Spfl Securities Ltd. Vs. Dy Cit, Circle 3(5), New Delhi - Court Judgment

Excerpt:
this is an appeal by the assessee against the order of the commissioner (appeals) dated 31-1-2002 pertaining to assessment year 1998-99.following grounds of appeal have been preferred - "1. that the learned commissioner (appeals) was wrong to hold that the loss of rs. 30,68,331 incurred by the assessee on the purchase and sale of shares, where delivery of shares were taken, as speculation loss, contrary to the provisions of sections 28 to 43.2. that the commissioner (appeals) was wrong to apply the explanation to section 73, which is limited to section 73 only, to treat the business loss in shares as speculation loss.3. that the commissioner (appeals) wrongly applied the explanation to section 73 to the facts of the case, and has wrongly interpreted and applied the decision of the.....

Judgment:
This is an appeal by the assessee against the order of the Commissioner (Appeals) dated 31-1-2002 pertaining to assessment year 1998-99.

Following grounds of appeal have been preferred - "1. That the learned Commissioner (Appeals) was wrong to hold that the loss of Rs. 30,68,331 incurred by the assessee on the purchase and sale of shares, where delivery of shares were taken, as speculation loss, contrary to the provisions of sections 28 to 43.

2. That the Commissioner (Appeals) was wrong to apply the Explanation to section 73, which is limited to section 73 only, to treat the business loss in shares as speculation loss.

3. That the Commissioner (Appeals) wrongly applied the Explanation to section 73 to the facts of the case, and has wrongly interpreted and applied the decision of the Calcutta High Court in 192 ITR 365 and section 73. The finding of the Commissioner (Appeals) being contrary to law be vacated." In brief, the facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of dealing in shares and securities on its own account and also acting as broker on commission basis. it filed its return of income for the assessment year under consideration declaring an income of Rs. 25,21,980. The assessing officer noted that the assessee in its Profit & Loss account had shown purchase of shares on its account at Rs. 7,11,47,36,141 and sales of Rs. 7,11,18,375 thereby incurring a loss of Rs. 30,68,331 on account of trading in shares. The assessing officer asked the assessee to show cause as to why it should not be deemed to be carrying on speculation business to the extent to which it consisted of the purchase and sale of shares having regard to the provisions of Explanation to section 73 of the Act. The pleas of the assessee were that the loss was a business loss incurred in the ordinary course of trading in shares as Member of the Stock Exchange; that the entire loss arising on account of purchase and sale of shares was on account of actual delivery of shares; that there was net profit from business activity as a whole carried on by the assessee, thus, the income from business was to be computed according to the provisions of sections 28 to 44 of the Act; that there was income from business as a Member of Stock Exchange and as a result there was a net business income as computed in terms of sections 28 to 44 of the Act and there being no loss, the provisions of section 73 of the Act are not applicable. It was also contended that the loss being based on actual delivery of shares could not be treated as speculation loss and referred to the provisions of section 43(5) of the Act. The assessing officer has, however, rejected the pleas of the assessee and has treated the loss on sale of shares amounting to Rs. 30,68,331 as a speculation loss in terms of the provisions of Explanation to section 73 of the Act. The assessing officer accordingly did not allow the said loss to be set off against incomes under the other heads. The issue was carried in appeal before the Commissioner (Appeals). Before the Commissioner (Appeals), the assessec reiterated the submissions made before the assessing officer. The Commissioner (Appeals) has since sustained the action of the assessing officer. Not being satisfied with the order of the Commissioner (Appeals), the assessee is presently in appeal before us.

Before us, learned counsel has made detailed submissions. It is submitted that the impugned loss has arisen in share dealings where actual delivery of the shares have been effected. Therefore, the loss cannot be considered as arising out of any speculative transaction. It is canvassed that the income from business is to be computed in terms of sections 28 to 44. That income from business could be considered as speculative only if such business fulfils conditions described in section 43(5) read with Explanation 2 to section 28. It is, accordingly, contended that it is Explanation 2 to section 28 which determines the character of speculation business. Once it is so determined, the same shall prevail for the entire provisions of the Act. That being so, having regard to the facts of the instant case, as the transfer of shares has been affected by delivery, the same could not be construed as speculative on combined reading of Explanation 2 to section 28 and section 43(5) of the Act. It was, therefore, contended that under section 28, the income from share broking and share trading are merely different sources of income but under the same head 'Business'. Therefore, the loss in the instant case is to be adjusted against the other business income of share broking in terms of section 70 of the Act. That being so, it was submitted by the Id. Counsel that there was no necessity of invoking Explanation to section 73 of the Act. It was further submitted that the Explanation to section 73 does not determine the speculative character of a transaction. Ld. Counsel submitted that although there are certain Tribunal decisions against the assessee and also the decision of the Calcutta High Court in the case of CIT v. Arvind Investments Ltd. (1991) 192 ITR 365 (Cal), it was vehemently argued that the aforesaid decisions have not taken into consideration the legal proposition presently being canvassed by the appellant. During the course of the submissions, learned counsel also referred to the provisions of Explanation I to section 24(1) of the Income Tax Act, 1922. The provisions of Explanation I to section 24(1) in the 1922 Act are akin to the provisions of Explanation 2 to section 28 of the present Act. It was submitted that the provisions of 1922 Act were considered by the Apex Court in the case of Davenport & Co. (P.) Ltd. v. CIT (1975) 100 ITR 715 (SC) wherein it is held that the transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips takes place. Our attention was invited to following observation of the Supreme Court :- "A transaction which is otherwise speculative would not be a speculation transaction within the meaning of Explanation 2 if actual delivery of the commodity or scrips has taken place; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips. The Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for purposes of income tax only." In the end, learned Counsel submitted that the Explanation to section 73 would apply in a situation where the assessee comes within the purview of sub-section (1) to section 73.

On the other hand, the Id. DR appearing on behalf of the revenue has defended the orders of the lower authorities by placing reasoning on the reasoning contained therein.

We have considered the rival submissions carefully, perused the orders of the lower authorities and also the authorities cited at Bar and proceed to dispose of the issue on the following lines. The facts in the instant case lie in a narrow compass and have been already noted by us in the earlier part of our order and therefore are not repeated for the sake of brevity. The only dispute is whether, in the facts and circumstances of the case, the provisions of Explanation to section 73 of the Act are attracted to the share dealings carried on by the assessee or not. The salient features of the fact situation before us can be appreciated as follows. The assessee- company is engaged in the business of share broking and share dealing and claimed deduction on account of loss suffered on purchase and sale of shares on its own account against the income of brokerage earned from its clients. The lower authorities have held that the loss suffered by the assessee in share dealings on its own account was speculative business within the meaning of Explanation to section 73 and, therefore, the same cannot be set off against any income other than that of speculative business. The assessee, however, contends that the Explanation to section 73 has no application inasmuch as the business of the assessee in share dealings cannot constitute separate business as the transactions are not speculative in nature. According to the assessee, the character of the transaction of sale and purchase of shares and the resultant loss or profit is to be determined in terms of Chapter IV-D of the Act, more specifically Explanation 2 to section 28 read with section 43(5) of the Act. It is the contention of the assessee that its business was a composite one comprising of share broking and share dealing and, therefore, the entire business had to be taken as a whole. in our considered view, the dispute in question is to be decided against the assessee having regard to the judicial precedents, namely, the decision of the Calcutta High Court in the case of Arvind Investments Ltd. (supra) and also the decision of the Co-ordinate Delhi Bench of the Tribunal in the case of S.R.J. Securities Ltd. v. Assistant Commissioner (2003) 86 ITD 583 (Del). The plea of the assessee that its business with respect to the sale and purchase of shares on its own account cannot be said to be speculative is required to be examined in the light of the Explanation attached to section 73 of the Act. This is for the reason that the assessee being a company falls within the mischief of the said Explanation. A bare reading of the Explanation does not leave any doubt that the assessee, like the appellant before us, which carries out transactions involving the sale and purchase of shares on its own account, although supported by effecting of actual delivery, yet it is to be construed as having been carried out a speculative business. The loss so incurred can only, therefore, be set off against the profits and gains, if any, of any speculation business.

The plea of the assessee that the transaction has to be regarded as speculative only within the meaning of section 43(5) cannot be doubted.

However, the provisions of Explanation to section 73 create a deeming fiction whereby a transaction in the purchase and sale of shares even if found to be non-speculative in terms of section 43(5) is deemed to be a speculation business under certain situations. Therefore, the argument that section 43(5) alone determines the nature of a transaction cannot be accepted.

Further, the plea of the assessee that Explanation 2 to section 28 is determinative of the nature of a speculative business and the same operate for the entire Act. It would be relevant to read the relevant Explanation 2 which is as under :- .-Whether 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." We are unable to accept this plea of the assessee also. Explanation 2 merely provides that where speculative transactions carried on by the assessee are of such a nature so as to constitute a business, such business, which is referred to as speculation business, shall be deemed to be distinct and separate from any other business. The said Explanation merely carves out a distinction between a speculation business and non-speculative business. To construe such distinction so as to take an assessee out of the provisions of Explanation to section 73 would be unjustified. The assessee contends that only in case the assessee is deemed to have a speculation business, in terms of section 28 to section 44 in which it suffers a loss, it is only then that it would fall within the scope of section 73(1). According to the assessee, Explanation to section 73 will operate only to such assessees inasmuch as the said Explanation carries the expression "for the purposes of this section". In our view, the interpretation being placed by the assessee regarding the scope and ambit of Explanation to section 73 is misplaced. A bare perusal of the Explanation to section 73 militates against the contentions of the assessee. The Explanation to section 73 introduces a legal fiction. The said Explanation applies only to a company. Further, if the business of a company does not fall within the excluded categories stated therein then it follows to the extent it consists of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business to that extent for the purposes of section 73. The application of the said Explanation has to be considered as a whole and not in part as is being presently made out by the assessee. The deeming fiction contained in the said Explanation is in relation to the entire activity of purchase and sale of shares whether or not they were effected by actual delivery. The Explanation has the import of treating the transaction of purchase and sale of shares which otherwise is not of speculative nature, deemed to be a speculation business. Therefore, to interpret that the said Explanation applies only to a case where there is a speculation business in terms of Explanation 2 to section 28 is not mandated by law. Therefore, howsoever attractive the argument of the assessee, yet the same cannot be accepted. Therefore, having regard to the judicial precedent noted by the Commissioner (Appeals), we are inclined to sustain the orders of the lower authorities on this issue.

Accordingly, the appeal of the assessee is dismissed.