TaxTMI 
TaxTMI 
2006 (5) TMI 110
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.... 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. 3. Ground Nos. 2 and 4 were not pressed as such they are dismissed. 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: "Loss on sale and purchase of shares 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....
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....arrying on speculation business for the purpose of s. 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....
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....eculative 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 s. 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 Explanati....
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....e 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 assessee 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 s. 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 br....
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.... 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 purchase....
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....r 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 s. 73 (Explanation) and same are allowable as expenses/losses incurred necessarily and exclusively for business purpose." Letter dt. 12th Feb., 2000 "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 Nation....
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....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, s. 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 Th....
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.... from Kantaben Bhagirath 81933.60 14-1-1997 Trf. from Kashmira R. Shah 10829.40 31-3-1997 Closing 2038774.90 21-1-1997 Trf. from Ankush Caplease 211704.50 5-2-1997 Sett. No. 05 Trf. from Nimish Vora 208312.60 5-2-1997 Trf. from Sakaria Stock Finance 25339.20 5-2-1997 Trf. from Mansi Consultancy 53879.50 12-2-1997 Trf. from Pushpa Tej Finance 173712.50 5-3-1997 Trf. from Ankush Caplease 9014210.30 19-3-1997 Trf. from Kantaben Bhagirath 44555.00 19-3-1997 Trf. from Bharat Bhudarji 73609.00 11547169.60 11547169.60" 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 bei....
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....ho 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 3013 Dipak Israni 100500 3015 N.A. Modi 45500 3017 Kantaben Bhagirath 83520 3019 Shreeji Investment 272300 3045 Pushpa Tej Finance 444725 3086 Anada Share Consultancy 1015400 3178 Sakaria Stock Finance 12050 3183 Mansi Consultancy 38665 3197 Nimish Vora 45255 3249 Bharat Bhudarji 31740 Total 3434765 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....
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....tal 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 s. 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 s. 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 ent....
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....d set off against the speculation profits, if any, in that year, and so on. The amending Act has added an Explanation to s. 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. [Sec. 15 of the Amending Act]" Referring to cl. ....
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.... 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 s. 43(5). (iii) CIT vs. 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 s. 43(5) such a finding would not resolve the controversy regarding applicability of Expln. 2 to s. 28 and s. 73 without a further finding that the assessee carried on business in such a speculative t....
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....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 payoff 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. vs. CIT (1969) 72 ITR 286 (SC)- 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 s. 10(2A), it would be most illogical and irrational to treat the so-called profits as having a neutr....
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....y. Explanation to s. 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'." The decision relied upon by CIT(A) is the decision in the case of CIT vs. Pangal Vittal Nayak & Co. (P) Ltd. (1969) 74 ITR 754 (SC). 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. Th....
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....tivity of sale and purchase of shares of other companies which is a precondition for application of Explanation to s. 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 s. 73. 28. To examine ....
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....siness 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 s. 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 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. An isolated activity is opposed to the concept of business. As observed by an English Court. 'A single plung....
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....ect 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 s. 43(5) of the Act provides an artificial definition of 'speculative transaction', s. 73(1) does not in terms provide that any loss in respect of a speculative transaction carried 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 s. 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 s. 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 vs. CIT 1977 CTR (Guj)(FB) 154 : (1978) 115 ITR 824 (Guj)(FB) : TC 19R.445, 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....
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....e 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 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. 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: (i) nature of assessee's business in general; (ii) the purpose behind the particular transaction; and (iii) the effect of the transaction, etc. Exami....
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....he 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. 30. It has further been held by their Lordships in the case of Mysore Rolling Mills (P) Ltd. vs. CIT 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....
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....oss on account of breach of contract, the Hon'ble Delhi High Court in the case of Bhagwan Dass Rameshwar Dayal 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 s. 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 mayor 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....
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....agwan Das Rameshwar Dayal supports the stand of the assessee. 15. Reliance placed by the learned Departmental Representative in the case of SRJ Securities Ltd. 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 vs. 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 s. 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 vs. Arvind Investment Ltd. has no application as it sets out a proposition that Explanation to s. 73 app....
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....etails 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 hrs. Office of Security & Exchange Commission ASE 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 --....