Court in the case of CIT v. Arvind Investment Ltd. (1991) 94 CTR (Cal) 263 : (1991) 192 TTR 365 (Cal). The decision in the case of CIT v. Arvind Investment Ltd. (supra) lays down the following proposition: The Explanation to Section 73 applies to certain categories of companies. The opening words of the Explanation to Section 73 are 'where any part of the business of company' do not create any difficulty. The assessee has not been able to cite any case where the word 'any' has been used in a restrictive sense so as not to include 'all'. Moreover, one fails to see why 'part' should not include, 'the whole' in this case. Such construction of statute always leads to absurdity. There is no reason why the phrase 'any part of the business' should be given a restrictive sense so that when a company's business consisted of purchase and sale of shares as well as some other business activities, such company should not come within the mischief of the Explanation to Section 73. The Circular No. 204, dt. 24th July, 1976, on which reliance has been placed, also does not advance the case of the assessee in any way.
Explanation to Section 73 was, therefore, attracted and the loss was speculative loss and, therefore, the assessee was not entitled to claim the loss under the head 'Business'.CIT v. Pangal Vittal Nayak & Co. (P) Ltd. . The said decision laid down the following proposition: It was contended that the receipt of commission was a receipt from the business of the assessee as a broker and was not a receipt of income from the business of speculation and therefore the commission should not be assessed under the head 'speculation business'. The argument is well-founded for the reason that there is no element of speculation whatever in the commission income received by the assessee. The commission was earned and received by the assessee independently of any fluctuation in the market and no risk was involved in the earning of the commission and so it must be treated as profit from the other business of the assessee and not as profit from speculation business. To put it differently, the assessee carries on two kinds of business, one in speculation and the other as a broker. The receipts of commission business is entirely of a different character from the profits and losses of the speculation transactions. The assessee does speculation business on his own account with the members of the association. The assessee also entered into forward contracts on behalf of its clients. This may result in a profit, in which case, he recovers the commission from the clients and pays the profit to them. If it is a loss, the clients are bound to bear it but the assessee still is entitled to charge the commission from his clients. The point to be noted is that the assessee carried on these speculative transactions on behalf of its clients and not on its own behalf. There is thus no element of speculation in the commission income received by the assessee and the commission is earned and received by the assessee independently of the profit or loss sustained by his clients in the transaction. Accordingly, the assessee is not entitled to get the commission receipts assessed under the head 'speculation business' for the relevant years.
Thus the learned Departmental Representative concluded his argument to contend that loss accrued to assessee from sale and purchase of shares has rightly been treated by AO as speculative for which set off of loss was not permissible against other income as per discussion made in the assessment order and in the order of CIT(A).
26. Giving reply to the arguments of learned Departmental Representative, learned Counsel pleaded that both the cases relied upon by the learned Departmental Representative have no application to the case. The loss arising to assessee is not hit by Explanation to Section 73 of the Act. In the alternative he pleaded that source of loss and brokerage being one and the same should be held to be incidental and be deducted from brokerage income.
27. We have carefully considered the rival submissions in the light of material placed before us. The AO has applied Explanation to Section 73 while disallowing the loss to be set off against brokerage income by holding that loss was result of business activity of the assessee carried on as sale and purchase of shares of other companies. As against this, the case of assessee is that concerned loss cannot be treated to be "speculation loss" within the meaning of Explanation to Section 73, on the ground that assessee at its own never indulged in the business activity of sale and purchase of shares of other companies which is a precondition for application of Explanation to Section 73.
It is the case of assessee that purchase of shares and consequential sale thereof was an eventuality occurred during the course of its business activity, i.e., broking business. Certain clients for whom the assessee was working as broker had disowned certain transactions which under compulsion had to be honoured by the assessee for the reasons that assessee had no alternative other than to accept these transactions as its own as, if not so done its licence of broker with stock exchange could be terminated/suspended. The assessee also wanted to keep good relation with these clients as the assessee, in future, was expecting good earning in the shape of brokerage from them and such expectation also turned to be true as assessee has earned a substantial amount of brokerage from them in the accounting year itself. It is the case of assessee that such transactions which were adopted by the assessee under compulsion cannot be termed as "business of sale and purchase of shares of other companies" as envisaged in the provisions of Explanation to Section 73.
28. To examine the abovementioned contentions it will be appropriate to refer to the relevant portion of provisions of Section 73(1) and Explanation thereof: 73. (1) 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.
Explanation.--Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
The abovementioned Explanation has been inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1977. The Explanation provides that where any part of the business of a company (other than certain specified companies as mentioned in the Explanation) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It is clear from the above provision that sale and purchase of shares of other companies, within the ambit of the Explanation, must be carried out as an activity of business. The term business has been defined in Section 2(13) as under: 2(13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture; Noting this definition from the viewpoint of Explanation to Section 73, it has been observed by their Lordships of Karnataka High Court in the case of Mysore Rolling Mills (P) Ltd. v. CIT (supra) that any kind of venture will not fall within this inclusive definition. The venture or the adventure will have to be in the nature of trade commerce or manufacture. Basically, the concept of business involves a frequent activity of a particular nature. The observations of their Lordships in this regard are reproduced below: The Explanation is attracted only when part of the business of the assessee-company consisted of the purchase and sale of shares of other companies; it is only in such a situation that such dealing in shares is deemed to be carrying on a speculation business. According to Mr. Chandra Kumar, learned Counsel for the Revenue, the definition of 'business' is quite wide and any particular venture will fall within the definition of 'business'. Learned Counsel referred to the definition in Section 2(13) wherein 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is to be noticed that any Rind of venture win not fall within this inclusive definition. The venture or the adventure will have to be in the nature of trade, commerce or manufacture. Basically, the concept of business involves a frequent activity of a particular nature. An isolated activity is opposed to the concept of business. As observed by an English Court (extracted from p. 114 of Kanga and Palkhivala's The Law and Practice of Income-tax--Vol. 1, 7th Eda).
A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property--if that is all that is involved in the plunge-may easily fall short or anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances.
Unless ex facie the single transaction is obviously commercial, the profit from it is more likely to be an accretion of capital and not an yield of income.
based on the facts of the said case. In fact, at p. 559, the Bench observed that: Our conclusion, therefore, is that if the transaction under which the assessee paid Rs. 13,500 to M/s Rallis India Ltd. amounted to a speculative transaction, it also amounted to speculation business attracting the operation of Section 73(1) and the loss of Rs. 13,500-could not be set off against the profits of the other business of the assessees.
decision of the Andhra Pradesh High Court. The question that arose was under Section 43(5) of the IT Act. The Bench found that the transaction in question could not be held to be a speculative transaction and, therefore, the Revenue's contention was negatived.
In the said case, the assessee was carrying on business in the manufacture and sale of groundnut oil and, in that connection, it had entered into a number of contracts for the purchase as well as sale of the aforesaid commodities. In respect of a small portion of the contract, delivery did not take place and, for reasons beyond the control of the assessee, the assessee committed breach of the contract. While considering the facts, the Court also considered the claim under Section 73. At p. 765, the Bench observed, after referring to Section 73(1) and Expln. 2 to Section 28, thus: In our opinion, it is necessary to examine the nature and the course of speculative transactions in any given year in order to determine whether the assessee is carrying on speculation business. Section 73(1) of the Act 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. While Section 43(5) of the Act provides an artificial definition of 'speculative transaction', Section 73(1) does not in terms provide that any loss in respect of a speculative transaction earned on by the assessee shall not be set off except against the profits and gains, if any, of another speculative transaction. The expression used in Section 73(1) is 'speculation business'. If speculation business is to be understood in the normal commercial parlance, the ingredients are totally different and a 'speculation transaction' artificially defined in Section 43(5) of the Act does not amount to 'speculation business' as is commercially understood.
A Full Bench of the Gujarat High Court in Pankaj Oil Mills v. CIT , has succinctly explained what is understood to be a speculative transaction in the ordinary commercial sense. We may quote below the observations of the . Gujarat High Court: In speculative transactions, the modus operandi of persons indulging in them is that when one enters into a contract of purchase, he also simultaneously enters into one or more contracts of sale against the same quantity deliverable at the same time either to the original vendor or to someone else, so as either to secure profit or to minimise loss, before the vaida day; and, similarly, when he enters into a contract of sale, he simultaneously enters into one or more contracts to purchase the same-quantity before the vaida day. The result of such dealings, when the sale and purchase are to and from the same person has the effect of cancelling the contract leaving only differences to be paid [vide Tod v. Lakhmidas Purshotamdas (1892) ILR 16 Bom 441, Perosha Gursetji Parakh v. Manekji Dossabhai Watcha (1898) ILR 22 Bom 899 and Sassoon v. Tokersey Jadhawjee (1904) ILR 28 Bom 616].
What is required for speculation business is that the course of speculative transactions carried on by an assessee is of such a nature as to constitute a business. It is, therefore, necessary in each case to examine and find out whether the speculative transactions carried on by an assessee are of such a nature as to constitute a business. It may be that, in a given case, a single speculative transaction, on application of proper tests, may be found to constitute 'speculation business'. It may equally be true that a plurality of speculative transactions, on application of proper tests, constitute 'speculation business'. It would depend upon the facts of each case. It is not possible to accept the submission of learned standing counsel for the Revenue that no recognised tests are applicable for the purpose of determining whether an assessee is carrying on speculation business by reference to the nature of the speculative transaction carried on by him.
8. It is thus clear that the facts of each case will have to be 'examined to arrive at a conclusion as to whether the transaction in question is a speculative venture or business. The nature of the assessee's business in general, the purpose behind the particular transaction, the effect of the transaction, etc., are all to be considered. As Mr. Sarangan contended, no company would throw away large sums of money by purchasing shares and later sell the same at a loss and then claim the said loss to reduce the tax burden because the loss sustained in the process will be far more than the actual tax relief. Unless it is conclusively established that the assessee entered into the transaction clearly as speculative venture, the Courts cannot infer that the transaction was a speculative venture only because the assessee derived subsequentiy the benefit of tax reduction. In fact, the crucial time and the stage is the time when the assessee purchased the shares and if possible to find out the intention behind such a purchase, and not to draw an inference of speculation from the fact that subsequently the shares were sold at a low price.
9. For the reasons stated above, we cannot agree with the finding of the Tribunal.
From the above observations it is clear that to find out that the assessee carried on purchase and sale of shares of other companies as its business in a given case, the facts of that case will have to be examined and the tests which could determine such situation are: Examining the facts of present case, in .the light of abovementioned tests, it can be pointed out that the nature of assessee's business in general is to earn income as a broker of stock exchange and the purpose behind the transactions in regard to which the assessee has incurred loss is the purchase for and on behalf of certain clients to earn brokerage income therefrom. It was only an eventuality that some of the clients disowned only part of the transactions which under compulsion were to be taken by assessee at its own.
29. As pointed out earlier in paper book IV the assessee has submitted the copies of parties' bills, along with assessee's purchase bills giving details of non-acceptance of Sauda by parties and xerox copies of settlement sheets. All these bills were comprising part of accounting books maintained by the assessee giving all required details regarding the transactions on which the assessee had to bear these losses. Thus, by placing all these materials on record of AO, it can be said that assessee had discharged its primary onus to substantiate its explanation regarding incurring of losses out of these transactions.
The AO has not brought any material on record to suggest that the assertions and documents produced by assessee were not substantiating the explanation furnished in this regard. There is also no material on record to disprove the facts stated by the assessee. In this view of the situation, the AO could not act unreasonably to reject that explanation. As per decision of Hon'ble Supreme Court in the case of Shreelekha Banerjee and Ors. v. CIT (supra), before AO. rejects such evidence it must (show) commensurate weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The AO cannot be merely rejecting unreasonably a good explanation, convert good proof into no proof.
Thus, the contention of assessee that the purpose behind the purchase was to earn brokerage income therefrom and sale of those shares was consequential act as purchase of these shares was disowned by respective clients, appears to be a bona fide contention, The conduct of assessee also indicates that by the end of the year, there was no item of such purchase of shares outstanding in the closing stock of the assessee. No purchase and sale of shares has been done either in the preceding year or in the proceeding year. Thus, the conduct of assessee shows that its intention had never been to deal in the sale and purchase of shares at its own and it was only an eventuality or forced circumstances under which the assessee had to adopt these purchases and these transactions entered into by assessee under compulsion cannot constitute business of the assessee, more so part thereof.Mysore Rolling Mills (P) Ltd. v. CIT (supra) that the crucial time and the stage is the time when the assessee purchases the shares and if possible to find out the intention behind such purchase. By documentary evidence produced by the assessee before AO it was established that the purchase of shares was made by assessee only on behalf of its clients.
Thus, the crucial time and the stage in the present case clearly depicts that these were purchased by assessee on behalf of its clients and intention of assessee behind the purchase of shares was not to indulge in the business activities of purchase and sale of shares to make profit out of it at its own. Thus, testing the facts of the present case on all these parameters, it can be concluded that the loss arisen out of purchase and sale of shares by the assessee is not a result of business activity carried on by the assessee in that regard.
As pointed out earlier, the Explanation to Section 73 is attracted only when part of the business of the assessee-company consists of the purchase and sale of shares of other companies and in that situation only such dealings in shares is deemed to be carrying on a speculation business. It is to be noticed that any kind of venture will not fall within the definition of "business". The venture or adventure will have to be in the nature of trade, commerce or manufacture. Thus, there is lack of ingredient called "business" in the sale and purchase done by the assessee of shares for which loss has occurred to assessee. It has been held in the case of CIT v. Shri Venkateswara Rice & Oil Mills (supra) that the transaction made which are beyond the control of the assessee would not make the transaction a speculative transaction in the absence of any evidence to show that the transaction was speculative.
31. It is further observed that the Tribunal in the case of Asstt. CIT v. Subhash Chand Shorewalla (2004) 91 TTJ (Del) 57 has held that where an assessee carrying on business of broking, in normal course of his business would be facing situations wherein some of the clients do not own up the transactions on investing losses and in such situations, the consequential loss incurred by the assesses to honour the commitment is to be viewed as an integral part of carrying on of assessee's business and is, therefore, not liable to be judged as a speculation. Relevant observations of the Tribunal from the said case are reproduced below for the sake of convenience: 11. We have heard the rival submissions and have also perused the orders of the lower authorities and the relevant material on record and proceed to dispose of the issue in the following lines.
12. At the outset, we may state that the Revenue has to fail for the reasons discussed hereinafter.
13. The two facets of the issue before us relate to: (a) loss as a result of the breach of contract by the clients; and (b) loss suffered on account of jobbing transaction. The order of the CIT(A) on this issue is quite illustrative, a portion of which we reproduce as under: I have considered the arguments of the learned Counsel. As regards the loss on account of breach of contract, the Hon'ble Delhi High Court in the case of Bhagwan Dass Rameshwar Dayal (supra) held that one can visualise a number of situations in which there may be no delivery for various reasons, i.e., because of failure of the party on account of insolvency or frustration, e.g., banning of business or mere breach, i.e., to say non-supply. All these cannot be classified as speculative within the meaning of Section 43(5). What the section visualises is a contract which is settled by means of a cross contract. If the contract is settled for some other reasons by payment of damages or even without payment of damages it may or may not be speculation transaction depending upon the circumstances of the case. The Hon'ble Court further held that if a contract is broken, i.e., for any reasons one party is unable to give delivery order the other party is unable to take delivery, it is a case of breach of contract. A breach takes place on repudiation of contract or failure to perform it. When the obligation to supply or to take delivery comes to an end, it does not make the transaction speculative. The Hon'ble Court clarified that if it was settled by mutual consent to avoid delivery then it would be speculative. But if it was settled because of inability of the assesses to supply or on account of the fact that it did not have necessary resources to give the delivery then it would be a breach of contract and not the speculative transaction.
In view of the decision of the jurisdictional High Court, I hold that the loss suffered by the appellant on account of breach of contract falls outside the purview of speculative transaction.
Accordingly, the AO was not justified in treating the loss as speculative loss. He is directed to treat the loss as business loss.
Even if the arguments of the AO are accepted that such loss suffered by the appellant was on account of self-trading, still the loss cannot be termed as speculation loss. In normal terminology, the share trading business on behalf of oneself is known as jobbing.
Section 43(5) defines the word - speculative transaction, but there are three exceptions to it. The proviso (c) to Section 43(5) readsas under: A contract entered into by a member of forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to hedge against loss which may arise in the ordinary course of his business as a member.
This proviso makes it very clear that any profit or loss on account of jobbing will not be in the nature of speculation profit or speculation loss. Thus, even if it is accepted that the loss suffered by the appellant was on account of self-trading in view of proviso (c) to Section 43(5) such loss cannot be treated as speculation loss. The AO is directed to treat the loss as normal business loss. Accordingly, I hold that the loss of Rs. 3,01,785 is normal business loss and not the speculation loss.
14. A perusal of the aforesaid leads to an inference that the legal aspect has been properly discussed and appreciated by the CIT(A).
Admittedly the assessee, being in the business of broking, would be facing situations wherein some of the clients do not own up the transactions on anticipating losses. In such situations, the consequential loss incurred by the assessee to honour the commitments is to be viewed as an integral part of carrying on of assessee's business and is, therefore, not liable to be judged as a speculation loss. The decision of the jurisdictional High Court in the case of Bhagwan Das Rameshwar Dayal (supra) supports the stand of the assessee.
15. Reliance placed by the learned Departmental Representative in the case of SRJ Securities Ltd. (supra) is, in our view, misplaced insomuch as that the same is on different facts. Further, the decision of the Tribunal in the case of Dy. CIT v. S.C. Gupta in ITA No. 2897/Del/1997, dt. 27th May, 2003, is on similar facts.
Therefore, following the same, as the facts are on similar footing, we dismiss the appeal of the Revenue.
32. In view of above discussion, we are of the opinion that loss arisen to assessee does not fall within the ambit of Explanation to Section 73. The loss occurred to assessee was in the course of its business activity of brokerage. It is not the case of Revenue that loss has not occurred to assessee and the same is not genuine. Thus, the loss is allowable as business loss in the normal course of business of the assessee and is available to be set off against brokerage income.
33. Now coming to the case law relied upon by the learned Departmental Representative. The decision in the case of CIT v. Arvind Investment Ltd. (supra) has no application as it sets out a proposition that Explanation to Section 73 applies not only where a part of the business of a company consists of purchases and sales of shares but also where the entire business activity of the company consists of purchases and sale of shares. In the said case the Tribunal after interpreting Section 73 had held that where a part of the business concern consists of purchase and sale of shares then only the Explanation will come into play and that it will have no application in a case where the sole business of the company is in share dealings. Thus in that case the sole business of the assessee was in shares dealings, i.e., sale and purchases of shares of other companies and Explanation to Section 73 was held to be inapplicable by the Tribunal for the reason that for application of Explanation to Section 73 it is necessary that some part of the business of assessee should be sale and purchase of shares. On this order of Tribunal, it was held by the Hon'ble High Court that where assessee is carrying on sole business in share trading the same also falls within the ambit of Explanation to Section 73. Here, on the basis of facts, it is found that no part of business activity of the assessee included sale and purchase of shares of other companies.CIT v. Pangal Vittal Nayak & Co. (P) Ltd. (supra), the assessee was found to be carrying on sale and purchase of shares of other companies on his own account also. Thus, it was held that both the activities of business, i.e., business of brokerage and business of dealings in shares were separate activities and thus assessee was held not entitled to set off the loss. Here in the present case, the assessee is found to have no business activity of sale and purchase of shares at its own. Thus, this decision has also no application to the facts of present case.
35. In view of above discussion, we hold that assessee is entitled to get set off of a sum of Rs. 20,38,775, being loss accrued to assessee being incidental to its business activity as a broker against its brokerage income. The AO is directed accordingly. Ground No. 1 is, therefore, allowed.
37. Apropos ground No. 3, director of assessee-concern namely, Shri Dhirajbhai and his wife visited abroad for which an expenditure of Rs. 6,20,841 was claimed being expenses on foreign tour. The assessee was required to furnish details. Though the details of visit were furnished but the same were not supported by vouchers and other documentary evidence which could show that assessee actually carried out certain business activity during the course of visit. Therefore, entire expenses were disallowed by AO. The disallowance has been upheld by CIT(A). The assessee is aggrieved hence in appeal.
38. The details as submitted before AO find place at pp. 262 and 263 of paper book IV. Referring to P. 263. the contents of which are as under:___________________________________________________________________________Place Duration Visit place Arranged___________________________________________________________________________New York -- New York Stock Exchange Tandem___________________________________________________________________________New York 9.00 a.m. to 10.00 a.m. Office of Painewebber ASE___________________________________________________________________________ 10.30 to 1.00 p.m.
Office of TCAM TCS___________________________________________________________________________ 2.00 p.m. to 5.00 p.m.
National Secu. Clearing Corpn. ASE___________________________________________________________________________Washington 9.30 a.m. for 2-3 his.
Office of Security & Exchange ASE -- Commission___________________________________________________________________________ 2.00 p.m. for 2-3 hrs. Office of Nasdaq ASE___________________________________________________________________________Chicago 9.30 a.m. for 2-3 hrs. Chicago Option Exchange ASE___________________________________________________________________________ 2.00 p.m. for 2 hors.
Options Clearing Corpn.
ASE___________________________________________________________________________Chicago 09.30 a.m. for 2 hrs.
Chicago Mercantile Exchange ASE___________________________________________________________________________Toronto -- Office of I.S.M. Wipro___________________________________________________________________________Calgary -- Alberta Stock Exchange TISM___________________________________________________________________________Los Angeles 3.00 p.m. to 5.00 p.m. Pacific Stock Exchange Stratus___________________________________________________________________________Singapore -- Singapore Stock Exchange HCLHP___________________________________________________________________________Hong Kong -- Hong Kong Stock Exchange Tandem___________________________________________________________________________ It was pleaded that assessee (director) had visited various stock exchanges. Thus, it was pleaded that the purpose of visit of director was not purely personal as apprehended by AO. Thus it was pleaded that disallowance of entire expenses is not justified.
39. Learned Departmental Representative on the other hand, however, relied on the orders of AO and the CIT(A).
40. We have carefully considered the rival submissions in the light of material placed before us. We find force in the argument of learned Counsel that the visit of director was not purely personal. It may have some elements of business nature. Therefore, we are of the opinion that entire expenses could not be disallowed and expenses relating to the director only should be estimated which have been incurred for the purpose of business. The expenses relating to the wife of director cannot be allowed being not wholly and exclusively incurred for the purpose of business, of assessee. Keeping in view the entirety of facts, we allow 25 per cent of total expenses and rest 75 per cent is held disallowable. The AO will work out the disallowance accordingly.
This ground is partly allowed.