Income Tax Appellate Tribunal - Mumbai
Growmore Research & Assets Management ... vs Assistant Commissioner Of Income-Tax on 8 August, 1996
Equivalent citations: [1998]65ITD435(MUM)
ORDER
A. Kalyanasundharam, A.M.
1. These are cross-appeals by the two companies and cross-appeals by the revenue, that involve certain common issues and hence, these appeals have been grouped together for the sake of convenience. The parties rendered their arguments on the above basis and accordingly, these appeals are being disposed of by means of this common order.
2. The common issues as raised by the appellant-companies are that the loss in money market transactions are allowable as business losses and that the loss on forward speculation of shares, etc., are allowable to it with reference to the valan date as fixed by the Stock Exchange and not with reference to date indicated on the forward contract notes.
3. Mr. Mistry, the learned counsel for the appellant-companies, submitted that there are two common issues in the appeals raised by the appellant companies. He pleaded that he be permitted to place the facts and the legal contentions starting with Growmore Leasing & Investment (P.) Ltd. (hereinafter referred to as GRLIL) and thereafter, would highlight salient points in the appeal of Growmore Research & Assets Management Ltd. (hereinafter referred to as GRAM). He pleaded that he felt this approach would assist in proper appreciation of the issues involved in the appeals. The representatives of the revenue department did not express any objection to this approach of the counsel for the appellant companies and accordingly, he was allowable to proceed with the case in the manner he felt that would bring about the facts clearly and crisply.
4. Mr. Mistry, the learned counsel submitted that the first of the common issues relate to the loss suffered in the money market transactions. He submitted that the money market is fairly new type of business and that he be allowed to place its nature for proper appreciation. He submitted that this is an off-shoot of business carried on by the financial institutions such as banks. He stated that the banks at times have surplus funds for a short time which time is shorter than call money periods. The banks with a view to make a quick profit from their surplus funds often lend or advance through a broker with a promise that the money would be refunded back on the date indicated by the bank. The bank decide on the best possible return from their investment for the short period and lend or advance the funds to the broker which is usually in the cloak of purchase of securities. The profit earned from the lending for a very short time is equivalent to the interest earned on such advance. The business of banking has provided for various forms of investments and lending normally does not allow or permit them to investment or lending for a short period and since, they indulge in such short-term lending or investment, are compelled to cloak the transactions as purchase of various kinds of shares/securities, for delivery at a future date. The banks are fully conscious of the fact that they are not to concern themselves about the delivery date indicated in the contract because, their real intention is to make a quick profit because, the surplus money is available only for a short time and on or before the expiry of the short period they have to collect the surplus back along with profit on it as otherwise, they would be infringing the provisions of either Banking Regulation Act or the Reserve Bank of India Act.
5. The banks make available the surplus funds to the broker who gives it over to a person with the condition that he shall return the funds on the date stipulated by the bank. The banks as stated earlier give the transactions the garb of purchase of securities and likewise, the person to whom the funds are made available cloaks it as a transaction of sale securities and the delivery date indicated on both the contracts of purchase and the sale is identical. He contended that both the bank and the person in such cases normally would not have the possession of the securities indicated or mentioned in the contracts and therefore, giving or taking delivery of securities does not arise at all. He contended that the bank is not concerned with whom the broker had left the funds of the bank and since, the broker is well known to the banks and the banks are assured of return along with profit thereupon and, therefore, take the risk of advancing or investing for short periods. He submitted in all such similar transactions with or through the broker, the banks limit themselves to keeping track of the broker and are not interested on the further actions of the broker because, it is treated as a direct business action with the broker only.
6. He contended that the broker has undertaken the responsibility of returning the money to the bank on the date indicated by the bank and what he does with the money and how he utilises the money is of no concern of the bank so long as on the appointed date they get the money back along with the interest thereupon. The broker may give or provide the money to one or more person. If the persons to whom the funds are made available, returns it to the broker earlier to the date which the bank had indicated, it is left to the broker to use such funds for the remaining time and he may once again advance it to another for such remaining period with the same stipulation of return on the specified date. He submitted that the persons with whom the broker has business is of no concern of the bank and the broker would be within his rights to refuse to furnish such information. He further contended that the bank is unconcerned with the loss if any, suffered by the broker during the period or time specified by it but, limits itself to the interest to be earned and refund of the principal amount. He contended that all contracts with the banks and with the persons by the broker indicate the securities of the like quantity, the rate and the delivery date which date cannot be altered because, such a date is fixed by the bank on which date it wants its money back with its profit. He contended that in all these transactions involving money there never takes place delivery of shares/securities and all that transpires is the person with the funds gets benefited with quick profit. He submitted that the bank not being aware of the persons with whom the broker had transacted does not make the contract of the bank with the broker non-genuine because, the contract is supported with the basic and direct evidence of the brokers bought and sold note, followed by the settlement of account by payment of money to the bank.
7. Mr. Mistry submitted that, in all money market transactions there always involves a reference item like shares/securities, etc., with a promises to deliver or take delivery on a specified date of a certain number of shares/securities along with the rate at which each such share/security shall be delivered or taken delivery of. He contended that in the instant case one such item is Units of Unit Trust of India and the first of a contract is purchase of 60 lakh units of UTI at a particular date for taking delivery at a further date. This contract of purchase is followed by a contract of sale of identical quantity of units at a specified rate mentioning the same date of delivery as earlier. He submitted that the person who had placed the contract of purchase or sale is concerned with the rate of purchase and the rate of sale and if the sale price exceeds the purchase price, he makes a profit and in the event of sale price being lower than the purchase price, he suffers a loss. He contended that the profit or loss is determined with reference to date on which the first contract of purchase or sale is squared off with the sale or purchase contract. He contended that the parties to the contract having set off their first contract by the second contract because both involve the identical quantity of Units and thereby nothing more remains to be done by either of the parties and the delivery date which is still to come becomes irrelevant as far as the parties are concerned. He contended that the assessee soon after the second contract that off-sets the first contract, he has nothing to do with the broker excepting to settle the difference with the broker by paying of the loss or to recover the profit earned by him. He submitted that the time taken by the broker to carry out the recording of the transactions in his books and actual settling of the accounts with the parties are irrelevant for purposes of the point of time when the profit or the loss is earned or suffered by the parties which is invariably the date of the second contract on which date the first contract is squared off. Because, the by means of the second contract the first contract is squared off, even for the broker, the delivery date loses all relevance for on that date even the broker has to perform no action.
8. He then carried us through the trading account of shares and money market transactions that gave individual description of transactions mentioning in money terms the profit or the loss against each such transaction. He submitted that in few of the money market transactions, GRLIL had made profit of Rs. 1.1619 crore and in few others it had suffered a loss of Rs. 1.07 crores. He referred to the supporting documents from the broker that gave complete information on each transaction. He submitted that it indicated the transaction of purchase by marking it as 'bought note' and a sale by marking it as 'sold note'. He submitted that the note indicates the date on which the same was directed by the assessee, the quantity along with the name of security/share, like 60 lakh units of UTI, the rate and the delivery date. He submitted that these notes are followed by the advice from the broker of the settlement amount payable or receivable by him.
9. Mr. Mistry submitted that the point of controversy between the assessee and the department of revenue is on what date the loss or the profit accrues or arises to the assessee. The contention of the assessee is that the loss or the profit accrues or arises on the date when the first contract got squared off by the second contract while the revenue had held that the loss accrues on the date of delivery and not earlier. He contended that the reason advanced by the revenue for holding that the loss accrues only on the delivery date was because such date fell after the close of the accounting period relevant to the assessment year under appeal. He contended that despite the stand taken by the revenue that loss accrues only on the delivery date, it had included the profit that was accounted on the basis of squaring off of the account on the second date, in computing the income of the companies. He pointed out that revenue refused to allow the loss even on the basis of delivery date without assigning any reason in the succeeding assessment year. He pleaded that there has to be consistent criteria for including of the income and for allowing deduction of the loss and because, the revenue had included the income that has been accounted for on the basis of settlement made on the date following the first contract date, which basis is what is followed for accounting of losses, the claim of the appellant-companies being justified, it should be allowed.
10. He submitted that the revenue while not allowing the loss had observed that the transactions are non-speculative. He contended that when the transactions are held to be non-speculative in nature, the revenue had no alternative but to allow the loss. He submitted that the Assessing Officer (hereinafter referred to as Assessing Officer) had in pages 8 to 12 of his order had made all his observations in this regard. He submitted that Commissioner of Income-tax (Appeals) [hereinafter referred to as CIT(A)] in page 8 onwards had dealt with the issue.
11. He contended that before CIT(A), he had cited an example of purchase of the entire wheat production in the State of Maharashtra in the year 1995 at a price of Rs. 25 crores by paying the amount to the Maharashtra Wheat Wholesale Association. A second party 'B' agreed to purchase the entire contract of purchase for a consideration of Rs. 30 crores and the initial purchaser seized the opportunity and passed over the contract to B and on conclusion of this transfer of purchase, a clear profit of Rs. 5 crores was earned. He pointed that according to the theory of the revenue, the profit could be stated to have arisen only when the actual delivery of wheat takes place in 1995. He submitted that extending this theory little further, i.e., in the event of the entire crop getting destroyed and no wheat could be delivered there would never arise any action on the delivery date of delivery and as a consequence, the profit of Rs. 5 crores could never be assessed. He pointed out that the fallacy in the theory of the revenue of linking to the delivery date on which date as far as the assessee is concerned, with reference to any of its contract there was no action ever to be performed.
12. He pointed out that the revenue had held that the profit or loss arises or accrues with reference to adjustment carried out by the broker and the intimation of such adjustment as is made to the assessee and because such date falls after the accounting period, the loss could not be allowed. He contended that the intimation by the broker about the quantum of settlement between the appellant and himself is not the determination of either the income or the loss because, it is just a follow-up information of an action that had already concluded and is similar to confirmation of an action performed on an earlier date, which date is the date of the second contract date by which date the first contract got squared off. He further contended that the broker may take time to incorporate various transactions with his clients in his books but, insofar as the appellant-companies are concerned, the transactions are complete on the second date on which date the contract was squared off. He further contended that the manner in which the broker maintains his books of account is not relevant in determining whether a particular transaction has resulted in a gain or a loss as far as the companies are concerned. He accordingly strongly emphasized that the revenue had faltered in giving undue importance to the brokers account and the intimation date of the broker both of which have no relevance in deciding the issues arising in the present appeals.
13. He further pointed out that the revenue had made out of the delivery date and he submitted that the balance sheet of the assessee is so small that the assessee had never the capacity to pay on the delivery date and the assessee never intended to wait till the delivery date any point of time or from the first of the contract. He finally contended that the assessee never intended to take delivery of or give delivery of because, all it had intended was to speculate and make profit in the bargain and sometimes it was lucky and some other times it returned out to be just unfortunate and suffered loss. He contended that in all speculation contracts, delivery was never the basis and the money market transactions are no different. He accordingly contended that the loss and the gain suffered or earned in money market transactions being unrelated to any delivery but, suffered to earned as and when the first contract gets squared off entirely by the second contract, because, the loss or profit that is suffered or earned on commercial basis, has to be the basis for determining income under the Act and it could be on no other basis.
14. Mr. Tilaqchand, the learned departmental representative submitted that the contract of purchase or sale are mere orders of purchase or sale. He referred to the provisions of Sale of Goods Act and submitted that the definition of goods contained in the said Act had held that money does not fall within such definition. He contended that money is a medium of exchange only. He contended that the various contract notes when closely inspected would reveal that they are mere orders because, the broker had not indicated the complete particulars of the persons with whom the transactions were carried out. He pleaded that the books of the broker do not reflect the transactions of purchase and sale. He pointed out that entire transactions of money market are through the broker Mr. Harshad Mehta who is also director of both the companies which makes it all the more necessary for close security of these transactions. He submitted that in all these cases it is for future delivery of units of UTI and the transactions can come to a close with delivery only.
15. Mr. Tilaqchand referred to the definition of the term 'speculation' as defined in section 43(5) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and submitted that it is defined as exclusively of transactions concerning shares and stocks and it was in this connection that the Assessing Officer had observed the transactions as non-speculative. He submitted the objection of Assessing Officer in allowing the loss is also based on the transactions not bearing a genuine colour. He referred to the decision of the Calcutta High Court in CIT v. Dunlop Ltd. (U.K.) [1993] 201 ITR 534 and submitted that there must be some right that results in the accrual of income which is absent in all these transactions. He further referred to the decision of the Bombay High Court in CIT v. Nadiad Electric Supply Co., Ltd., [1971] 80 ITR 650 and submitted that there must exist some enforceable legal obligation for claiming of the loss which is absent in the transactions. He contended that considering the fact that the second contract is for identical quantity as the first contract, it could be treated as there being a constructive delivery and in support of the decision he relied upon the Tribunal decision in Talakshi Lalji & Co. v. ITO [1991] 39 ITD 44 (Ahd.). He emphasised that the detailed evaluation and reasons advanced by the Assessing Officer which he supports fully must be sufficient to reject the claim of the appellant. He further contended that because the appellant had conceded that delivery was never intended upon, it ought to be held that the transactions as non-genuine and the loss on all such non-genuine transactions are not allowable. He contended that Government securities could not be traded but could be bought or sold by banks only. In so far as the income being included in the total income, he pleaded that department could not hold these as not genuine but, when the assessee wants any deduction of loss, it is for it to establish that it had suffered it and it is genuine.
16. The rival contentions and the various records and documents referred to during the hearing and as are part of the record have been very carefully considered. Before we proceed to consider the arguments of the parties, it is necessary to briefly state the reasons that weighted on the minds of the revenue authorities in not allowing the loss and their appreciation of the transactions.
17. The Assessing Officer in GRLIL had noted that transactions in money markets includes sale/purchase of Units, Bonds and Government Securities. He noted that the contract notes for purchase and sale of money market instruments to be delivered on a particular date was issued by M/s Harshad S. Mehta (hereinafter referred to as HSM). He noted that no order for purchase or sale was available to suggest any independent decision being taken by the company. He noted that HSM was enquired about the receiving orders from the company in regard to the transactions for and on behalf of the companies and whether there existed any separate mechanism through which decision to purchase or sale was taken by the company. He noted that HSM had acted in his dual capacity both as director of the companies as well as their broker. He noted that the company could not furnish any information about the parties with whom the various transactions had materialized. He noted that payments are received in the bank account of HSM and the accounts of the companies are effected through his personal account. He considered the fact that the purchase and the sale were related to a particular delivery date and though, the transactions of the purchase and the sale are stated to have been adjusted on a date prior to the delivery date indicated on the alleged purchase and sale notes, based on which the net amounts were calculated, it must be treated as involving constructive delivery and, therefore, the contracts could be held to have complete on the delivery date only. Because, he had held that there was constructive delivery with reference to the delivery date, he had concluded that the transactions were non-speculative in nature.
18. Assessing Officer in GRAM had noted that HSM had acted as the broker in all money market transactions for banks, companies while share market transactions were handled and effected both by HSM and M/s Ashwin S. Mehta (hereinafter referred to as ASM). He noted that HSM had stated that no company or broker ever maintain any record for forward contracts orders but all they maintain is the contract notes that is issued to the companies and it is based on such contract notes that the companies record the transactions in their books. HSM was asked as to how is able to keep track of the various orders of various parties and distinguish between them when there is no order book maintained and he replied as under :
"Corporate entities in our group have a different legal entity. Any transaction relating to stock market as well as securities, bonds, etc., has to be done only through some stock broker. M/s HSM being the member of Bombay Stock Exchange and being a stock broker firm in the group, all transactions of corporate, will normally be routed through the in house broker firm instead of giving to some other broker. Decisions as to transactions are taken on individual case. Contract notes are issued for such and every transactions. Further profit and loss statement in such transaction is also drawn out accordingly and duly accounted. The companies Board of Directors are duly authorised to take decision and execute these transactions."
19. HSM was asked normal transactions involve payment or receipt of money but, in all of the transactions of the companies, only the income or the loss is credited or debited to the accounts, absence of payment which was an important factor and a contemporaneous evidence for any transaction, how to justify the losses which might have been so done only to reduce the profit.
The reply by HSM was that only of small or irregular clients that settlements are done with reference to the transactions but, in cases of regular clients or huge dealings, settlements are effected not on transactions basis but, periodically. It was further replied that if the transactions of losses are with a view to reduce the profits, it would have the counter effect in the hands of HSM because, the transactions have been effected through him and on this basis it was replied that there is no reason to unnecessarily to create accounting entries for the companies. It was further stated that the transactions are all real transactions and not adjustments.
A query was raised on HSM which read :
"Computerized contract notes or account statements need not prepared at the time of execution of any deal or transaction, so these are not the contemporary evidences. Please state any other evidence showing that respective transactions actually took place on that particular date in the hands of a particular company ?".
The reply to this query was :
"as to your query that computerized contract notes and account statements need not be prepared at the time of execution of any deal or transaction is partly true, as statements are not prepared on the day of execution but the contracts are drawn out on the same day after the execution of transaction and/or oral confirmation/intimation of the transaction. The contract notes issued by the stock broker are accounted by the companies as a documentary evidence to register the transaction in their books of accounts."
20. Assessing Officer in Gram had observed that there existed no contemporary evidence to show that the decision regarding the transactions in the company were taken independently. It was further observed that because HSM had acted in a dual capacity, the genuineness of the transactions are noted established. He then noted the reply by the assessee vide its letter dated 26-2-1993, which is reproduced for the sake of convenience -
"your department has suggested that loss incurred by Gram should not be allowed as the business is conducted by HSM at various exchanges and the same is later diverted to Gram. In this regard our submissions are as follows -
Gram is a limited company and specific entity just as HSM is another entity. The decisions for purchase and sale of securities are independently taken by and for Gram. It would be very logical for Gram to deal with the group brokerage firms then, i.e., HSM, ASM, or Mrs. Joyti H. Mehta. It would be imprudent to give business outside when the group brokerage firm can have an opportunity of earning the brokerage. Even internationally, say, Meryll Lynch Inc. would give the brokerage business on a priority to its broker firm for a variety of reasons and more importantly for maintaining secrecy. The grounds proposed for disallowing losses is not tenable. All transactions entered by Gram are backed by contract notes and settlement notes. As regards HSM as we understand he carried his investment transactions separately. Even from the point of view of revenue, it must be noted that both the entities are being taxed at the higher rates of slab. There is no materials whatsoever which would even suggest that all the activities were done by M/s HSM which was later diverted to M/s Gram, as alleged by you. In the circumstances, it is submitted that there is no question of disallowing the aforesaid losses.
The nature of profit/loss in money market and capital operation is identical. The company receives the contract notes and advises for differences. In the books of company no delivery is taken or given and therefore, the nature of profit or loss as appearing in the trading account is only speculative and hence profit and loss arising out of capital market can be adjusted. There is a net profit of Rs. 66,37,536 on this account."
21. Assessing Officer had given the following reasons for holding that the explanation offered by the assessees are not correct. The reasons of Assessing Officer in the case of the two companies for rejecting the explanation offered are reproduced in the following table.
Gram Grlil
1. Regarding stock market activities, All the contracts relating
there is no doubt those are to the above-mentioned losses
speculative transactions, but money are relating to the deliveries
market transactions pre-supposes deliveries from May 1990
delivery of the instruments on a which is much after the
particular date and on the date of accounting year. Before
delivery, if both the transactions delivery takes place loss/
are squaring up even of assessee- profit cannot be determined
company is not receiving physical because till then company
delivery or taking physical can enter into any other
delivery, the deliveries effected contract also which can set
through the process of settlement off the loss on the date of
and it is presumed that assessee delivery.
had received delivery and given
the same against sale. So
transactions in money market are
different than badla transactions
of share market.
2. Broker in all money market Netting of settlement is
transactions is M/s HSM who done only on the date of
had admitted during assessment delivery and on such date
proceedings for Assessment year only any profit or loss
1990-91 that all money market becomes due on the transac-
transactions are resulting into tions. So before that in no
delivery only. Considering this method of accounting such
the transactions of the company losses can be claimed before
in money market are also result- these become due.
ing into delivery on the due date.
3. Even if the security is not M/s HSM had entered into all
coming in the books, if on the these transactions who had
same day or simultaneously not debited the account of
transactions of purchase and sale GRLIL on account of future
are settled together it amounts losses. So such debit in
to delivery only. trading account of GRLIL is
not correct as per the
principles of accounting.
4. M/s HSM is issuing advice on These transactions were not
the date of delivery to the assessee settled during the year even
company in which it is mentioned without delivery also, so
that M/s HSM had debited/credited such loss cannot be allowed
the assessees account, on account from the profit of financial
of difference out of settlement of year 1989. 90.
deliveries. This itself proves that
the transactions in money market
are resulting in the delivery
and cannot be equated with
speculative transactions in stock
market.
5. Accounting of difference in
money market transactions are
done on the date of delivery
both by Grlil and HSM as per
their books. So it is wrong
on the part of the company
to claim future losses during
the year.
22. For the sake of convenience, in the table below the figures of profit & loss of the two companies in money and share market transactions are given together with the reasons for not allowing of the loss in share market transaction.
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GRAM GRLIL
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Profit Loss Net Profit Loss Net Money 11619500 10775000 834500 26536745 341467 26119258 Share 1913913 681560 1232313 25950875 45508617 (-)19557742
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Net Profit 2076753 Profit 6637536
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The reasons for not allowing the speculation loss on shares are given hereunder.
Net valan difference debited on Net valan difference debited
29-3-90 on ASM's valan difference on 29-3-90 on ASM's valan
of Rs. 63,46,328 corresponding difference of Rs. 61,388,
entry in the books of ASM not corresponding entry in the
found. Final valan difference books of ASM not found. Final
debited of Rs. 3,94,356 & ... valan difference debited of
Rs. 24,55,636 not found in books Rs. 1,35,785 not found in
of HSM. books of HSM.
Therefore total valan difference Because both the brokers had
of Rs. 91,96,320 debited to the not accounted for these losses
trading account on account of against the company, the bills
valan difference had not become having been raised in the
due by the year end, as both subsequent year, losses relate
brokers had not accounted these to the period after 31-3-90.
losses against the company and The reasons noted for money
hence even on mercantile system market equally apply here
of accounting, losses are not because both the brokers had
deductible against profits. entered into the transactions
on behalf of the company
had issued net difference
bill only. Since, entries for
valan difference are made on
the same day by the company
and the broker, there is no
jurisdiction for making
entries in the books of the
company and not that of the
broker.
23. Assessing Officer in both the assessees hands for the above reasons had refused to allow the set off of the losses in money market transactions against the profit in share market transactions. CIT(A) had upheld the order of the Assessing Officer as such.
The perusal of the above and considering the arguments of both the parties, it is undisputed that the money market transactions are all forward contracts. The term 'forward contract' is understood in commercial circles as an executory contract consisting of reciprocal promises between two parties, namely, the buyer and the seller, i.e., it is an agreement to sell or buy by one person to another to be performed on a subsequent date fixed by the parties and usually both delivery and payment are concerned conditions. In the commercial circles it is too well known that in all forward contracts there is an element of speculation. Speculation is an action whereby the parties to the agreement terminate their original agreement of further date earlier to that date by agreeing to settle between themselves with the differences in money value, i.e., without waiting for the actual delivery to take place. A wagering contract is understood as one where the parties by common consent agree to speculate only on the differences according to the rise or fall in prices in the market, and the delivery of goods is not in the contemplation of the parties; and the transaction is merely a bet on prices and a gamble in differences.
24. Sometimes a genuine transaction of delivery and payment may end up without the delivery taking place by settlement prior to the date of delivery but, because there was no delivery given or taken, it may not make the transaction a mere speculation or a wager or a gamble or a bet. Whether the documents show an ordinary commercial transaction, and in conformity with them one of the parties incurs personal obligations on a genuine transaction with third parties so that he himself is not a winner or loser by the alteration of the price but can only benefit by his commission, it is not proper of infer that such a contract was a wagering contract and the fact that no delivery is required to tendered is irrelevant. An ordinary speculation conducted on the Stock Exchange through a broker who makes himself by rules personally liable to the other members on the Stock Exchange for the performance of the contract is not treated as a wagering contract. To make contract wagering there must be from the outset a common intention of both the parties to the contract to make or accept no delivery and to deal only in differences.
25. The intentions of the parties could be adjudged from their actions. If in a series of contract, between the parties in a transaction there were no deliveries, such series of contract do reflect the intention of the parties of not to deliver or take delivery but to settle only in differences and accordingly these contracts are wagering contracts. If the original contract is for delivery on a future date but by means of a subsequent agreement the parties mutually agree not to enforce that part of the contract relating to the aspect of delivery, then, the circumstances that lead to the modification of the original agreement needs to be evaluated to determine whether, the original agreement is cloaked as a genuine commercial transaction of future date only to be modified later on or there existed some circumstance that made the performance on the part of either parties impossible or causing genuine hardships that led them to square up the account with the differences.
26. A forward contract that covers certain goods that is impossible to be delivered either because such goods is unavailable for sale or it would never come into existence and both the parties were aware of such impossibility and they settle their accounts with the differences in prices, such an agreement too would become a wagering one. Government securities is perhaps one such item which could not be traded in the market except by banks and that trading is perhaps permitted only between banks.
27. Every forward contract is understood to involve some element of speculation and what makes such forward contract as not in the nature of speculative but a wagering one, is the fact that performance of the terms shall not be demanded but only the difference shall be payable. In other words, a forward contract, to be treated as a speculative transaction it must show that the parties to the agreement had all the intentions of performing their part of the contract including giving and taking delivery of but, there developed certain circumstance which may result in huge unexpected losses to one which was unexpected, whereby both the parties agree to rescind the contract by agreeing to settle with the difference in prices.
28. In the instant cases before us, all of the transactions that had resulted in a loss is on account of Units of UTI Scheme, 1964 and the transactions are for delivery of units numbering One Crore in most cases and in few cases, little less. As observed earlier, if the stated number of units are unavailable for purchase or sale, and this was known to both the parties, then, the only conclusion is that all these transactions are wagering and not speculative in nature. As had been observed earlier, the series of contracts show that in none of them delivery was either given or taken which indicates that the assessee had no intention of performing that part of the contract relating to the delivery, but, settle by difference in prices only, also show that these contracts are wagering contracts.
29. Unlike the case of speculation carried by the broker in the floor of the Stock Exchange where he abides by the rules making himself liable to the other members of the Stock Exchange, for earning a commission, there is no such commitment shown to exist of the broker with other brokers nor any agency to check or verify the actions of the brokers, so as to make these transactions fall in a similar plane of speculative transactions. Even the assessee does not bind itself as it had kept any deposit with the broker, and the counsel Mr. Mistry had contended that it was not necessary because HSM is both the director as well as the broker.
30. If, there exists some similar governing force like the Stock Exchanges for shares for the trading of money market transactions, where members of that force make themselves personally liable to other members of that force which force acts as the controlling force of all transactions, of its members and permits speculation in the like manner as shares are speculated in the Stock Exchanges, such a force may perhaps make the above wager like transactions as speculation though, such transactions may not fall within the definition of speculation business as defined in section 43(5) of the Income-tax Act, 1961. We are not aware of any such controlling force and neither both the authorities nor the appellants have brought on record existence of any such authority which guides such money market transactions. The Reserve Bank of India guides the functioning of banks on its lending of money. The Export & Import Bank of India guides the lending of money concerning export transactions. There are similar other financial institutions that provide various kinds of advances or money but, all such advances are for various productive purposes where delivery and payment always go hand in hand.
31. In our opinion it is necessary to enquire into the existence of any governing force for the money market transactions. It is also equally necessary to examine whether in the absence of any such governing force of money market transactions, that transactions similar to the one in the instant cases, in the normal commercial circles it is an accepted business transaction giving it a legal sanction, so that these could be cloaked as genuine speculation transactions and not wager transactions and non-genuine transactions involving providing of entries for losses or incomes without there being any actual generation of income or sufferance of loss.
32. The objection of the Assessing Officer which to our mind is quite lethal is the absence of independent evidence of the rates arrived in the contracts. In so far as the share market transactions, quotations are available that give the relevant rates while in money transactions, there is no reference point available. It is for this reason that he had called for the particulars of the parties with whom the transactions had taken place and for the more serious reason of HSM being the broker and the director of the company. It is because of the involvement of HSM as the broker that he had expressed the opinion that the transactions do not appear to be genuine, unless the transactions are verifiable with other contemporaneous evidences other than the brokers note because in the absence of an independent third party evidence, the brokers note may be in the nature of self-serving statement.
33. The example of the bank making available with the broker the funds for a short duration to make a quick income is no parallel to the circumstances in which the assessee is placed because, unlike as in the case of a bank where there is real movement of money, there is neither any advance of funds nor recovery of funds but, a situation of broker co-operating with the assessee to buy and sell on its behalf without any involvement or risk of any sort. Going by the proposition advanced by the assessee that the orders are all oral orders placed by the assessee, and therefore, no other evidences could be available, it leads to a logical plane that the assessee is fully aware of the movement in the market and this awareness might be based on some contemporaneous evidence, that needs to be explored.
34. In the present case, since, the broker and the director happen to be one and the same person there might not arise a situation of broker making a profit at the instance of the company but, there obviously is some safeguard available with the company and with the broker as well to protect each other from the onslaught of criminal litigation by either parties. One such safeguard to our mind the terms of reference and agreement together with the basis of such agreement or conciliation which is all the more manifest because of dual capacity of HSM. In our opinion mere contract note of the broker in the present circumstances of the case is insufficient to justify the loss in the money market transactions.
35. A loss could be claimed to be set off against income only when it is established that it is suffered during the course of business and there is evidence to support the loss is actually suffered. The loss if suffered in the accounting period, is to be accounted for and when it is so accounted for in the year, it could not be denied because, the loss is not accounted for by the broker in the same accounting year. The loss or profit arises or accrues to the assessee by its action and volition and could not be said to arise or accrue because of the action of another without the active involvement of the assessee. It is this active involvement that was enquired of by the Assessing Officer which must be shown by the assessee as existing from the start. The broker's bought or sold note is an evidence which needs to be related to the first action of the assessee of instructing to buy or sell the item. If the brokers is the source of information about the rates, then it is all the more becomes necessary for him to identify the source. It otherwise gives an impression as a mere paper transaction by which entries are provided by the broker thereby showing some income or loss thus making the company credit worthy without their being actual capital growth. HSM had stated that the account of the companies are adjusted periodically and this suggests actual movement of finance between the broker and the company.
36. We had earlier observed that the item contracted should be capable being traded in and delivered as well without which the contract would be an illegal one and would be a wager or a gamble only. The counsel for the appellant companies had contended that they were never concerned with either actual availability of the units or they being capable of being traded in and further it was submitted that at no point of time they had intended to take delivery the units because, it had no such financial capacity, for which submission, the smallness of the balance sheet was referred to. It was also submitted that in all money market transactions the securities are mere issues for reference only and not really contemplated upon and all transactions are mere speculation in money. The objection of the departmental representative was that money is not an item that could be traded in but has remained a mere medium of exchange for goods. In recent times, there is currency trading between currencies of various countries by which the exchange rate of one currency to another is determined. In India, these currency trading are controlled presently by the Reserve Bank of India and what factors play a crucial role in determining the exchange rates.
37. The Bombay High Court in Nadiad Electric Supply Co. Ltd.'s case (supra) had held that there must be some enforceable right or obligation before any loss or income could arise and such enforceable right or obligation can arise only on a valid contract and not on a contract that is void ab initio. This principal applies both to the loss and to the income in the like manner, i.e., if the first contract of purchase is bad, the second contract of sale at a higher or lower rate is equally bad and therefore, such bad contracts could not yield any profit or loss because, there is no legal sanction to such invalid contracts.
38. In our view, therefore, for the reasons indicated above, it is only proper that the orders of the authorities are set aside to be decided afresh by the Assessing Officer. Assessing Officer shall keep in mind our observations made earlier as to the nature of transactions being in the nature of wagering contracts. Assessing Officer shall explore the various observations indicated above, namely, whether there exists any governing force similar to the Stock Exchanges which permits member brokers to speculate in shares making themselves personally liable to other members of such Exchanges for earning partly commission; whether there exists any indicator similar to the quotations of shares released by the stock exchanges; whether these are genuine business transactions in commercial circles or mere paper transactions. The assessee shall be within its rights to bring on record such evidences to justify its claim.
39. Because, the money market transactions do not fall within the category of speculation business as defined in section 43(5) of the Act, the loss in money market transactions could not be set off against the speculation income of shares. We have to uphold the orders of the authorities below that the loss in money market transactions not being loss on speculative business as defined section 43(5) of the Income-tax Act, could not be set off against income from speculative business.
40. The other common contentious issue relates to the loss declared by the appellant-companies stated to have been suffered by them on the speculative forward transactions in shares, etc., traded in the Stock Exchanges, based on the advice of its brokers as on the valan date fixed by the respective Stock Exchanges. The plea advanced on behalf of the companies by Mr. Mistry was that the Stock Exchanges had fixed the valan dates for settlement of accounts between brokers who as members of the Stock Exchanges trade in the floor of the Exchanges. He submitted that carryover of such speculative trading is permitted between broker members but, all the members need to square up their accounts on the valan date and from the date following the valan date, the Stock Exchanges treat as a start of fresh transaction. He contended that the Stock Exchanges determine the rate based on which the accounts need to be squared up by the brokers and related to these rates, the brokers had advised the assessee companies of the profit or loss they have earned or suffered on their various speculative transaction. He contended that since, the brokers deal on the floor of the Exchanges for its clients for earning a commission, whatever rule applies in regard to its trading in the Exchanges apply mutatis mutandis to its clients as well. He contended that since, brokers are advised to close their accounts on the valan date based on the valan rate fixed by the Stock Exchanges, simultaneous effect had to be given and had been given in the respective constituents accounts. He contended that both income or gain and loss have been accounted on the same basis and this is an accepted mode of accounting because it is based on accepted commercial practice. He contended that the revenue had accepted the income but, had refused to give deduction for the loss from the income accounted for on the same lines. He pleaded that income and loss from speculation must be given the same treatment.
41. The plea of the Sr. DR however was that the authorities had rightly included the income as declared but, since, the loss is premature because the settlement date according to the assessee itself is to fall after the valan date and the loss on speculation can be determined with reference to the date of settlement fixed by the assessee and not earlier.
42. The issue on valan transactions is limited to the answer to the question of the client of the brokers whether are equally bound in the like manner as the broker himself by the rules of Stock Exchanges that decide the settlement rate on the valan date and require the brokers settle their accounts with other brokers on that basis of their various inter se transactions. The Stock Exchanges permit carry over of the transactions. The claim of the appellant is that though the clients had entered into various forward contracts, such forward dates falling after the valan date fixed by the Stock Exchanges, the settlement of various transactions should be held as effected on the valan date and on that basis, the income or the loss had arisen or accrued to the assessee, which should be taxed and the loss to be allowed to be deducted on that basis. The contention of the revenue on other hand is that the transactions could be held to be complete only on the dates indicated in the contracts. We reproduce below the reasons for not allowing the loss in the case of two appellants.
Gram Grlil
Net valan difference debited on Net valan difference debited on
29-3-1990 on ASM's valan 29-3-1990 on ASM's valan differ-
difference of Rs. 63,46,328, ence of Rs. 61,388, corresponding
corresponding entry in the books entry in the books of ASM not
of ASM not found. Final valan found. Final valan difference
difference debited of Rs. 3,94,356 debited of Rs. 1,35,785 not
& Rs. 24,55,636 not found in books found in books of HSM.
of HSM.
Therefore total valan difference Because both the brokers had not
of Rs. 91,96,320 debited to the accounted for these losses again-
trading account on account of st the company, the bills having
valan difference had not become been raised in the subsequent
due by the year end, as both year, losses relate to the period
brokers had not accounted these after 31-3-1990. The reasons
losses against the company and noted for money market equally
hence, even on mercantile system apply here because both the
of accounting, losses are not brokers had entered into the
deductible against profits. transactions on behalf of the
company had issued net
difference bill only. Since,
entries for valan difference
are made on the same day by the
company and the broker, there is
no justification for making
entries in the books of the
company and not that of the
broker.
43. It was contended that the valan date is fixed by the Stock Exchanges and all members of the Exchange are bound by such valan date and have necessarily to square up the accounts with other members of the Exchange and the rate of valan too is decided by the Exchange. Since, the broker is acting on behalf of the clients and had owned the liability on the valan date, to that extent, the burden of liability is shifted to the clients as well and the nature of liability being financial, corresponding effect on the clients appears. The brokers as members of the Exchanges are bound by the rules and have to necessarily prepare the accounts at the rate on valan date determined by the Exchanges for determining mutual liability and recoveries. The clients for whom the brokers speculate on the floor of the Exchanges, had known that the transactions come to a close on the valan date though, they intended to settle the accounts on a different date; this to our mind is too much of a claim by the appellant. The reason is obvious and that is the clients are unconcerned with the rules of Stock Exchanges and all they are concerned with is about their transactions with the broker and it stops at that point and does not travel beyond.
44. If the claim of the appellant is to be accepted that the loss or income as indicated by the broker is based on the valan date, then the clients of the broker need separate contracts, one ending with the valan date and the second, a fresh contract immediately following the valan date. If the claim of the appellant is to be accepted that on the valan date based on the advise of the broker there arises income or the loss, then it would be a situation that for the one and the same transaction there could be two points that give rise to a profit or loss, i.e., at the first instance it may be a profit only to be followed by a loss or vice versa, which is a situation of real income not being brought to tax but postponed to a different year. In our opinion, therefore, the profit or loss could not arise or accrue on the basis of the advice of the broker when the contract with the broker is with reference to a date later to the valan date. The claim of loss could not be allowed because the profit had been included but, could be allowed when it could be established as having been suffered by the appellant. In our opinion, therefore, brokers advice based on the valan date settlement between brokers is insufficient ... evidence for coming to the conclusion that loss has accrued to the assessee. We are, accordingly, setting aside the orders of the authorities below and direct the Assessing Officer to include the profit and allow the loss as a deduction with reference to the settlement date agreed to by the clients with the brokers HSM and ASM.
45. In the result, the appeals are allowed in part.