C.N.M.P. Investments (P.) Ltd. Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. this appeal filed by the assessee is directed against the order dated 28th september, 1993 of the learned commissioner of income-tax (appeals) -i, new delhi, pertaining to the assessment year 1989-90. the assessee has raised as many as six grounds of appeal.2. the learned counsel for the assessee shri k.s.v.s. manian has pointed out that the issue involved in this appeal is covered by all the grounds, therefore, he submitted that ground nos. 1 and 6 may be taken. reproduced below are ground nos. 1 and 6 :-- " 1. the learned commissioner (appeals) should have accepted the claim of the appellant of the returned income and accepted the loss on purchase and sale of shares as claimed by the assessee. 6. without prejudice the commissioner (appeals) has erred in not accepting the claim that in computing the business income under section 28 in the case of appellant, being a company, all business income will be computable as has been interpreted by the decision of bombay tribunal and in that view of the matter, all purchases and sale transaction of shares and the resultant position thereof will be also computed under section 28 which means automatically all the profit and loss on purchase and sale of shares of all kinds would get set off, which means the returned income will have to be accepted, i.e. deduction claimed of loss of rs. 1,99,850 on purchase of shares would form parts of computation under section 28 regarding the business income as occurring in section 73 (explanation). this is what is claimed before the tribunal now based on the interpretation of explanation to section 73 placed by hon'ble tribunal, bombay bench reported in 41 itd p. 469." the learned counsel for the assessee shri k.s.v.s. manian submitted that the accounting year of the assessee company comprises of 21 months ending 31st march, 1989 relevant to assessment year 1989-90 due to adoption of uniform accounting year in the act. paper book containing 84 pages has been filed whereby consolidated profit & loss account for 21 months ended 31st march, 1989, balance-sheet as on 31-3-1989, details of purchase and sale of shares from t.h. vakil & co., shares & stock brokers, bombay have been placed on record. statement showing details of shares of different companies purchased and sold resulting loss of rs. 1,99,850 (pp. 32 to 34 of the paper book) is given as under :--9. baroda rayon rs. 13,000.00 __________________ the learned counsel pointed out that shares were purchased first and sold within a period of very few days and the losses were incurred.this was done due to immediate fall in value of shares. referring to section 43(5) proviso (b) he pointed out that section 43 is a definition of section defining certain terms relevant to computation of income from profits and gains of business or profession, proviso (b) reads as under : -- (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations.he further referred to a definition of the words "speculative transaction" given in a.n. iyer's indian tax laws (1989) which is the relevant year section in the law for assessment year 1989-90.sub-section (5) of section 43 reads as under : -- "(5) "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." the learned counsel further pointed out that the transactions resulting in a loss have been incurred by payment of settlement of differences of the losses, without taking delivery or giving delivery of the shares in terms of sub-section (5) of section 43 of the act. he submitted that in view of proviso (b) to sub-section (5), even though the shares were purchased and sold otherwise than by actual delivery or transfer of scrips, it cannot be deemed to a "speculative transaction". he claimed that if the shares were not sold in short period, there was a fear that the fall in price may be more which might result in greater loss.pointing out the object clause of the memorandum of the company (p. 78 of the paper book), the learned counsel submitted that the entire income of the company is from business of banking or granting of loans or advances and also on account of purchase and sale of shares and dividend income. according to the learned counsel, as per head note, section 73 deals with losses in speculative business and rules of set-off thereof. explanation to section 73 which reads as under, is relevant on the issue involved : -- "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 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.' it was submitted that the explanation has an overriding effect generally related to any part of business of a company having purchase and sale of shares in whatever manner, and deemed the same to carrying on a ''speculation business". in spite of the overriding effect, deeming all transactions as carrying on speculation business related to purchase and sale of shares, there arc two types of companies which have been made exception to the above overriding position, they are :-- (1) a company whose gross total income consists mainly of income which is chargeable under the head "interest on securities", 'interest from house property", "capital gains" and "income from other sources." (2) a company the principal business of which is the business of banking or the granting of loans and advances.that is the companies having gross total income stated in the first part of the above clause or a company carrying on the business of banking and granting loans and advances are stated specifically and covered by the words "other than". it means from the companies generally covered by the section, these two categories of company have been taken out. therefor it was submitted that since the assessee company was in the second category of the exception to the above explanation and such exception applies, it is claimed in view of the above section that the purchase and sale of shares resulting in a loss is not a speculative transaction even otherwise and therefore claimed that the computation of income filed, setting off the loss on sale of shares by the assessee in the return should be accepted. the learned counsel also pointed out the details of computation filed before the assessing officer and submitted that the gross total income determined therein in the statement of computation filed with the return is rs. 4,53,018.18 which should have been the basis for assessment. to a query that the company had only settled the differences between the purchase and sale price, and not taken delivery, the learned counsel replied that that is a fact in the trading transactions in the stock exchange as a matter of trade practice. over the phone, directions are given for the purchase or sale of shares to the broker and the broker carries out the same and sends their bill popularly known as broker note and that is binding on placing the order and a commitment. he also pointed out in the paper book that he had enclosed extract from law of income-tax by sampath iyengar's 9th edition vol. 2 dealing with section 43(5) in chapter 4 - internal pages 2912 to 2914 and also 2924 comprising of pages 81 to 84 (photo copies of books of the learned author). he also brought in particular page 84 of the paper book internal page 2924, where para 3 deals with, under the head "hedges" in respect of stocks and shares : clause (b)", the trade practice has been adopted and recognises even transactions of varied nature in the commercial world of share dealing, briefly dealt with by the author. the last four sentences of clause 3 para 1 were brought to the notice which read as under :-- "it may however be mentioned in clause (if) refers to guarding against loss in holdings'. the word 'holdings' would include holdings on blank transfer. it would also include scrips bought but not actually taken delivery of, since it is the custom of the trade to include brought-scrips in the stock." he also pointed out that the learned author while referring to "reports of the direct taxes administration enquiry committee, 1958-59, para 3.57" noted that as a trade practice the hedges need not be in the same type of shares but may extent to other types of shares as well and has illustrated quoting the above report and administrative instructions that shares of indian iron against indian cables, howrah jutes against hindustan motors, orissa cement against indian copper, etc. he further submitted that the trade practice does not require taking delivery; settlement of difference is recognised. even blank transfers and settlement of two different types of shares are recognised for hedging and such settlement can be without holding the stocks in hand by way of actual stocks in hand and stocks purchased, though not in hand.therefore, he contended that when all the requirements of law are fulfilled for qualifying for taking the above loss on purchase of sale of shares, the learned commissioner (appeals) should have accepted the claim of the assessee and allowed the deduction of rs. 1,99,850.supporting his arguments he relied upon the following decisions :-- accordingly, he claimed that as there is no specific exclusion of the loss incurred by the assessee on the purchase and sale of share transactions from the gross total income under section 73, as held in the case of rajan enterprises (p.) ltd. (supra), in the case of the assessee also, it was to be determined with respect to gross total income of the assessee without applying the provisions of explanation to section 73 of the act. further it was submitted that since the assessee is an investment company and money lending company, the loss incurred by the assessee on purchase and sale of shares, would not be speculative in nature within the meaning of explanation to section 73 of the act. thus the above loss arising out of purchase and sale of shares of rs. 1,99,850 should be part of the computation as made in the return by the assessee and should be allowed. referring to the chandigarh bench judgment in m. gulab singh & sons (p.) ltd, 's case (supra), the learned counsel submitted that the loss on purchase and sale of shares has to be adjusted in the computation as claimed by the assessee.3. the learned dr shri abhey tayal on the other hand, relied upon the orders of the authorities below and referring to the order of the commissioner (appeals) dated 28-9-1993 submitted that in view of section 43(5) it is a speculative transaction and the assessee company has sold the shares within a very short time of a week and in some of the cases on the very next day, for example shares of colgate. he further submitted that contract notes were only an agreement to purchase and no payment as such were made on account of purchase.referring to para 2.3 at page 4 of the order of the commissioner (appeals) whereby the learned commissioner (appeals) has mentioned that the contract notes did not mention the distinctive number of shares, bought or sold and claimed that it is a speculation loss, the learned dr contended that the shares were not held but they were only an agreement for purchase. he further contended that section 43(5) is a specific section regarding speculation transactions and explanation to section 73 being a deeming provision, cannot override provisions of section 43(5).4. we have considered the rival submissions and perused the material available on record. admittedly the issue relates to the loss resulting from purchase and sale of shares of certain quoted companies by the assessee, details of which have been furnished at pp. 32 to 34 of the paper book, totalling to loss claim of rs. 1,99,850. names of the companies and the loss arising out of transaction are noted hereinabove. the admitted facts are that the shares have been sold within a short period to avoid huge losses and the settlement of difference was made by payment to the stock broker and no delivery was taken or given of the shares. it is pointed out that every transaction of sale was preceded by purchase. thus there was no case on facts that sale preceded purchase. the purchases were on facts succeeded by sales.the contention of the assessee was that factually there was a trend of fall in price and in order to arrest the increased losses the assessee was compelled to sell the shares and suffered a loss of rs. 1,99,850.5. the learned ar invited our attention to section 43(5) which defines ''speculative transaction", in fact section 43 as per head note, deals with definitions of certain terms relevant to income from profits and gains of business or profession. sub-section (5) defines "speculative transaction". our attention was also invited to proviso to (b) of sub-section (5) of section 43 of the act. that is, for the purpose of sections 28 to 41, speculative transaction means a transaction in which a contract for the purchase or sale of stocks and shares periodically or ultimately settled otherwise than by actual delivery or transfer of the scrips. proviso to (&) of sub-section (5) of section 43 reads as under :-- (b) a contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; according to the learned counsel for the assessee, the purchase and sale of shares in settlement is made otherwise than actual delivery or transfer of shares within the meaning of sub-section (5). the proviso (b) makes specific provision in respect of contracts related to stocks and shares by a dealer or investor entered to guard against the loss in holding through price fluctuation shall not be deemed to be a speculative transaction. it has to be understood that there is mandate under proviso (b) that if such a transaction as per sub-section (5) takes place by a dealer or investor it would not be a speculative transaction. the contract entered into by the assessee with m/s. t.h.vakil & co. was to guard against the loss in holding of shares through price fluctuation. according to the assessee, the very purchase covered by contract with stockbrokers obliges the assessee under the contract either to take delivery or settle-the same. once the purchase is made through a broker then it is a binding contract of assessee to honour it and liable to pay the stocks broker the consideration for purchase. in falling market, the assessee claims that the sale was done immediately through same broker. this has resulted in arresting further loss in his holding of shares, which are already purchased under the contract from the same broker. therefore what is provided in proviso (b) is squarely complied with and the definition of speculative transaction does not apply due to the mandate under the proviso.6. we also note from the consolidated 21 months audited profit and loss account and balance-sheet from page 59 onwards of the paper book that the gross sales amounted to rs. 53.24 lakhs comprising of sale of shares of rs. 28.13 lakhs, interest received of rs. 12.16 lakhs, dividend of rs. 0.33 lakh and closing stock of shares in hand of rs. 12.61 lakhs and the profit before taxation has been shown at rs. 5,38,238. in the balance-sheet at page 60 of the paper book it is clear that the fixed assets are only of rs. 1.87 lakhs whereas investment in shares were rs. 11.26 lakhs and current assets comprising of stock in hand, deposits with companies and loans and advances all amounted to rs. 61.02 lakhs (rs. 63.27 lakhs cash and bank balances of rs. 2.25 lakhs). further at page 78 of the paper book the memorandum of association in which the main objects are given enables to carry on the business of investments and to buy, underwrite, invest in, acquire, hold and deal in shares, stocks debentures etc. of any kind. the second object is to carry on the business of money lending. these two objects alongwith the fact that the assessee has only interest income and dividend income besides sale of shares also beyond doubt brings home by factual situation that the assessee is a dealer and an investor.7. it is also clear on the facts as per the contract notes furnished at pp. 41 to 53 of the paper book, details of purchase of shares and debentures at page 7 and further details of purchase and sale of shares resulting in loss of rs. 1,99,850 at pp. 32 to 34 of the paper book, that first nine transactions clearly establishes that the assessee had contracts in respect of stock and shares entered into as a dealer/investor. it is also fact that the transaction resulting in a loss is arising out of contract for purchase and immediately the sale has taken place of the same shares purchased because of price fluctuation. this was done by the assessee to arrest further loss in respect of shares purchased under the contract. such loss if occurred would fall under the proviso (b) to section 43(5). referring to the extracts taken from law of income-tax by sampath lyengar 9th edition, vol. 2, pp. 2912 to 2914 (pp. 81 to 84 of the paper book) we find the case laws of supreme court regarding details of speculative transaction under section 43(5) are given. the features envisaged are dealt in four sub-heads :-- (iii) periodical or ultimate settlement of the contract, the author has detailed under the heading "periodical or ultimate settlement the contract" making it clear that by the usage of the words periodical or ultimately that even a part of the contract settled otherwise by delivery is covered. he has also dealt with the dictionary meaning of the word "settled" and noted that the proper meaning of section 43(5) could be a contract settled and cannot be held to mean that the contract is to be substituted. (iv) "hedges in respect of stock and shares" dealing with section 43(5) the learned author has dealt with the kind of transaction the dealer or investor of shares enter. when the price goes down the holder thereon attempts to cut short the investment losses. he also notes that by these transactions there is no intention to effect a delivery nor any taking or giving delivery is ever made. the term 'holding' occurring in (b) refers to guarding against loss in holding. the word 'holding' will include holdings on blank transfer. it would also include scrips bought but not actually taken delivery of, since it is the custom of the trade to include bought-scrips in the stock. the author further noted from direct taxes administration enquiry committee report 1958-59 that hedges need not be of same type of shares but extend to other type of shares not held by assessee such as those of indian iron against indian cables, howrah jutes against hindustan motors, orissa cements against indian copper etc. he further states that, "but the total of such hedging sales should not exceed the actual stock in hand and stocks purchased though not in hand." 8. on perusal of the above it is clear that proviso (b) to section 43(5) of the act squarely applies to the facts of the case and the mandatory provision that such transaction need not be speculative transaction applies to the facts of the case. accordingly, we hold that the transaction in which purchase and sales were taken place shall not be deemed to be speculative transaction in view of proviso (b) to section 43(5).9. in our considered view the commissioner (appeals) is not justified in holding that section 43(5) is a specific section regarding speculative transaction in respect of certain companies dealing with shares and as such explanation to section 73 cannot override provisions of section 43(5). we have already held that in view of proviso (6) to section 43(5) being a deeming provision defining speculative transaction clearly mandates that the transaction of this kind cannot be speculative transaction.10. section 73 of the act deals with loss in speculative business and the manner of such set off of such loss under sub-sections (1), (2), (3) & (4) in chapter vi of the income-tax act which relates to aggregation of income and set off or carry forward of losses.explanation to section 73 deals with any part of business of company consists in the purchase and sale of shares in other companies, such company shall, for the purposes of this section, will be deemed to be carrying on speculative transaction to the extent to which the business consists of the purchase and sale of such shares. this explanation contains two exceptions namely, a company whose gross total income consists mainly of income which is chargeable under the head interest on securities, house property, capital gains of other sources or a company the principle business of which is the business of banking or the granting of loans and advances. the assessee has claimed that the second category of the exception namely the company whose principle business is in the business of banking or granting of loans and advances applies to it besides dealing in the shares. on the facts the assessee has also established that he does fall in the category of this company supported by evidences given in the paper book which are also given to the lower authorities. therefore, the claim of the assessee that it is an investment company and the loss arising out of purchase and sale of shares should form part of a computation of total income in view of explanation 73 and also in view of section 43(5) proviso (b) should have been appreciated by the commissioner (appeals) and the assessing officer. we are of the opinion that the decisions of the itat bombay and chandigarh are not distinguishable as held by the commissioner (appeals). therefore, we quash the order of the commissioner (appeals) confirming disallowance of rs. 1,99,850 made by the assessing officer.

Judgment:
1. This appeal filed by the assessee is directed against the order dated 28th September, 1993 of the learned Commissioner of Income-tax (Appeals) -I, New Delhi, pertaining to the assessment year 1989-90. The assessee has raised as many as six grounds of appeal.

2. The learned counsel for the assessee Shri K.S.V.S. Manian has pointed out that the issue involved in this appeal is covered by all the grounds, therefore, he submitted that ground Nos. 1 and 6 may be taken. Reproduced below are ground Nos. 1 and 6 :-- " 1. The learned Commissioner (Appeals) should have accepted the claim of the appellant of the returned income and accepted the loss on purchase and sale of shares as claimed by the assessee.

6. Without prejudice the Commissioner (Appeals) has erred in not accepting the claim that in computing the business income under section 28 in the case of appellant, being a company, all business income will be computable as has been interpreted by the decision of Bombay Tribunal and in that view of the matter, all purchases and sale transaction of shares and the resultant position thereof will be also computed under section 28 which means automatically all the profit and loss on purchase and sale of shares of all kinds would get set off, which means the returned income will have to be accepted, i.e. deduction claimed of loss of Rs. 1,99,850 on purchase of shares would form parts of computation under section 28 regarding the business income as occurring in section 73 (explanation). This is what is claimed before the Tribunal now based on the interpretation of explanation to section 73 placed by Hon'ble Tribunal, Bombay Bench reported in 41 ITD P. 469." The learned counsel for the assessee Shri K.S.V.S. Manian submitted that the accounting year of the assessee company comprises of 21 months ending 31st March, 1989 relevant to assessment year 1989-90 due to adoption of uniform accounting year in the Act. Paper Book containing 84 pages has been filed whereby consolidated profit & loss account for 21 months ended 31st March, 1989, Balance-sheet as on 31-3-1989, details of purchase and sale of shares from T.H. Vakil & Co., Shares & Stock Brokers, Bombay have been placed on record. Statement showing details of shares of different companies purchased and sold resulting loss of Rs. 1,99,850 (pp. 32 to 34 of the Paper Book) is given as under :--9. Baroda Rayon Rs. 13,000.00 __________________ The learned counsel pointed out that shares were purchased first and sold within a period of very few days and the losses were incurred.

This was done due to immediate fall in value of shares. Referring to section 43(5) proviso (b) he pointed out that section 43 is a definition of section defining certain terms relevant to computation of income from profits and gains of business or profession, proviso (b) reads as under : -- (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations.

He further referred to a definition of the words "speculative transaction" given in A.N. Iyer's Indian Tax Laws (1989) which is the relevant year section in the law for assessment year 1989-90.

Sub-section (5) of section 43 reads as under : -- "(5) "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." The learned counsel further pointed out that the transactions resulting in a loss have been incurred by payment of settlement of differences of the losses, without taking delivery or giving delivery of the shares in terms of sub-section (5) of Section 43 of the Act. He submitted that in view of proviso (b) to sub-section (5), even though the shares were purchased and sold otherwise than by actual delivery or transfer of scrips, it cannot be deemed to a "speculative transaction". He claimed that if the shares were not sold in short period, there was a fear that the fall in price may be more which might result in greater loss.

Pointing out the Object Clause of the Memorandum of the Company (P. 78 of the Paper Book), the learned counsel submitted that the entire income of the company is from business of banking or granting of loans or advances and also on account of purchase and sale of shares and dividend income. According to the learned counsel, as per head note, section 73 deals with losses in speculative business and rules of set-off thereof. Explanation to section 73 which reads as under, is relevant on the issue involved : -- "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 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.' It was submitted that the Explanation has an overriding effect generally related to any part of business of a company having purchase and sale of shares in whatever manner, and deemed the same to carrying on a ''speculation business". In spite of the overriding effect, deeming all transactions as carrying on speculation business related to purchase and sale of shares, there arc two types of companies which have been made exception to the above overriding position, they are :-- (1) a company whose gross total income consists mainly of income which is chargeable under the head "Interest on securities", 'Interest from House Property", "Capital gains" and "Income from other sources." (2) a company the principal business of which is the business of banking or the granting of loans and advances.

That is the companies having gross total income stated in the first part of the above clause or a company carrying on the business of banking and granting loans and advances are stated specifically and covered by the words "Other than". It means from the companies generally covered by the Section, these two categories of company have been taken out. Therefor it was submitted that since the assessee company was in the second category of the exception to the above Explanation and such exception applies, it is claimed in view of the above section that the purchase and sale of shares resulting in a loss is not a speculative transaction even otherwise and therefore claimed that the computation of income filed, setting off the loss on sale of shares by the assessee in the return should be accepted. The learned counsel also pointed out the details of computation filed before the Assessing Officer and submitted that the gross total income determined therein in the statement of Computation filed with the return is Rs. 4,53,018.18 which should have been the basis for assessment. To a query that the company had only settled the differences between the purchase and sale price, and not taken delivery, the learned counsel replied that that is a fact in the trading transactions in the Stock Exchange as a matter of trade practice. Over the phone, directions are given for the purchase or sale of shares to the broker and the broker carries out the same and sends their bill popularly known as broker note and that is binding on placing the order and a commitment. He also pointed out in the Paper Book that he had enclosed extract from Law of Income-tax by Sampath Iyengar's 9th edition Vol. 2 dealing with section 43(5) in Chapter 4 - internal pages 2912 to 2914 and also 2924 comprising of pages 81 to 84 (photo copies of books of the learned author). He also brought in particular page 84 of the Paper Book internal page 2924, where para 3 deals with, under the head "Hedges" in respect of stocks and shares : clause (b)", the trade practice has been adopted and recognises even transactions of varied nature in the commercial world of share dealing, briefly dealt with by the author. The last four sentences of clause 3 para 1 were brought to the notice which read as under :-- "It may however be mentioned in clause (if) refers to guarding against loss in holdings'. The word 'holdings' would include holdings on blank transfer. It would also include scrips bought but not actually taken delivery of, since it is the custom of the trade to include brought-scrips in the stock." He also pointed out that the learned author while referring to "reports of the Direct Taxes Administration Enquiry Committee, 1958-59, para 3.57" noted that as a trade practice the hedges need not be in the same type of shares but may extent to other types of shares as well and has illustrated quoting the above report and Administrative instructions that shares of Indian Iron against Indian Cables, Howrah Jutes against Hindustan Motors, Orissa Cement against Indian Copper, etc. He further submitted that the trade practice does not require taking delivery; settlement of difference is recognised. Even Blank transfers and settlement of two different types of shares are recognised for hedging and such settlement can be without holding the stocks in hand by way of actual stocks in hand and stocks purchased, though not in hand.

Therefore, he contended that when all the requirements of law are fulfilled for qualifying for taking the above loss on purchase of sale of shares, the learned Commissioner (Appeals) should have accepted the claim of the assessee and allowed the deduction of Rs. 1,99,850.

Supporting his arguments he relied upon the following decisions :-- Accordingly, he claimed that as there is no specific exclusion of the loss incurred by the assessee on the purchase and sale of share transactions from the gross total income under section 73, as held in the case of Rajan Enterprises (P.) Ltd. (supra), in the case of the assessee also, it was to be determined with respect to gross total income of the assessee without applying the provisions of Explanation to section 73 of the Act. Further it was submitted that since the assessee is an investment company and money lending company, the loss incurred by the assessee on purchase and sale of shares, would not be speculative in nature within the meaning of Explanation to section 73 of the Act. Thus the above loss arising out of purchase and sale of shares of Rs. 1,99,850 should be part of the computation as made in the return by the assessee and should be allowed. Referring to the Chandigarh Bench judgment in M. Gulab Singh & Sons (P.) Ltd, 's case (supra), the learned counsel submitted that the loss on purchase and sale of shares has to be adjusted in the computation as claimed by the assessee.

3. The learned DR Shri Abhey Tayal on the other hand, relied upon the orders of the authorities below and referring to the order of the Commissioner (Appeals) dated 28-9-1993 submitted that in view of section 43(5) it is a speculative transaction and the assessee company has sold the shares within a very short time of a week and in some of the cases on the very next day, for example shares of Colgate. He further submitted that contract notes were only an agreement to purchase and no payment as such were made on account of purchase.

Referring to para 2.3 at page 4 of the order of the Commissioner (Appeals) whereby the learned Commissioner (Appeals) has mentioned that the contract notes did not mention the distinctive number of shares, bought or sold and claimed that it is a speculation loss, the learned DR contended that the shares were not held but they were only an agreement for purchase. He further contended that section 43(5) is a specific section regarding speculation transactions and Explanation to section 73 being a deeming provision, cannot override provisions of section 43(5).

4. We have considered the rival submissions and perused the material available on record. Admittedly the issue relates to the loss resulting from purchase and sale of shares of certain quoted companies by the assessee, details of which have been furnished at pp. 32 to 34 of the Paper Book, totalling to loss claim of Rs. 1,99,850. Names of the companies and the loss arising out of transaction are noted hereinabove. The admitted facts are that the shares have been sold within a short period to avoid huge losses and the settlement of difference was made by payment to the stock broker and no delivery was taken or given of the shares. It is pointed out that every transaction of sale was preceded by purchase. Thus there was no case on facts that sale preceded purchase. The purchases were on facts succeeded by sales.

The contention of the assessee was that factually there was a trend of fall in price and in order to arrest the increased losses the assessee was compelled to sell the shares and suffered a loss of Rs. 1,99,850.

5. The learned AR invited our attention to section 43(5) which defines ''speculative transaction", In fact section 43 as per head note, deals with definitions of certain terms relevant to income from profits and gains of business or profession. Sub-section (5) defines "speculative transaction". Our attention was also invited to Proviso to (b) of sub-section (5) of Section 43 of the Act. That is, for the purpose of Sections 28 to 41, speculative transaction means a transaction in which a contract for the purchase or sale of stocks and shares periodically or ultimately settled otherwise than by actual delivery or transfer of the scrips. Proviso to (&) of sub-section (5) of Section 43 reads as under :-- (b) a contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; According to the learned Counsel for the assessee, the purchase and sale of shares in settlement is made otherwise than actual delivery or transfer of shares within the meaning of sub-section (5). The proviso (b) makes specific provision in respect of contracts related to stocks and shares by a dealer or investor entered to guard against the loss in holding through price fluctuation shall not be deemed to be a speculative transaction. It has to be understood that there is mandate under proviso (b) that if such a transaction as per sub-section (5) takes place by a dealer or investor it would not be a speculative transaction. The contract entered into by the assessee with M/s. T.H.Vakil & Co. was to guard against the loss in holding of shares through price fluctuation. According to the assessee, the very purchase covered by contract with stockbrokers obliges the assessee under the contract either to take delivery or settle-the same. Once the purchase is made through a broker then it is a binding contract of assessee to honour it and liable to pay the stocks broker the consideration for purchase. In falling market, the assessee claims that the sale was done immediately through same broker. This has resulted in arresting further loss in his holding of shares, which are already purchased under the contract from the same broker. Therefore what is provided in Proviso (b) is squarely complied with and the definition of speculative transaction does not apply due to the mandate under the proviso.

6. We also note from the consolidated 21 months audited profit and loss account and balance-sheet from page 59 onwards of the Paper Book that the gross sales amounted to Rs. 53.24 lakhs comprising of sale of shares of Rs. 28.13 lakhs, interest received of Rs. 12.16 lakhs, dividend of Rs. 0.33 lakh and closing stock of shares in hand of Rs. 12.61 lakhs and the profit before taxation has been shown at Rs. 5,38,238. In the balance-sheet at page 60 of the Paper Book it is clear that the fixed assets are only of Rs. 1.87 lakhs whereas investment in shares were Rs. 11.26 lakhs and current assets comprising of stock in hand, deposits with companies and loans and advances all amounted to Rs. 61.02 lakhs (Rs. 63.27 lakhs cash and bank balances of Rs. 2.25 lakhs). Further at page 78 of the Paper Book the Memorandum of Association in which the main objects are given enables to carry on the business of investments and to buy, underwrite, invest in, acquire, hold and deal in shares, stocks debentures etc. of any kind. The second object is to carry on the business of money lending. These two objects alongwith the fact that the assessee has only interest income and dividend income besides sale of shares also beyond doubt brings home by factual situation that the assessee is a dealer and an investor.

7. It is also clear on the facts as per the contract notes furnished at pp. 41 to 53 of the Paper Book, details of purchase of shares and debentures at page 7 and further details of purchase and sale of shares resulting in loss of Rs. 1,99,850 at pp. 32 to 34 of the Paper Book, that first nine transactions clearly establishes that the assessee had contracts in respect of stock and shares entered into as a dealer/investor. It is also fact that the transaction resulting in a loss is arising out of contract for purchase and immediately the sale has taken place of the same shares purchased because of price fluctuation. This was done by the assessee to arrest further loss in respect of shares purchased under the contract. Such loss if occurred would fall under the proviso (b) to section 43(5). Referring to the extracts taken from Law of Income-tax by Sampath lyengar 9th Edition, Vol. 2, pp. 2912 to 2914 (pp. 81 to 84 of the Paper Book) we find the case laws of Supreme Court regarding details of speculative transaction under section 43(5) are given. The features envisaged are dealt in four sub-heads :-- (iii) Periodical or ultimate settlement of the contract, the author has detailed under the heading "periodical or ultimate settlement the contract" making it clear that by the usage of the words periodical or ultimately that even a part of the contract settled otherwise by delivery is covered. He has also dealt with the dictionary meaning of the word "settled" and noted that the proper meaning of section 43(5) could be a contract settled and cannot be held to mean that the contract is to be substituted.

(iv) "Hedges in respect of stock and shares" dealing with section 43(5) the learned author has dealt with the kind of transaction the dealer or investor of shares enter. When the price goes down the holder thereon attempts to cut short the investment losses. He also notes that by these transactions there is no intention to effect a delivery nor any taking or giving delivery is ever made. The term 'holding' occurring in (b) refers to guarding against loss in holding. The word 'holding' will include holdings on blank transfer.

It would also include scrips bought but not actually taken delivery of, since it is the custom of the trade to include bought-scrips in the stock. The author further noted from Direct Taxes Administration Enquiry Committee Report 1958-59 that hedges need not be of same type of shares but extend to other type of shares not held by assessee such as those of Indian iron against Indian cables, Howrah Jutes against Hindustan Motors, Orissa Cements against Indian Copper etc. He further states that, "But the total of such hedging sales should not exceed the actual stock in hand and stocks purchased though not in hand." 8. On perusal of the above it is clear that proviso (b) to section 43(5) of the Act squarely applies to the facts of the case and the mandatory provision that such transaction need not be speculative transaction applies to the facts of the case. Accordingly, we hold that the transaction in which purchase and sales were taken place shall not be deemed to be speculative transaction in view of proviso (b) to section 43(5).

9. In our considered view the Commissioner (Appeals) is not justified in holding that section 43(5) is a specific section regarding speculative transaction in respect of certain companies dealing with shares and as such Explanation to section 73 cannot override provisions of section 43(5). We have already held that in view of proviso (6) to section 43(5) being a deeming provision defining speculative transaction clearly mandates that the transaction of this kind cannot be speculative transaction.

10. Section 73 of the Act deals with loss in speculative business and the manner of such set off of such loss under sub-sections (1), (2), (3) & (4) in Chapter VI of the Income-tax Act which relates to aggregation of income and set off or carry forward of losses.

Explanation to Section 73 deals with any part of business of company consists in the purchase and sale of shares in other companies, such company shall, for the purposes of this section, will be deemed to be carrying on speculative transaction to the extent to which the business consists of the purchase and sale of such shares. This Explanation contains two exceptions namely, a company whose gross total income consists mainly of income which is chargeable under the head interest on securities, house property, capital gains of other sources or a company the principle business of which is the business of banking or the granting of loans and advances. The assessee has claimed that the second category of the exception namely the company whose principle business is in the business of banking or granting of loans and advances applies to it besides dealing in the shares. On the facts the assessee has also established that he does fall in the category of this company supported by evidences given in the Paper Book which are also given to the lower authorities. Therefore, the claim of the assessee that it is an investment company and the loss arising out of purchase and sale of shares should form part of a computation of total income in view of Explanation 73 and also in view of Section 43(5) proviso (b) should have been appreciated by the Commissioner (Appeals) and the Assessing Officer. We are of the opinion that the decisions of the ITAT Bombay and Chandigarh are not distinguishable as held by the Commissioner (Appeals). Therefore, we quash the order of the Commissioner (Appeals) confirming disallowance of Rs. 1,99,850 made by the Assessing Officer.