TaxTMI 
TaxTMI 
2016 (3) TMI 592
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....ined at 3,67,68,820/-. 2.1. The assessment was thereafter reopened as the Assessing officer felt that, the transaction in shares is hit by explanation to Section 73 of the Income Tax Act, 1961. Therefore, a notice under Section 148 was issued to the assessee on 07.05.1993. In response to this notice, the assessee had filed a return disclosing the total income, as admitted in the original return. The contention of the assessee, interalia was that a sum of Rs. 25,47,443/-, would have to be considered as short term captial loss. This loss was claimed to be on account of sale of shares of the sister concern, which was held by the assessee. But that contention was not accepted and the finding of the Revenue was that, it was a 'speculation loss' and therefore that must be carried forward and to that extent, income had to be enhanced. Challenging the re-assessment, assessee filed the appeal before the Commissioner of Appeals. 2.2. The Commissioner of Appeals held that the transactions in shares cannot be equated with speculations and the finding was that there was nothing on record to show that the appellant was buying loss, to be set off against the income from its ....
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.... (b) to look into the relevant provisions relating to speculative transaction, speculative business, and the deeming provisions as dealt with in the Income Tax Act, 1961, (along with explanations). 4.1. Section 2 (13) defining business, Explanation 2 to Section 28 dealing with speculation loss / business, Section 43 dealing with speculative transaction, etc., are relevant provisions to be considered. 4.2. Section 2(13): Business (13)"business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture; The concept of business, as defined in Section 2(13), includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. These words are of wide import, the underlying idea being of continuous exercise of an activity. The definition, however, is not exhaustive as held in the case of [CIT vs. A.Dharma Reddy, (1969) 73 ITR 751, 755 (SC). The Hon 'ble Mr. Justice Venkataraman Aiyar, speaking for the court in Mazagaon Dock Ltd. vs. CIT [(1958) 35 ITR 368, 376 (SC)], explained 'business' as a word of wide import and in fiscal statutes it must be construed....
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....ce, of the management of any property or business;] (iii) income derived by a trade, professional or similar association from specific services performed for its members; (iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955 , made under the Imports and Exports (Control) Act, 1947 (18 of 1947 );] (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;] (iiic) any duty of customs or excise re- paid or re- payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;] (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; 4.4. Explanation 2 to section 28 defines the expression speculation business :- The basic ingredients of speculative transactions, are as described hereunder, as per the decision reported in the case of CIT v. Ram Chandra Gupta & Co., (1968) 69 ITR 254, 259-260 (Cal) :- (i) that the contracts are to be periodically or ultimately settled; and (ii) the settlement would be otherwise th....
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.... stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member (or) (d) An eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. Explanation Four the purpose of this clause, the expressions (i) eligible transaction means any transaction (A) Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; ;and (B)which is supported by a time sta....
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....owance on account of depreciation, or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other 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 trading in shares or 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 Explanation to section 73 creates a deeming fiction that where the assessee is a company and where any part of the business of the company consists of the purchase and sale of shares of other companies, the assessee is for the purposes of section 73 deemed to carry on a s....
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....action, 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." "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.Chandrakumar, 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, ....
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....n 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 meaning and scope of this expression is no more res integra in view of the decision of the Supreme Court in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57. In that case, the Supreme Court explained the distinction between "a settlement of the contract otherwise than by actual delivery of the goods" and "breach of contract". It was observed (at page 60) : ".... A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, in terms of section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of section 73 of the Contract Act the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caus....
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....as profit from the other business of the assessee and not as profit from speculation business (v) Commissioner of Income Tax vs. Hotz Hotel Ltd. (260 ITR 132 (DEL)):- ".... Clause (5) of Section 43 of the Income-Tax Act, 1961, defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, which may include stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scripts. However, certain exceptions to the definition of speculative transaction are provided in a proviso to section 43(5). Clauses (a), (b) and (c) of the proviso enumerate the contracts which are not deemed to be speculative transactions. Clause (b) provides that a contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in his holdings of stocks and shares through price fluctuations shall not be deemed to be a speculative transaction. Proviso (b) contemplates a transaction which is entered into to safeguard the fall in price of the holding of stocks or shares. It is a hedging contract to protect onself against loss on account of adverse pric....
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....entitled to set-off the loss as against its business income the following decisions are relied upon by the learned counsel for the respondent:- (i) R.P.G. Industries Ltd. v. CIT and another (2011) 338 ITR 313 (Cal.):- " In the case of S.Sundaram Pillai v. V.R.Pattabiraman, AIR 1985 SC 582, the Supreme Court laid down the general rule of 'interpreatation of an explanation' in the following way:- "It is now well settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision. Sarathi in 'Interpretation of Statutes' while dwelling on the various aspects of an Explanation observes as follows: "(a) The object of an explanation is to understand the Act in the light of the explanation. (b) It does not ordinarily enlarge the scope of the original A section which it explains, but only makes the meaning clear beyond dispute." Swarup in 'Legislation and Interpretation' very aptly sums up the scope and effect of an Explanation thus: "Sometimes an....
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.... Reports:- "8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall in Chapter IV, in Section D, which deal with computation of business income. The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. 9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that -..'Derivatives are time bombs and....
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....into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Reference, in this context, may be made to the decision of the Supreme Court in CIT v. Harprasad and Co. P. Ltd. [1975] 99 ITR 118. The Supreme Court in the case of CIT v. J.H. Gotla [1985] 156 ITR 323, in construing the word "income" in Section 16(3) of the Indian Income-tax Act, 1922, held that the word "income" would include loss. (iv) Paharpur Cooling Towers v. CIT (2011) 338 ITR 295 (Cal):- "The Explanation to any section cannot be read to extend or stretch the applicability of that section. The Explanation creates a fiction and that fiction cannot be read or explained for any purpose other than that for which it is created. The fiction created in the Explanation does not take away the real object and purport of section 73 of the Income-tax Act, 1961. Section 73 generally provides that any loss arising out of speculation business can be set off only against another speculation business of the assessee. The word assessee in sub-section (1) covers all types of assessees as mentioned in section 2(7) of the Act which includes individuals and companies. Sub-secti....
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....e of shares, not other category of speculative dealings. If on a clear and plain reading the statute can be applied without any difficulty or without any aid whatsoever, then the objects and reasons need not be looked into. 6.1. The decisions relied upon by the learned counsel for the respondent are not applicable to the facts of the case. 7. As held in the decisions relied upon by the learned counsel for the assessee, the facts and circumstances of each case is relevant to find out, whether the transaction alleged would amount to speculative transaction or not. 8. In order to decide that, the nature of the transaction alleged is important, it has been stated the order of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appellant has chosen to i....