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Case Number
Judges
  • R.P Garg
  • A.M
  • J.P Bengra, J.M
Acts
  • provisions of s. 28 and s. 43(5) of the IT Act
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • R.P Garg
  • A.M
  • J.P Bengra, J.M
Acts
  • provisions of s. 28 and s. 43(5) of the IT Act
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Smart Summary

Concise Summary of the Opinion (Assesssee Appeal — Asst. Yr. 1982–83)

Factual and Procedural Background

This is an appeal by the assessee against the order of the Additional Assistant Commissioner (AAC), B-Range, Bombay, relating to the assessment year 1982–83. The AAC upheld the Income Tax Officer's (ITO) finding that a short-term capital loss of Rs. 17,850 claimed by the assessee on the sale of shares was a "speculation loss" and therefore not allowable as a set-off under the provisions relied upon by the revenue. The ITO had reached that conclusion because the shares were acquired and sold within a short span (acquired during the year and sold within a few days) and the assessee failed to produce evidence of actual delivery of shares. The AAC distinguished two High Court decisions cited by the assessee and confirmed the ITO's disallowance. The assessee appealed to the Court (before J.P. Bengra, J.M.).

Legal Issues Presented

  1. Whether the loss on sale of the shares (total Rs. 17,850) constitutes a speculative loss under s. 43(5) of the Income-tax Act and therefore cannot be set off under s. 73(1).
  2. Whether isolated transactions in shares (including those where shares were allotted after application and payment) can be treated as non-speculative (short-term capital loss) rather than speculative transactions or part of a speculative business, with reference to s. 28, Explanation 2 to s. 28, s. 43(5) and s. 73(1) of the IT Act.
  3. Whether absence of evidence of actual delivery (for a particular market purchase) gives rise to a presumption of speculation sufficient to disallow the loss, or whether the single/isolated nature of the transaction prevents the application of s. 73(1).

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The AAC failed to appreciate that a speculation loss arising out of a solitary/isolated transaction is not speculative business and therefore should be allowed as a short-term capital loss.
  • For two transactions (DMR Trading & Investments Ltd. and Ridhi Holdings & Traders Ltd.), the assessee applied for shares, paid application money and subsequent call/allotment money by cheque; the shares were allotted in the assessee's name — therefore there was no “settlement” without delivery and these cannot be treated as speculative transactions.
  • For the third transaction (100 shares of Gujarat State Fertilisers Co. Ltd.), the assessee paid by cheque through a broker and claimed delivery through the broker; even if that single transaction were treated as speculative, being an isolated transaction it would not amount to speculative business attracting s. 73(1).
  • Relied on the Bombay High Court decision in Commissioner of Income-Tax v. Indian Commercial Co. Pvt. Ltd. and the Andhra Pradesh High Court decision in Addl. CIT, AP v. Maggaji Shermal to support the position that an isolated transaction does not convert into speculative business.
  • Relied on provisions of s. 28 and s. 43(5) of the IT Act as relevant statutory context for distinguishing capital loss from speculative loss.

Revenue's (Departmental) Arguments

  • Allotment of shares in the two allotment cases does not amount to actual delivery/transfer of shares; therefore those transactions fall within the definition of speculative transactions under s. 43(5).
  • The third transaction (market purchase of Gujarat State Fertilisers shares) clearly lacked evidence of delivery and is therefore speculative; the assessee had effectively preferred to purchase a loss, and so would not be entitled to set off that loss.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax v. Indian Commercial Co. P. Ltd., (1976) CTR (Bom) 171 : (1977) 106 ITR 465 (Bom) The decision holds that the use of the plural “speculative transactions” in Explanation 2 to s. 28 indicates that a single/isolated transaction will not by itself constitute “speculative business”; an isolated transaction, absent proof of a systematic or organised course of speculation, will not attract s. 73(1). The Court relied on this authority to hold that the assessee’s isolated market transaction (100 shares of Gujarat State Fertilisers) — though lacking proof of delivery — did not convert the assessee's activity into speculative business such that s. 73(1) would be attracted. The Court treated the precedent as dispositive for isolated transactions.
Addl. CIT, AP v. Maggaji Shermal, (1978) 114 ITR 862 (AP) The Andhra Pradesh High Court addressed a fact situation where, in the absence of actual delivery, the transaction was held to be a speculative transaction under s. 43(5); the Tribunal, however, accepted the assessee's contention that though the transaction was speculative, the loss was not speculative for set-off purposes. The Court followed this decision to support the proposition that even where a transaction may be held to be speculative, it does not necessarily amount to a speculative business attracting s. 73(1); the Court cited it to reinforce the conclusion that an isolated speculative transaction need not prevent allowance of the loss as a short-term capital loss.

Court's Reasoning and Analysis

The Court examined the factual details provided by the assessee and the documentary material in the paper-book:

  1. The Court separated the three transactions and addressed them individually. For the two allotment transactions (DMR Trading & Investments Ltd. and Ridhi Holdings & Traders Ltd.), the assessee had applied for the shares, paid application money by cheque, received allotment, and paid first-and-final call/allotment money by cheque. The assessee also produced covering letters of allotment and broker's sale notes in the paper-book.
  2. On those two transactions, the Court concluded from the documentary record that these acquisitions were not speculative transactions within the meaning of s. 43(5) because after allotment the shares stood in the assessee's name and there was no settlement without delivery; accordingly, these transactions were properly treated as transactions giving rise to capital loss (short-term), not speculation.
  3. As to the third transaction (100 shares of Gujarat State Fertilisers Co. Ltd.), the Court noted that the assessee asserted payment by cheque through a broker and contended that delivery was effected through the broker, but the assessee did not produce independent evidence of actual delivery. Ordinarily, in the absence of proof of delivery, a presumption of speculation would arise.
  4. However, the Court applied the principle in Commissioner of Income-Tax v. Indian Commercial Co. P. Ltd.: Explanation 2 to s. 28 (and the statutory scheme) indicates that a single/isolated speculative transaction does not automatically constitute a speculative business for the purposes of s. 73(1). The Bombay High Court had held that an isolated transaction, with nothing to show a systematic/organised course of speculative activity, would not attract s. 73(1).
  5. The Court also relied on the Andhra Pradesh High Court decision in Maggaji Shermal to show that even if a transaction is held to be speculative, it need not turn into a speculative business so as to prevent allowance of loss by way of set-off. Combining these authorities, the Court reasoned that the isolated nature of the Gujarat State Fertilisers transaction meant s. 73(1) was not attracted in the present facts.
  6. On this basis, the Court concluded that the AAC erred in treating the aggregate Rs. 17,850 as speculative loss for the purpose of disallowance; the ITO should have allowed set-off of the short-term capital loss.

Holding and Implications

Core Ruling: APPEAL ALLOWED — the Court set aside the order of the AAC and directed the ITO to allow set-off of the short-term capital loss of Rs. 17,850 as claimed by the assessee.

Direct Consequence for the Parties:

  • The assessee's claimed short-term capital loss of Rs. 17,850 is to be allowed as a set-off by the ITO.
  • The AAC's decision to disallow the loss as speculative was set aside.

Broader Implications: The Court applied existing High Court authorities distinguishing between a speculative transaction and speculative business (noting particularly that an isolated speculative transaction does not necessarily constitute speculative business under Explanation 2 to s. 28 and thus s. 73(1) need not be attracted). The opinion does not articulate any novel legal principle beyond applying those precedents to the facts; the decision's immediate effect is limited to the parties' assessment for the year in question.

Show full summary ...

    P.H Nanavati v. Third Income Tax Officer

    J.P Bengra, J.M:— This is an appeal by assessee against the order of AAC, B-Range, Bombay, pertaining to the asst. yr. 1982–83.

    2. The main grievance in assessee's appeal relates to the AAC holding the ‘Short Term Capital Loss’ on the sale of shares by assessee as ‘Speculation Loss’, and consequently disallowing an amount of Rs. 17,850 as the loss on sale of shares. The case of the assessee is that the AAC has failed to appreciate that speculation loss arising out of a solitary transaction is not speculative in nature and has to be allowed as short Term Capital Loss. Though we find that the assessee has taken several grounds of appeal in an agrumentative manner, this is the only grievance of the assessee.

    3. The assessee has income from securities, house property as well as share dealing. He is also a partner in the firm known as M/s H.T Nanavati whose business is dealing in shares The assessee disclosed short-term capital ioss of Rs. 17,850 on the sale of shares. The ITO found that the assessee had incurred this loss on sale of shares of three companies. These shares were acquired during the year and sold within few days at a loss. The ITO asked the assessee to produce evidence that the assessee actually got delivery of the shares from the seller and he gave delivery of the shares to the buyer. Since no evidence was produced before the ITO, the ITO held it to be a speculative activity and disallowed the loss claimed at Rs. 17,850 on the ground that it is a speculation loss, which would be allowed to be carried forward subject to the provi sions of the Act.

    4. On appeal before the AAC, in support of his contention, the assessee placed reliance on the decision of the Bombay High Court in the case of Commissioner Of Income-Tax v. Indian Commercial Co. P. Ltd., (1976) CTR (Bom) 171 : (1977) 106 ITR 465 (Bom) and the decision of the Andhra Pradesh High Court in the case of Addl. CIT, AP v. Maggaji Shermal, (1978) 114 ITR 862 (AP); But the AAC distinguished the facts of these cases from the facts of the present case and confirmed the decision of the ITO making the following observations.

    “I have considered both the judgments cited by the appellant. In the case of the assessee who is a partner in a share broker firm, there have been 3 transactions and not one during the year. Therefore, both the cases relied by him are not applicable because in both those eases there was only one transaction. It is further seen that the appellant had applied for shares of 2 companies and the shares were allotted to him during the year. During the year itself the appellant sold off the shares of both the companies. There is no evidence to show that the shares were actually purchased by him for the purpose of investment. In that case, the appellant would have been entitled to capital loss. In fact it is rather strange that in one of the cases the final call money was paid prior to the allotment of the shares by the limited company. It is also seen that the transactions were entered into by the firm in which the appellant is a partner. As the cash book of the said firm has not been pro-duced to certify that the investment was not speculation, it has got to be accepted that the entire transaction may be an after-thought of the appellant. This has been done in order to deflate the income of the appellant. Thus the entire transaction was speculation. In my opinion the ITO has rightly disallowed the loss of Rs. 17,850 in the case of the appellant.”

    The assessee, aggrieved by the above order of the AAC, has come in appeal before us.

    5. The learned assessee counsel, Shri Patil, placed before us details of loss on sale of shares as per page 1 of his paper-book, which is as under:

    A. Original Subscriber: (i) DMR Trading & Investments Ltd. Cost of acquisition 21st Sept., 1981 —500 shares application money @ Rs. 5 per share. vide cheque No. 981969 drawn on NBI Rs. 2,500 21st Oct., 1981 —1st and Final Call Money @ Rs. 5 per share vide cheque No. 981978 drawn on NBI Rs. 2,500 Rs. 5,000 Less: Sales Proceeds @ Rs. 2 per share 4th March, 1982 vide Broker's Notes Rs. 1,000 Rs. 4,000 (ii) Ridhi Hodlings & Traders Ltd. Cost of acquisition 9th Nov., 1981 —500 shares application money @ Rs. 5 per share vide cheque No. 981979 drawn on NBI Rs. 2,500 27th Nov., 1981 —Allotment money @ Rs. 5 per share vide cheque No. 981982 drawn on NBI Rs. 2,500 Rs. 5,000 Less: Sales Proceeds @ Rs. 2 per share 4th March, 1982 vide Broker's Note Rs. 1,000 (Rs. 4,000) B. Market Purchase 12th Feb., 1982 —Cost of acquisition of 100 shares of Gujarat State Fertilisers Co. Ltd. @ Rs. 535 per share vide cheque No. 981989 drawn on NBI vide Broker's Note Rs. 53,500 Less: Sales Proceeds @ Rs. 436.50 per share vide Broker's Note Rs. 43,650 (Rs. 9,850) Total Loss (A(i) + (ii)+B) Rs. 17,850

    He submitted on the basis of the above details that as regards the shares of DMR Trading & Investments Ltd, and Ridhi Holdings & Traders Ltd., they cannot be termed as speculative activity. The assessee made ah application for purchase of 500 shares and for this purpose paid Rs. 5 per share by cheques and thereafter these shares were allotted to the assessee by the companies. The 1st and Final Call Money/Allotment money on these shares was also paid by the assessee by cheques. Therefore after the allotment of these shares in the name of the assessee there is no settlement at all and the transaction cannot be considered as a speculative transaction. As regards the third transaction with regard to 100 shares of Gujarat State Fertilisers Company Ltd., he submitted that the assessee paid the amount by cheque through broker. There was no allotment of the shares. Even if this transaction is treated as a speculative transaction, that would not amount to speculative business, because it is only an isolated transaction and therefore provisions of s. 73(1) are not applicable. Our attention was invited to the provisions of s. 28 and s. 43(5) of the IT Act and it was argued that the amount was actually paid on 12th Feb., 1982 and the assessee at the time of selling the shares has received the payment. The delivery of the shares had taken place from the broker who was the agent of the assessee and, therefore, it is also not a speculative transaction at all. He submitted that for a speculative transaction, there are two things to be satisfied—(1) Settlement of Contract, and (2) Settlement of Contract without delivery. It is not a settlement of contract because money was actually paid and received at the time of transaction. In this connection, he placed reliance on the decision of the Bombay High Court in the case of Indian Commercial Co. Pot. Ltd. (supra) and the decision of the Andhra Pradesh High Court in the case of ‘Maggaji Shermal (supra).

    6. As against this, the learned departmental representative, Shri Subramanian submitted that allotment of shares in the case of DMR Trading & Investments Ltd., and Ridhi Holding & Traders Ltd., does not amount to actual delivery of the shares including stock or transfer of the shares. Therefore, these two transactions also fall within the definition of speculative transac tions under s. 43(5) of the Act. As regards the third transaction, he submitted that it is clearly a speculative transaction and the assessee has preferred to purchase a loss, and therefore, the assessee would not be entitled to set off this loss.

    7. We have considered the rival submissions. From the details of loss on shares given by the assessee mentioned above, it is clear that the acquisitilon of 500 shares each in DMR Trading & Investments Ltd., and Ridhi Holdings and Traders Ltd., is not at all speculative transaction at all. The assessee has acquired these shares after making proper application and after making payment of the application money of Rs. 5 per share by cheque and it is only thereafter these shares were allotted to the assessee. At the time of allotment, the assessee has paid first and final call money/allotment money of Rs. 5 per share again by cheque. In this way, from these facts, it is clear that the assessee has not entered into any speculative transaction with respect to these shares. After the allotment of shares in the name of the assessee, there is no question of transfer of these shares to any other person without actual delivery. The assessee has also produced the broker's sale note at pages 17 to 19 of his paper book and covering letters of allotment of shares at pages 13 and 14, which prove the contention of the assessee. In view of the sefacts, the transfer of shares on allotment by the assessee of these companies cannot be said to be speculative transactions within the meaning of s. 43(5) of the IT Act.

    8. Now we are left with the last transaction with regard to 100 shares of Gujarat State Fertilisers Co. Ltd. The case of the assessee is that the amount was actually paid on 12th Feb.,.1982 and at the time of selling these shares, he received the amount. The delivery of the shares had also taken place through broker. However, no evidence was produced by the assessee for the actual delivery of these shares. In the absence of the actual delivery of the shares, it will be presumed to be a speculative transaction. But here, we find that the decision of the Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax v. Indian Commercial Co. P. Ltd.. Put. Ltd. (supra) comes to the rescue of the assessee, wherein the Hon'ble Bombay High Court held as under:

    “Moreover, the use of the plural “speculative transactions” in Explanation 2 to s. 28 clearly shows that in order to constitute “speculative business” within the terms of that Explanation, a single transaction would not be sufficient. There was nothing on record to show that it was a systematic or organised course of activity or conduct on the part of the assessee-Company and not to fulfil its contracts, and to settle the same with the other parties thereto, with the result that even according to ordinary notions and common sense principles, it could not be said that a transaction of the nature of the transaction in the present caseamounts to ‘speculation business’. Therefore, in any event the transaction in this case did not amount to speculation business for the purpose of Explanation 2 to s. 28 and, therefore, s. 73(1) of the Act is not attracted and the sum of Rs. 50,000 could not be disallowed as a deduction from the other business income of the assessee-company.”

    9. The Hon'ble Bombay High Court in the above case made fine distinction between the speculative transaction and speculative business. In sum and substance, the Hon ble Bombay High Court held that if it is an isolated transaction, it cannot be treated as a speculative business and in that event provisions of s. 73(1) will not be attracted. In the present case, the assessee could not produce the evidence of actual delivery, though there is a contract for purchase and sale of the shares. But since this is an isolated transaction, the decision of the Hon'ble Bombay High Court in the case of Indian Commercial Co. Pvt. Ltd. (supra) fully applies to the facts of the present case.

    10. In the case of Maggaji Shermal (supra), the Hon'ble Andhra Pradesh High Court, on the following facts held that the transaction was a speculative transaction within the meaning of s. 43(5) of the Act since the contract was settled otherwise than by actual delivery:

    “The assessee entered into a contract with another dealer on 4th Nov., 1987, for purchase of 1,000 bags of groundnuts at the rate of Rs. 358 per kandi, delivery of which was to be made in February,.1968. On 16th February, 1968, there was a fall in the prices of groundnuts and the assessee thought it fit not to purchase the groundnuts., It, fhere ore, paid Rs. 20,833 to the contracting dealer. The assessee claimed set-off of the loss in this transaction against its other income. But, as there was no actual delivery of the goods, the ITO as well as the AAC held that the transaction was a speculative transaction and the loss should be regarded as a speculative loss. On appeal, the Tribunal accepted the contention of the assessee and held that though the transaction was a speculative transaction, the loss was not speculative.”

    11. Therefore, respectfully following the said decision, we are of the opinion that even if it is a speculative transaction is not a speculation business of the assessee in view of the provisions of s. 28 and Explanation 2 to s. 28, and provisions of s. 73(1) are not attracted. We are, therefore, of the opinion that the learned AAC failed to appreciate the legal position and he was not right in disallowing set off of the short-term capital loss of Rs. 17,850 to the assessee on sale of shares. We, therefore, set aside the order of the AAC and direct the ITO to allow set off of the short-term capital loss of Rs. 17,850 as claimed by the assessee.

    12. In the result, appeal of the assessee is hereby allowed.

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    Comments

    P.H Nanavati v. Third Income Tax Officer
    (Oct 17, 1988)