Income Tax Appellate Tribunal - Ahmedabad
Shri Kanubhai A. Patel, Shri Kantibhai ... vs The Assistant Commissioner Of Income ... on 22 August, 2003
ORDER
Appeal against order withdrawing interest allowed under section 244A Catch Note:
Order pased against withdrawal of interest allowed under section 244A is appealable under section 246 before Commissioner (Appeals).
Ratio:
Order pased against withdrawal of interest allowed under section 244A is appealable under section 246 before Commissioner (Appeals). Case Law Analysis:
Shrichem Intermediates (IT Appeal No. 69 (Ahd) of 1999) followed.
Application:
Also to current assessment year.
Decision:
In favour of assessee Income Tax Act 1961 s.246 Income Tax Act 1961 s.244A ORDER B.M. Kothari, Accountant Member
1. All these appeals relate to the persons belonging to the same group and involve consideration of common points. Hence these appeals were heard together and are being disposed of by this common order.
2. In the case of Shri Kanubhai A. Patel [ITA 579/Ahd/98] the first ground raised by the assessee relates to alleged invalid proceedings and invalid orders passed by the learned CIT(A) and the AO. However, this ground was not pressed by the learned counsel appearing for the assessee at the time of hearing. Hence ground No. 1 of this appeal is rejected.
3. The second ground raised by the assessee in this appeal is reproduced below:
II. Rejection of claim of set off of share badla business loss Rs. 4,59,740/- against other income.
i) The CIT(A) erred in holding that the appellant had entered into series of speculative transaction amounting to speculation business, and the loss suffered by him in these transactions cannot therefore be set off against other income.
ii) The CIT(A) failed to consider the contention of the appellant that the appellant is an investor in shares of Tata Steel and during the year he entered into share badla (i.e. hedging transactions) of Tata Steel.
iii) The CIT(A) erred in rejecting the ground of appeal that the appellant has incurred net loss of Rs. 4,59,740/- in share badla i.e. hedging transactions and he is entitled for set off of this loss against other income of the appellant.
iv) The CIT(A) failed to consider in proper perspective the written submissions before rejecting the grounds of appeal claiming the set off of loss of Rs. 4,59,740/- against other income of the appellant.
v) The CIT(A) erred in rejecting the contention of the appellant that the transactions of the appellant is single transaction of speculation, and this transaction is distinct from speculation business.
vi) The CIT(A) further erred in holding that as this transaction was carried over, over seven settlement dates, this cannot be termed as single transaction.
vii) The CIT(A) further erred in holding that the appellant had entered into series of speculative transactions amounting to speculative business and the loss suffered by him in this transaction cannot therefore be set off against other income.
The CIT(A) erred in holding that case laws cited by the appellant are distinguishable from case of the appellant and the appellant cannot take benefit of aforesaid case laws.
viii) The action of the CIT(A) to reject the ground of appeal of set off of loss Rs. 4,59,740/- against other income by not considering the facts narrated in written submission in its proper perspective and also the Departmental Circular No. 23-D dated 12-9-1960 and the case laws cited in the written submission inclusive of the judgment of the High Court of Gujarat and the observations of the High Court of Gujarat in case of Mohanlal Ranchhoddas 203 ITR 304 and the proviso (b) to Section 43(5) of the Act.
ix) The findings of the CIT(A) while analysing Section 28 and Section 73 that it is not single solitary transaction settled otherwise than by actual delivery, could not be treated as speculative transaction and the judgment of the Bombay High Court in Komani Tubes Ltd. 207 ITR 298 could not be applied.
4. The third ground relates to withdrawal of interest under Section 234-A of the Act.
5. In the case of Shri Kantibhai A. Patel [ITA 1723/Ahd/98] Ground No. 1 relating to invalid proceedings and invalid orders passed by the CIT(A) and the AO, was not pressed by the learned counsel at the time of hearing. Hence Ground No. 1 of this appeal is also rejected.
6. Ground No. II in this appeal relating to claim of set off in respect of share badla business loss of Rs. 1,60,240/- against other source of income, is similar as per Ground No. II raised in the case of Shri Kanubhai A Patel in ITA 579/A/98; except that the figure of loss in this case Rs. 1,60,240/- arising due to purchase and sale of 2000 shares of Tata Steel.
7. Ground No. III relates to withdrawal of interest under Section 244-A of the Act.
8. In the case of Shri Chandrakant A. Patel [ITA 1727/Ahd/93] the first ground relating to invalid proceedings and invalid orders passed by the CIT(A) and the AO, was not pressed by the learned counsel at the time of hearing. Hence Ground No. I is rejected.
9. Ground No. II relating to time barred order was also not pressed. Hence the same is also rejected.
10. Ground No. III relating to rejection of assessee's claim of set off of share badla business loss Rs. 1,14,375/-, is similar as in the case of Shri Kanubhai A. Patel and the only difference is that the transaction for purchase and sale of 500 shares of Reliance Industries Ltd. resulting in a loss of Rs. 1,14,375/- as against the loss of Rs. 4,59,740/- suffered in the case of Shri Kanubhai A. Patel in the transaction of 2000 shares of Tata Steel.
11. The learned representatives of both sides admitted that the facts relating to assessee's claim for set off of loss in respect of share badla business against other income in the same assessment year are similar in all the three cases. The learned representatives of both sides therefore contended that the arguments in the main case of Shri Kanubhai A. Patel [ITA 579/98] will govern various grounds raised in all the three appeals.
12. The learned counsel submitted that these assessees derived income by way of share from partnership firms, income from property and income from other sources such as dividend income and interest etc. They were not dealers of shares. They made investments in shares of TISCO in their capacity as an investor and not as a dealer or as a speculator. Shri Kanubhai A. Patel owned 542 shares of TISCO along with the investments in various other shares. During the year under consideration he has done share badla (hedging) transactions of shares of Tata Steel through the share broker Shri Gordhandas N. Gupta. The said share broker purchased 2000 shares of Tata Steel on 2-4-92 for Rs. 14,00,000/-. Like this the transaction in purchase and sale of 2000 shares of Tata Steels was made during seven periods of fortnightly settlement as per the following details verifiable from the documents given by the said broker:
Details of Settlement Akadas Akada Date Period of Settlement 09-4-92 26-3-92 to 9-4-92 30-4-92 9-4-92 to 30-4-92 14-5-92 30-4-92 to 14-5-92 28-5-92 14-5-92 to 28-5-92 11-6-92 28-5-92 to 11-6-92 25-6-92 11-6-92 to 25-6-92 09-7-92 25-6-92 to 9-7-92
13. The learned counsel submitted that this was one single transaction which had to be renewed on every settlement date (badla date). Each time the assessee entered into hedging contract for purchase/sale of equivalent number of 2000 shares of TISCO with a view to insure the risk of loss in the investments made for purchase of 2000 shares of TISCO. The learned counsel submitted that the assessee made actual payment of Rs. 4 lakhs on 24-4-92 to cover up the risk of the broker against the loss due to fluctuations in the price of TISCO shares. The loss so suffered by the assessee is a genuine and real loss. The genuineness thereof has not been doubted by the AO. The said loss cannot be regarded as speculative loss as the assessee did not carry on any speculation business. The assessee was an investor and he already owned 542 shares of TISCO along with the investments in shares of various other companies. The assessee had renewed these contracts of purchase and sale of 2000 shares of TISCO during the period from April, 1992 to July, 1992 only with a view to limit the risk of loss in the said investments. The loss in question cannot therefore be treated as speculative loss.
14. Explanation to Section 28 which provides that where a speculative transaction carried on by the assessee are of such a nature as to constitute a business, such speculative business shall be deemed to be distinct and separate from any other business. The assessee has not carried on any business of speculative transaction. Hence Explanation 2 to Section 28 is not applicable. Likewise Section 73(1) provides that any loss computed in respect of speculative business carried on by the assessee, shall not be set off except against the profits and gains, if any, of another speculative business. This section will also not apply to the facts of the present case as the assessee has not carried out any speculation business. Section 43(5) defines speculative transaction means a transaction in which the contract for the purchase and sale inter alia of any share is periodically or ultimately settled otherwise than by actual delivery or transfer or scripts/shares. Various exceptions have been carved out in proviso to Section 43(5). One of the exceptions contained in proviso (b) is that a contract in respect of stock and shares entered into by a dealer or investor therein to guard against loss in his holding of stock and shares through price fluctuation shall not be deemed to be a speculative transaction. The learned counsel contended that the renewal of transaction on every settlement date were made with a view to guard against loss in the holdings of shares through price fluctuation. The learned counsel also stated that the assessee has not carried out any such transaction in the past. This was a single and isolated transaction which was a bona fide transaction of investment as a investor followed by hedging contracts made with a view to insure against the risk of loss in the said transaction. The learned counsel thus strongly urged that the loss claimed by the assessee should be set off against the income under any other heads in the year under consideration.
15. The learned DR strongly relied upon the reasons mentioned in the orders of the learned Departmental Authorities. He placed reliance on the judgment of the Hon'ble Calcutta High Court in the case of CIT v. Ganga Prasad Birla (HUF) (1993) 199-ITR-173 (Cal). The learned DR submitted that the facts of this case are exactly similar with the facts in the case of Ganga Prasad Birla (HUF). He also contended that the loss in question could not be regarded as short term capital loss as the assessee did not own any capital asset whatsoever. Hence there is no question of claiming the loss as short term capital loss. He strongly supported the order of the CIT(A).
16. We have considered the rival submissions made by the learned representatives of the parties and have carefully gone through the orders of the learned Departmental Authorities. It is an undisputed fact that the transaction relating to purchase and sale of shares in question was periodically as well as ultimately settled otherwise than by actual delivery of shares. Therefore such transaction comes within the ambit of "speculative transaction" as defined in Section 43(5) of the Act.
17. One of the exceptions provided in proviso (b) to Section 43(5) provides that a contract in respect of shares entered into by a dealer or investor therein to guard against loss in his holdings of shares through price fluctuations, shall not be deemed to be a speculative transaction. We will therefore have to examine as to whether the transaction of purchase and sale of shares in the present case can be regarded as hedging transaction covered within the exceptions carved out in proviso (b) to Section 43(5) of the Act. The hedging contract enables the person dealing with the actual commodity to hedge themselves, i.e. to insure themselves against adverse price fluctuation.
18. The Full Bench of the Hon'ble Gujarat High Court in the case of Pankaj Oil Mills v. CIT (1978) 115-ITR-824 (Guj) has explained the subtle and significant distinction between speculative transaction and hedging transaction. It will be imperative to reproduce the relevant extracts from the said judgment in order to properly understand the true meaning and scope of these expressions:
"It would be profitable to appreciate in proper perspective how hedge transactions are commercially understood before we determine about the true scope and width of prov. (a) to Section 43(5). As the very name suggests, hedge contracts are those contracts which hedge against prejudicial price fluctuations. Speculative transactions are not the same as agreements by way of wager. In speculative transactions the modus operandi of persons indulging in them is that when one enters into a contract of purchase, he also simultaneously enters into one or more contracts of sale against the same quantity deliverable at the same time either to the original vender or to some one else, so as either to secure profit or to minimise lose, before the Vaida day; and similarly when he enters into a contract of sale, he simultaneously enters into one or more contracts to purchase the same quantity before the Vaida day. The result of such dealings, when the sale and purchase are to and from the same person, has the effect of cancelling the contracts leaving only differences to be paid (vide Tod v. Lakshmidas Purushottamdas (1898) ILR 16 Bom 441; Perosha Cursetji Parakh v. Manekji Dossabhai Watcha (1898) ILR 22 Bom 899 and Sassoon v. Tokersey Jadhawjee (1904) ILR 28 Bom 616). The principle enunciated in thee cases is to the effect that there is a possibility of confounding speculative transactions with agreements by way of wager but the distinction between the two as to their legal results is vital. In speculative transactions a seller might never have intended to give delivery and the purchaser did not expect him to deliver, but that does not convert a contract otherwise innocent into a wager. Hedging transactions are, however, to be distinguished from the speculative transactions, inasmuch as they are genuine transactions entered into for purposes of insuring against adverse price fluctuations. In hedging transactions neither delivery nor transfer is contemplated and yet they cannot be treated as speculative transactions in the commercial parlance. The technique of hedge trading is very pithily explained by a well known Economist, W.R. Natu, in his book Regulation of Forward Markets, at page 9, as under:
"The hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e. to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transaction on the forward market itself."
19. In the present case, there is no material on records to show that the assessee had any intention to take actual delivery of 2000 shares of TISCO originally purchased on 2nd April, 1992 which were purchased for total consideration Rs. 14,00,000/-. No payment was made by the assessee to the share broker at the time of purchase of these shares. The settlement period when this transaction of purchase was made on 2-4-92 was 26-3-92 to 9-4-92. On the close of the settlement period, 2000 shares were sold on 9-4-92 as "closing badla" at the rate of Rs. 520/- per share for total consideration of Rs. 10,40,000/-. Thus there was a loss of Rs. 3,60,000/- at the close of the aforesaid settlement period. As against this, the assessee had given Rs. 4 lakhs to the broker on 24-4-92. Seven transactions of purchase and sale of 2000 shares of TISCO during seven settlement periods shows that the transaction of purchase and sale was settled at the end of each badla period and the amount of loss was determined and payment against such loss was made by the assessee to the broker. There is no material on records to show that all these transactions in shares were made for the purpose of insuring against adverse price fluctuations of the existing shares. The onus lies on the assessee to prove that the transactions in question were hedging transactions. The assessee has not brought adequate material on records to prove various ingredients of hedging transactions. The transactions in question were speculative transactions and the loss so suffered by the assessee is a speculative loss.
20. Now the question that requires our consideration is whether these speculative transactions in shares, which were more than one transactions, though claimed to be a single and isolated transaction by the assessee, constitute a speculation business. The assessee contended that the transaction was a single and isolated transaction, which was renewed at the end of each settlement period. In the case of Shri Kanubhai A. Patel, the transactions of purchase and sale were made during seven settlement periods and cannot be treated as one single or isolated transaction. Even one single transaction can amount to an adventure in the nature of trade keeping in view the intention with which such transactions have been carried out.
21. The Hon'ble Calcutta High Court in the case of Ganga Prasad Birla (HUF) (supra) considered almost a similar question. In this case, the assessee purchased 10,000/- shares of company O at the rate of Rs. 38.20 per share on 22-8-1973 and obtained delivery of those shares. The shares were in his possession when, on that very date, i.e., August 22, 1973, the assessee entered into a contract for sale of 10,000/- shares at the rate of Rs. 39.20 per share. If the assessee delivered the shares pursuant to he contract, the assessee would have made a profit out of this deal. The shares, however, were not delivered. But, on September 20, 1973, instead of delivering 10,000 shares at the rate of Rs. 39.30 per share, the assessee entered into another contract for purchase of 10,000 shares at the rate of Rs. 48.40 per share. This purchase of 10,000 shares was not followed up by taking delivery of the shares. But the contract for sale entered into on August 22, 1973, was settled by payment of the difference in price amounting to Rs. 91,000/- to the share broker. On October 17, 1973, the assessee sold and delivered 10,000 shares of company O at Rs. 45.80 per share. The assessee claimed to have made a profit of Rs. 75,839/- in the said transaction. The assessee claimed that the loss of Rs. 91,000/- suffered in the transaction followed on 22-8-73 settled by way of payment of difference amounting to Rs. 91,000/- should be set off against the profit of Rs. 75,839/-. The AO held that the loss of Rs. 91,000/- arose out of speculative transaction and did not qualify for adjustment against the other income of the assessee. The Tribunal however held that a single speculative transaction would not amount to speculative business. On these facts the Hon'ble Calcutta High Court held as under:
"We are in respectful agreement with the views expressed by the Madhya Pradesh High Court. In our judgment, a solitary speculative transaction by an assessee will not prevent the transaction from being speculative business. If the transaction amounted to an adventure in the nature of trade, then the profits of such trade will have to be treated as business income. But, if the transaction was settled without actual delivery of goods, then the adventure in the nature of trade will be an adventure in speculative business. Speculative business is only a species of general business where contracts for purchase and sale of commodities are settled without actual delivery of the commodities.
There is a further point to be noted in the case that the assessee had entered into at least two transactions where goods were not delivered- one for the sale of shares on August 22, 1973, and the other for the purchase of shares on September 20, 1973. Therefore, in our view, the Tribunal was in error in holding that, in the instant case, there was one isolated transaction. The Tribunal was also in error in holding that, even if the transaction in question was speculative, it could not amount to speculative business within the meaning of Explanation 2 to Section 28 of the IT Act, 1961."
22. The Hon'ble Calcutta High Court thus decided the issue in favour of the Revenue. The facts of the present case are more unfavourable to the assessee. In the present case, it is an admitted fact that the delivery of 2000 shares of TISCO initially purchased on 2-4-92 was not obtained by the assessee nor there is any evidence on record to show that there was an intention to take actual delivery. However, in Calcutta case the assessee at the time of initial purchase of 10,000 shares of company O had obtained delivery of those shares. There were only two transactions in Calcutta case of same quantity of 10,000 shares of company O. While in the present case there are seven transactions during seven different settlement periods, which have been settled otherwise by taking actual delivery and payment of only the difference amount has been made. The transactions so made repeatedly on seven occasions, may be to renew the preceding transactions of purchase/sale of equivalent number of shares, surely come within the definition of "speculative transactions" as defined in Section 43(5) and such speculative transactions clearly amount to adventure in the nature of trade. The transactions were settled without actual deliver of shares and therefore such adventure in the nature of trade will also constitute speculative business. Such loss in speculative business cannot be set off against any other income except against the profits and gains, if any, of another speculative business in view of clear provisions contained in Section 73(1) of the Act.
23. Reliance placed by the learned counsel on the Departmental Circular No. 23 dated 18-9-60 does not any manner support the assessee's claim as the Board in the said Circular has also clearly mentioned that if on the facts of any case, it can be demonstrated that the forward transaction has been entered into only for safeguarding against loss through future price fluctuations, such a transaction should not be treated as a speculative transaction but as a case of hedging. We have already examined the facts of the present case in the light of principle of law laid down by the Full Bench of the Hon'ble Gujarat High Court in the case cited supra and are of the view that the facts of the present case do not demonstrate that the transactions in question were hedging transactions. The transactions in shares made by the assessee are clearly speculative transactions which on the facts of the present case constitute speculative business. The assessee is therefore not entitled to the benefit of set off of such speculative loss against any other income of the year under consideration. The view taken by the AO and confirmed by the CIT(A) in all these cases relating to denial of benefit of set off is therefore held to be perfectly valid and justified.
24. The next common ground in the appeals of Shri Kanubhai A. Patel and Shri Kantibhai A. Patel relates to withdrawal of interest allowed Under Section 244A of the Act. The learned CIT(A) has held that no appeal lies against the action of the AO of withdrawing the interest already allowed Under Section 244A.
25. The learned counsel drew our attention to the order dated 21-4-2003 passed by the Tribunal SMC Bench in the case of M/s. Shricham Intermediates in ITA No. 69/Ahd/99 in which the ground relating to withdrawal of interest granted Under Section 244A has been sent bench to the CIT(A) for deciding the same in accordance with law and after giving adequate opportunity to the assessee as well as to the AO of being heard in that regard. We therefore, respectfully following the said order of the Tribunal, set aside the order of the CIT(A) in relation to his finding given in respect of non-maintainability of appeal against withdrawal of interest granted Under Section 244A, with a direction to decide the aforesaid issue afresh in accordance with the provisions of law and after providing adequate and reasonable opportunity to the assessee as well as to the AO.
26. In the result, ITA No. 579 and 1723/Ahd/98 are partly allowed for statistical purpose and the appeal in ITA No. 1727/Ahd/99 is dismissed.