Income Tax Appellate Tribunal - Bangalore
Comfund Financial Services (I) Ltd. vs Deputy Commissioner Of Income-Tax on 30 September, 1997
Equivalent citations: [1998]67ITD304(BANG)
ORDER
Bandyopadhyay, A.M.
1. In this appeal filed by the assessee against the order of the CIT (Appeals), one of the issues relates to treatment of the amount of Rs. 44,69,88,170 remitted by Deutsche Bank (DB) in favour of the assessee.
2. The assessee-company was originally established in December 1989 with the paid-up capital of Rs. 1 crore of which 30 per cent was subscribed by DB, 24 per cent by Brooke Bond India Ltd., (a company belonging to Unilever group) and the balance 46 per cent contributed by the employees of both DB as well as Unilever group companies. The assessee-company got involved in dealings in shares and securities in a very large manner. According to the facts of the case, one Ms. Latha Sriram who was employed as Manager-treasury of the company since March 1991 over-indulged in securities transactions. There was a complete failure of internal regulatory system. As a result of these facts, the assessee-company suffered huge losses. It also got involved in the security scam in early 1992 in the above-mentioned process. The affairs of the company were investigated by Janakiraman's Committee Report (reference pages 64 to 85). The company admitted before the Janakiraman's committee that several irregularities had been committed by it and especially by its officer Ms. Latha Sriram (designated by the assessee-company as dealer).
3. It is an undisputed fact that DB was acting as the manger-banker of the assessee-company. The assessee enjoyed huge overdraft facilities from DB. The major portions of the transactions entered into by the assessee, whether of purchase or sales of shares and securities, were routed through DB only. On account of the huge loss suffered by the company, DB decided to write off a sum of Rs. 47.3 crores due to it from the assessee. This amount is stated to be consisting of Rs. 44,69,88,170 towards the principal and Rs. 2,60,11,830 towards interest. According to the lower authorities, the assessee-company treated the last item of Rs. 2,60,11,830 as its income for the current year. It, however, contended that the other amount of Rs. 44,69,88,170 could not be considered as income of the assessee even under section 41(1) of the IT Act inasmuch as no deduction had been claimed in respect of this amount in the computation of income of the assessee in any assessment year whatsoever. The Assessing Officer states that the contention of the assessee for treating the remission of the liability amount of Rs. 44.7 crores as capital receipt is not acceptable. He discusses that the assessee had admitted that all its security transactions entered into with DB also formed part of the total dues to DB. The Assessing Officer has argued that in other words, the dues to DB are towards the purchases made during the year by the assessee-company. He furthermore argues that as the purchases have been claimed as expenditure, the remission of liabilities on this account will be taxable under section 41(1). He furthermore argues that purchases of securities have been taken into consideration while arriving at the profit/loss during the year and hence, the contention of the assessee that this amount was never allowed as expenditure would not be correct inasmuch as the entire purchase amount has been claimed by the assessee as expenditure. Ultimately, the Assessing Officer treated the entire amount of Rs. 44,69,88,170 remitted by DB towards principal as income of the assessee under section 41(1) of the Act.
4. In the first appeal, the CIT (Appeals) looked into the problem in great detail and from different angles. He discussed that the assessee had entered into certain direct purchase and sale transactions with DB itself and such transactions also find place in the account of assessee with DB. It was explained to him by the assessee that during the relevant period, total sale by assessee to DB stood at Rs. 865.8 crores whereas purchases effected by the assessee on direct trading account from DB were of the order of Rs. 365.5 crores only. It was tried to be argued before the CIT (Appeals) by the assessee that in other words, on the trading account the assessee was to receive money from DB and hence there was no question of remission by DB of any liability due to DB from the assessee on direct trading transactions between the assessee and DB. The CIT (Appeals) raised certain doubts about figures supplied to him by the assessee. He found out that as per the accounts submitted to him, the total contract value of purchases from DB for the previous year ended on 31-3-1993 was Rs. 379.77 crores while that of sales by assessee to DB was Rs. 1086.203 crores. These figures were certainly at variance with the figures stated to have been given to the Assessing Officer by the assessee-company. We also note this variance for which there is no immediate answer before us from the side of the assessee. At the same time again, we are of the opinion that these variations would not effectively alter the situation inasmuch as the CIT (Appeals) himself has accepted the position that the sales to DB in any case exceeded the purchases from DB, in value. The CIT (Appeals) actually came to the conclusion that there is no question of any portion of the write-off being attributable to the trading transactions between the assessee and DB.
5. The CIT (Appeals) furthermore examined the nature of transactions between the company and DB which, according to him, had the following several facts :
"(a) DB was one of the financiers to the appellant. It allowed certain overdraft facilities to the appellant which was increased to Rs. 3 crores and this was continued thereafter.
(b) DB acted as banker to the appellant. In this capacity it received BRs and bankers cheques for the appellant.
(c) DB acted as a custodian of physical securities of the appellant for which it charged certain amounts as custodian charges.
(d) DB stood as guarantor to the appellant.
(e) For the various facilities DB used to charge interest on overdraft, guarantee commission, bank charges, custodian charges and service charges."
He also found out that DB had charged total amounts of Rs. 2,79,476, Rs. 29,22,046 and Rs. 6,57,26,480 during assessment years 1991-92, 1992-93 and 1993-94 respectively on different accounts like interest on overdraft, guarantee commission, bank charges, custodian charges and service charges. The aggregate of the total charges claimed by DB on assessee for these three years comes to Rs. 1,85,60,598.
6. The CIT (Appeals) thereafter discussed that the liabilities from the assessee to DB were due to trading transactions and other debits for expenses like interest on outstandings and charges for services rendered by DB. It also included excess of purchase values of shares, securities, etc., purchased by the assessee from third parties over the sale value of shares, securities, etc., of the assessee sold to third parties, DB acting as banker/agent of the assessee in both types of transactions. The CIT (Appeals) thus jumped on to the conclusion that it is thus obvious that the liabilities the assessee owed to DB were on account of trading transactions and not due to any borrowal as such. [para-14 of the CIT (Appeals) order].
7. The CIT (Appeals) discussed at para-15 of his appellate order that the balance portion of the liability to DB is attributable to expense of one or other kind mentioned by him earlier and which goes into the computation of income of the previous year relevant to assessment year 1993-94. He also stated that waiver by DB of any portion of the liability resulted in corresponding benefit to the assessee in the form of reduction in the expenses which the assessee is otherwise have to bear in respect of the cost of goods (securities, shares, etc.) or services relevant. He thus came to the conclusion that the provisions of section 41(1) would therefore apply to the remission allowed by DB.
8. The CIT (Appeals) thereafter took into consideration the provisions of section 28(iv) of the Income-tax Act. He held that there cannot be any doubt that the waiver of liability by DB has resulted in a benefit by way of cessation of a corresponding portion of the liability of the assessee which was caused by the trading transactions of the assessee. He ultimately held that the entire amount of Rs. 47.70 crores written off by DB constitutes benefit by way of cessation of liability arising from business, transactions and hence, is assessable in the hands of the assessee for this year under section 41(1) or under section 28(iv).
9. During the course of the hearing of the appeal before us, Shri Dastur, learned counsel for the assessee has firstly emphasised on the fact that the CIT (Appeals) himself has admitted that so far as direct trading transactions in securities and shares, etc., between the assessee and DB are concerned, the sales by the assessee to DB far exceeded the purchases made by the assessee from DB. Hence, rather DB owed to the assessee on this account and not otherwise. It is thus contended that there is no question of remission of any liability by DB on this account. On the basis of the facts of the case as discussed above, we agree with the contentions of Shri Dastur. This point has been admitted even by the CIT (Appeals) himself.
10. Thereafter, it has been argued that DB acted merely as banker of the assessee and all the purchases and sales transactions of the assessee with third parties were routed through DB in the sense that cheques drawn on DB were issued to the sellers of the securities to the assessee, whereas cheques received by the assessee from purchasers of securities, etc., were deposited with DB for encashment purpose. The learned DR appearing before us has tried to argue that DB was an agent of the assessee in all these transactions. We are, however, unable to agree with her contentions. DB acted as an agent merely for the limited purpose of delivering or receiving cash on behalf of the assessee from its constituents, viz., third parties with whom the assessee dealt in securities and shares. The learned DR has also tried to argue that there was no exact loan transaction with DB. For this purpose, she has tried to rely on a decision of the Madras High Court in the case of CIT v. Nachimuthu Industrial Association [1982] 138 ITR 585/14 Taxman 224 in which judgment the different incidents of a transaction to become a proper loan have been described. We are, however, unable to accept the contention of the learned DR. It is very clear from the facts of the case that the assessee enjoyed overdraft facilities with DB. What was, therefore, due to DB by the assessee (excluding the results of direct transactions with DB) represent nothing but bank-loan obtained by the assessee.
11. Shri Dastur has relied on several decisions of different courts and has argued that for the purpose of applicability of section 41(1), firstly, there should be an allowance or deduction in respect of a loss, expenditure or trading liability incurred by the assessee in some earlier year and secondly, the assessee should enjoy some benefit in respect of such trading liability, etc., by way of remission or cessation thereof. He says that the CIT (Appeals) himself has agreed that the remission of a liability incurred during the same year would not entail applicability of section 41(1). In support of this contention, Shri Dastur has relied on a decision of the Karnataka High Court in the case of K. G. Subramanyam v. CIT [1992] 195 ITR 199 at page 208.
We are not very sure whether the Karnataka High Court has come out with a definite finding that for the purpose of applicability of the provisions of section 41(1), it is necessary that the trading liability, loss or expense should have been allowed in an earlier year and the remission or cessation of the liability must taken place in a later year. The Karnataka High Court merely stated as under :
"The purpose of section 41(1) is quite clear. Its idea is to levy tax on any amount received by the assessee subsequently or any benefit received by an assessee during any subsequent year in respect of which he had earlier obtained an allowance or deduction while computing his income."
Use of separate expressions for the amount being received by the assessee subsequently or any benefit received by the assessee during any subsequent year shows that the intention of the Karnataka High Court might not have been that it is necessary for the purpose of applicability of section 41(1) that the benefit must come to the assessee in a subsequent year alone. In any case, the CIT (Appeals) himself has admitted that for the purpose of section 41(1), the allowance of expense, loss, etc., must have taken place in a year earlier than the one in which the benefit was ultimately obtained by way of remission, cessation of the liability concerned. At the same time again, he has vehemently argued that if both the questions of allowability of expense, loss and remission/cessation come in the same assessment year, in that case, the remission/cessation of the liability would directly result in reduction in the amount of the expense or trading loss, the effect of which would be similar as in the case of application of the provisions of section 41(1). We agree with him that although it is not very clear as to whether section 41(1) would be applicable when both the allowability of the loss, expense, etc., and remission/cessation of the liability pertained to the same year, the ultimate effect from taxation angle would however be the same.
12. Shri Dastur has relied on a decision of the Supreme Court in the case of CAIT v. Kerala Estate Mooriad Chalapuram [1986] 161 ITR 155/27 Taxman 339. In that case, it was held by the Supreme Court that in the absence of a deeming provision similar to section 41(1) of the Income-tax Act, in the Kerala Agricultural Income-tax, the remission towards interest on a loan taken from a creditor could not be considered as amounting to receipt of agricultural income. The Supreme Court also affirmed the views of the Kerala High Court in this connection that what was waived by the creditor had nothing to do with the agricultural activities of the assessee and that the remission did not arise from business, nor did it arise from agricultural operations of the assessee.
Reliance has also been placed by Shri Dastur on a decision of the Madras High Court in the case of CIT v. P. Ganesa Chettiar [1982] 133 ITR 103 in which case it has been held that a debt for given or waived cannot constitute income of the assessee in the ordinary way.
Further reliances have also been placed on one decision of Punjab & Haryana High Court in the case of CIT v. Haryana Co-operative Sugar Mills Ltd. [1985] 154 ITR 751/23 Taxman 273, of Madhya Pradesh High Court in the case of CIT v. Combined Transport Co. (P.) Ltd. [1988] 174 ITR 528, of Allahabad High Court in the case of Dal Chand Chittar Mal v. CIT [1970] 75 ITR 710 and of Gauhati High Court in the case of CIT v. Usha Ranjan Bhadra [1980] 126 ITR 44. It is, however, argued by Shri Dastur that a decision of the Delhi High Court in the case of Phool Chand Jiwan Ram [1981] 131 ITR 37 is a direct authority on the present issue. In that particular case, after analysing the facts of the case, the Delhi High Court held that the debt owed by the assessee to a Bombay firm was a trading debt which had been allowed for the purpose of income-tax and hence, the provisions of section 10(2A) of the Income-tax Act, 1922 [corresponding to section 41(1) of the 1961 Act] would apply to that amount. The Delhi High Court, however, also held that so far as the account of a firm M/s. JD was concerned, the liability of the assessee to JD arose because JD had paid a sum of Rs. 1,80,000 to the Bombay firm on the assessee's account; vis-a-vis the assessee and JD, the payment was not made for the purchase of stock-in-trade and it was simply a credit in respect of an amount borrowed by the assessee from JD in order to discharge its liability to the Bombay firm. Shri Dastur has thus strongly argued that inasmuch as the liability of the assessee to DB had not arisen out of any trading operations between the assessee and DB and the assessee merely owed a loan to DB which was waived or remitted, there cannot be any question of applicability of the provisions of section 41(1).
13. The facts of the case clearly indicate that the assessee had incurred expenses in past or even in this year towards the purchase price of shares and securities brought from other parties and that the payments in that regard were made by the assessee out of its overdraft account with DB. When DB remitted or waived the principal amount of such loan, it cannot be said that any portion of the purchase price was waived by recipients of such prices. The expenses towards purchases had already been incurred and there was no remission from the side of the said sellers of securities, etc., in favour of the assessee out of such purchase prices. The transactions between the assessee and DB (apart from those relating to direct purchases and sales of shares and securities between the two parties) are mostly of the nature of loan transactions. These transactions are therefore on capital account. The waiver or remission of the liability towards loan incurred by the assessee cannot, therefore, be considered to constitute a revenue income in the hands of the assessee. The departmental contention that the entire transactions with DB represent trading liabilities of the assessee cannot be accepted. There is a clear-cut distinction between trading transactions entered into by the assessee with third parties and payments or receipt of money from such transactions finding place in the bank account of the assessee. We are also unable to accept the departmental contention that in all those transactions with third parties, DB merely acted as an agent of the assessee. We have already discussed that the role of DB as an agent was limited merely to making payment of or collection of dues by or to the assessee. Even if DB be considered as an agent in making the purchases and sales of the shares and securities, the transactions between the assessee and DB would be of the nature of banking transactions only. Unless it can be shown that, on the other hand, DB acted as agents of the third parties with whom the assessee had transactions in shares, etc., the account of the assessee with DB cannot at all be considered to represent any trading transactions. This is certainly not the case of the Department that DB merely represented an agent of the third parties.
14. Different courts have held that the liability of an assessee towards purchase of assets is completely different from the liability incurred by it on raising loan for the purpose of the same purchases. Thus, it has been held repeatedly by different courts [for example by Supreme Court in the case of State of Madras v. G. J. Coelho [1964] 53 ITR 186 at page 194 that the liability towards interest payment incurred on loan specifically utilised for acquiring capital assets would also form revenue expense in the hands of the assessee. It is, thus, clear that the loans from credits stand completely on a different footing from the transactions in which the assessee indulged by utilising such loans. In the instant case, therefore, we completely agree with the contention of the assessee that the trading transactions of the assessee can neither be equated nor can directly be connected with the liability of the assessee towards loan incurred by it from its banker, viz., DB. Ultimately therefore, we are of the opinion that so far as remission of principal amounts are concerned, the provisions of section 41(1) would not at all be applicable.
15. As regards the applicability of the provisions of section 28(iv), Shri Dastur has argued in the following lines :
(i) No positive benefit accrued to the assessee by way of remission or the liability by the bank. Benefit of the nature of cessation of liabilities is already covered by the provisions of section 41(1). In section 2(24) defining income in an extensive manner, separate clause (v) has been used in respect of deemed income under section 41 and clause (vd) for deemed income under section 28(iv). It is thus argued that the scopes of applicability of sections 28(iv) and 41(1) are completely different and where 41(1) applies, 28(iv) would not apply.
(ii) Section 28(iv) speaks about the value of a benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. It is argued that since in this particular case, the benefit, if any, arose in monetary form by way of a clear-cut remission of certain loan amount, the provisions of section 28(iv) would not be applicable. In support of this contention, reliance has been placed on a judgment of Gujarat High Court in the case of CIT v. Alchemic (P.) Ltd. [1980] 130 ITR 168 at page 173 and another of Delhi High Court in the case of Ravinder Singh v. CIT [1994] 205 ITR 353. It has also been pointed out that the recent judgment of the Supreme Court in the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644/85 Taxman 381 at page 653, although on an issue arising out of the provisions of section 40A(5), however, holds an analogous view that where the question of assessability of value of a benefit, amenity or perquisite is concerned, the relevant provision would not be applicable if such benefit, etc., be available to the assessee directly in cash.
(iii) Since the benefit in this particular case did not arise to the assessee from its business consisting of various activities as detailed above, the provisions of section 28(iv) would not be applicable. In this connection, reference has once more been made to the judgment of the Supreme Court in the case of Kerala Estate Mooriad Chalapuram (supra) in which case it was decided that what was waived by the creditor had nothing to do with the activities of the assessee and it did arise neither from the business of the assessee nor from the agricultural operations of it.
(iv) Lastly, it is contended that for the purpose of applicability of the provisions of section 28(iv), the benefit arising to the assessee must be on revenue account which is not the case here.
Although we find that the arguments as put forward by Shri Dastur in first three of the contentions as above have their individual force, yet, we are of the view that the main reason why the provisions of section 28(iv) would not applicable to the present case is that the benefit did not arise in the instant case to the assessee on its revenue account. As mentioned earlier, the Madras High Court has held in the case of P. Ganesa Chettiar (supra) that a debt forgiven or waived cannot constitute income. Even according to general commercial principles and various decisions of different courts, it cannot be said that a waiver of a loan as such constitutes income in the hands of the debtor. Such waiver clearly affects the capital account of the assessee and hence, in ordinary sense, such waiver cannot constitute income of the assessee. Section 28(iv) deals with the extended definition of business income. However, for the purpose of applicability of the same, the benefit or perquisite must relate to the revenue account of the assessee. The learned DR has placed reliance on a judgment of the Delhi High Court in the case of K. S. Malik v. CIT [1980] 124 ITR 522 in this connection. Shri Dastur has however argued that this particular decision has been delivered by the Delhi High Court before so many other decisions had come from different courts including the Supreme Court excluding cash benefit from the purview of sections like 28(iv) and 40A(5). The learned DR has furthermore relied on a judgment of the Privy Council in the case of Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 in which case also, it was held that income includes all benefits and perquisites. In view of the extended definitions of income and business income as given in section 2(24)(vd) and section 28(iv) we are of the view that no special notice of this particular judgment need be taken inasmuch as the legislative provisions have already covered this particular decision.
16. Lastly, the learned DR has also tried to distinguish the facts of the present case from those relied upon by Shri Dastur. She has argued that any increase in the positive networth of the assessee represents its income. In support of this argument, she has relied on a judgment of the Karnataka High Court in the case of Mysore Thermo Electric (P.) Ltd. v. CIT [1996] 89 Taxman 558. We, however, find that this particular judgment merely explains the idea about applicability of the provisions of section 41(1) to certain circumstances.
17. Ultimately taking into consideration all the arguments from both the sides and agreeing mostly with those put forward by Mr. Dastur on behalf of the assessee, as discussed above, we hold that remission of the liability towards principal amount cannot constitute income in the hands of the assessee either under the provisions of section 41(1) or section 28(iv).
18. After coming to such conclusion, even then however, we are required to take into consideration the different facts of transactions between the assessee and DB even apart from DB acting as banker of the assessee. The CIT (Appeals) has discussed that total amount of Rs. 1,85,60,598 was payable by the assessee to DB under several heads on revenue expenses like interest on overdraft, guarantee commission, bank charges, custodian charges and service charges. The details of such expenses incurred by the assessee and most probably claimed in its accounts also are as follow :
------------------------------------------------------------------------
"Asst. Year 1991-92 1992-93 1993-94
------------------------------------------------------------------------
Rs. Rs. Rs.
Interest on Overdraft 2,57,164 16,38,950 1,66,64,484
Guarantee Commission - 85,050 18,00,000
Bank charges 22,312 1,51,941 74,731
Custodian charges - 10,46,105 7,26,215
Service Charges - - 4,84,23,050
--------- ---------- --------------
2,79,476 29,22,046 6,57,26,480"
--------- ---------- --------------
The total amount in this regard for the three years come to Rs. 6,89,28,002 out of which only Rs. 1,85,60,598 constitutes interest on overdraft account. It is stated that the bank remitted the liability of the assessee to the extent of Rs. 44,69,88,170 towards principal and Rs. 2,60,11,830 towards interest. It is not understood as to what exactly happened to the other expenses aggregating Rs. 5,03,67,404 also incurred by the assessee like guarantee commission, bank charges, custodian charges and service charges which also remained as payable to DB. The facts are not at all clear as to whether these expenses were also remitted or not. It is also not clear that whether this amount of Rs. 5,03,67,404 constitutes a part of the so-called principal amount of Rs. 44,69,88,170. We are of the opinion that since these expenses are clearly of nature of the revenue expenses already incurred and also claimed by the assessee in its accounts, remission of any portion of these expenses would clearly constitute income in the hands of the assessee either by way of direct deduction from the expenses incurred or under section 41(1). We, therefore, remit only this limited matter back to the file of the Assessing Officer for examining and coming to a clear-cut conclusion as to whether this amount of Rs. 5,03,67,404 or even any portion thereof is includible within the amount remitted by the assessee. If it be found to be so, the amount to the extent it is remitted by the bank will have to be treated as income of the assessee.
19. The next point relates to the treatment of compensation paid for settlement/cancellation of contracts. The Assessing Officer discusses at para 7 of the assessment order that the assessee-company claimed total loss of Rs. 29,36,80,000 towards compensation for settlement/cancellation of securities contract. The details of loss claimed by the assessee are as under :
(i) Amount paid to ANZ Grindlays Bank, Bombay, for breach of contract for purchase of 5 crore units of Unit Trust of India and sale of 1 crore of such units -
Rs. 96,80,000
(ii) Amount paid to Reliance Capital and Finance Trust (RCFT) on account of negotiated damages and compensation for cancellation of contracts for sale of 10 crore units of Unit Trust of India. This issue has been discussed in detail both in the assessment as well as in the first appellate order. So far as payment to ANZ Grindlays Bank is concerned, the facts of the case are that the assessee-company had entered into two different contracts with ANZ for purchase of 5 crore units of UTI at the rate of 14.381 and sale of 1 crore units at the rate of 13.969. The stipulated date for delivery for both the contracts was 31-7-1992. The contracts were not performed.
So far as the payment to RCFT is concerned, it is stated that the assessee-company had on 30-4-1992 built up an over-sold position of units of UTI to an extent of approximately 27 crore units which were sought to be regularised as under :
(i) Purchase on 5-5-1992, 10 crore units from RCFT at the rate of Rs. 15 for delivery on 5-5-1992 on a term that the same number of units would be sold back to RCFT before 30-5-1992.
(ii) 10 crore units to be purchased from RCFT on a one year ready forward basis with an understanding that the same number of units would be sold back to RCFT on 4-5-1993 at a price of Rs. 15-43. These 20 crore units were utilised by the assessee-company to regularise the earlier over-sold position and as such, the company was unable to meet its obligation on the due dates to resell the units. As a result of negotiations, 2 crore units were re-sold under the first contract and the contract for re-selling the balance 8 crores under the said first contract and 10 crore units under the second contract were terminated and payment of Rs. 28.40 crores (Rs. 4.40 crores for the first contract and Rs. 24 crores for the second contract) were made. It was the plea of the company that the company had to resort to this arrangement as it would have incurred a larger loss had it admitted to purchase of such a larger amount of units in the market at such a short notice and at a far higher price.
20. The company thus tried to argue before the Assessing Officer that the payments had to be made towards settlement for breach of contracts and hence, the loss incurred by the company was not speculative in nature. The Assessing Officer, however, held that even at the time of entering the contracts with the above two parties, the assessee-company did not have any securities to meet its commitments and this clearly shows that the intention of the company was to speculate in units of UTI. He, therefore, came to the conclusion that the amounts paid to both ANZ and also RCFT were nothing but differences in prices and would therefore fall within the ambit of speculative transactions as envisaged in section 43(5) of the Income-tax Act.
The Assessing Officer furthermore referred to the submissions made by the assessee before the Janakiraman's Committee Report confessing the fudging of accounts by its employee Mrs. Latha Sriram. The Assessing Officer furthermore stated that in case of payment to ANZ as per assessee's own submission, the sale of units had been netted off against the purchases and hence, no physical delivery had taken place to this extent. The Assessing Officer also emphasised on the fact that even as per the assessee's own admission, the dealings in securities were unauthorised. He also referred to the admission made by the assessee that the above contracts were in the nature of ready-forward transactions. Ultimately, he disallowed the entire claim of loss of Rs. 29,36,80,000 as speculative loss and otherwise also being towards illegal payments. The CIT (Appeals) also discussed the facts of the case in detail. He referred to various correspondences between the assessee and ANZ and came to the conclusion that even before or at least on the stipulated date of delivery being 31-7-1992, neither of the parties involved had the intention to fulfil the obligations under the contract and that is why they resorted to the process of settlement of the contract. He thus endorsed the view of the Assessing Officer that both the contracts were of speculative nature and hence, the losses were required to be disallowed as speculative losses.
21. Regarding the observation of the Assessing Officer that the Special Court had held that ready-forward transactions were illegal, the CIT (Appeals) discussed the argument of the representative of the assessee that such transactions might not have been permitted by the RBI in respect of banks and other financial institutions, but that there was no such bar for the assessee. The CIT (Appeals) candidly admitted that he had not seen the observations of the special court in this regard. He, however, discussed thereafter that the Reserve Bank of India, had issued instructions to banks and financial institutions barring them from entering into contracts for purchases and sales of shares without actual delivery of the same and also from entering into ready-forward transactions. He stated thereafter that if any bank entered into such contracts, the contracts would be void being opposed to public policy (vide section 25 of the Indian Contract Act). Any payment effected by the assessee in pursuance of such void contract would, according to the CIT (Appeals), constitute payment without any legal obligation arising from the contract. He finally held that from above considerations it would appear that there is justification in holding that the payment to ANZ was not a case of loss arising on account of valid business transaction. He furthermore added that he was not able to comment on similar lines in respect of the payment to RCFT as it appeared that neither the RCFT nor the assessee was barred by the RBI from entering into such transactions. Summing up his entire discussions, the CIT (Appeals) finally held that the entire loss as claimed by the assessee in this regard arose from speculative business and furthermore that the payment of Rs. 96.80 lakhs to ANZ also appears to be on account of a void contract which the assessee was under no obligation to perform. The CIT (Appeals) thus ultimately upheld the decision of the Assessing Officer to disallow the entire claim of Rs. 29,36,80,000.
22. Before us, Shri Dastur, learned counsel for the assessee, has brought our notice to the discussions made by the Supreme Court in the case of Davenport & Co. P. Ltd. v. CIT [1975] 100 ITR 715 at page 722. The Supreme Court clearly stated therein as follow :
"The words 'actual delivery' in Explanation 2 to section 24(1) (of 1922 Act) mean real as opposed to notional delivery. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of 'delivery' in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips."
The above discussions made by the Supreme Court are therefore clear that in order to consider some transactions to be speculative, one has got to examine the same from the four corners of the definition as given in section 43(5) which is as below :
"43(5) 'Speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips."
Shri Dastur has tried to argue in this connection that the expression "commodity" in general sense does not include stocks and shares nor even units of UTI. He also argues that the Income-tax Act distinguishes between stocks and shares on the one hand and the units of UTI on the other in various sections. For example, he has pointed out that the proviso to section 2(42A) takes into consideration stocks and shares and units separately. It is pointed out that similarly in Explanation 1 to section 54E, clause (iii) relates to units whereas clause (v) relates to shares. Similar distinction between the two things has been made in other sections like section 80CC, section 80L [clauses (iv) and (v)], sections 88A, 196A and 196B. Shri Dastur has also relied on a judgment of the Calcutta High Court in the case of CIT v. Nirmal Trading Co. [1971] 82 ITR 782, in which cases it has been held that the right to renounce the allotment of shares is neither a commodity nor shares. Shri Dastur has also brought our notice to the following judgments of different Benches of ITAT wherein it has been held that the units of UTI are not stocks and shares and hence dealing in the same cannot constitute speculative transactions :
(i) Apollo Tyres Ltd. v. Dy. CIT [1992] 43 ITD 464 (Coch.) at pages 467 & 495.
(ii) Unreported order of ITAT, Bombay Bench dated 23-11-1992 in IT Appeal Nos. 8215 and 7981 (Bom.) of 1988 for assessment year 1985-86 in the case of Colgate Palmolive (I) Ltd.
(iii) Unreported order of ITAT, Bombay Bench dated 13-1-1997 in IT Appeal No. 7971 (Bom.) of 1989 in the case of Colgate Palmolive (I) Ltd. for asst. year 1986-87.
23. From a close study of the above orders of the different Benches of the ITAT we find that it was held in all these judgments that transactions in units of UTI could not be considered to be of speculative nature in as much as the units do not fall within the category of shares and stocks. However, examination in that regard is found to have been made solely from the angle of the Explanation to section 73 which contains a deeming provision about activities of purchase and sale of shares carried on by a company and considering the same to constitute a speculative business. None of the above orders of the ITAT seems to have been engaged in examining the issue from the angle of whether units can be considered to fall within the general definition of "commodity". Even the definition of the word "commodity" as per Oxford Illustrated Dictionary is "useful thing; article of trade". The Calcutta High Court held in the case of Nirmal Trading Co. (supra) that the right to renounce the new allotment of shares did not constitute a commodity. However, such a right is abstract in nature and hence, the Calcutta High Court might have considered such right to be not falling within the general definition of "commodity".
On the other hand, however, units of UTI are not only useful things but also articles of trade inasmuch as they can be purchased and sold quite easily. They are also material things which can be given and taken physical delivery of. It is required to be noted in this connection that in section 43(5), the Legislature used the expression "commodities including stocks and shares". The intention of the Legislature that the commodity includes stocks and shares is, therefore, clear. A question may therefore arise that if stocks and shares be included within the general definition of commodities as such, what is the use of mentioning the same once more. Our answer to this question would be that the Legislature, being sure of the position that the expression "commodity" includes stocks and shares, mentioned stocks and shares once more as abundant caution and to dispel any doubt about includibility of stocks and shares within the expression "commodity". It is required to note further in this connection that the Legislature has not used the expression "commodity and also "stocks and shares". In such a case, it could have been held that the intention of the Legislature was to treat commodity separately from stocks and shares.
The learned DR has brought our notice to an English judgment in the case of Imperial Tobacco Co. (of Great Britain Ireland) Ltd., passed by the High Court of Justice (King's Bench Division) dated 22nd and 25th January, 1943 and by the Court of Appeal dated 8th June, 1943 as reported at 25 T.C. 292. In the said judgment, Lrd Greene, M.R. observed as below :
"That being so, what is the true analysis of the position ? A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a 'commodity' not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do."
When the court of Appeal held even dollar, which is nothing but a currency also to represent commodity, we find no difficulty in holding that shares and securities and also units of UTI should also be considered as commodity. In this view, we dismiss the argument put forward by Shri Dastur that transactions in units of UTI would not fall within the ambit of section 43(5).
24. Thereafter, Shri Dastur has argued that as per the provisions of section 43(5), "settlement" of the contract can take place only before or on the due date of delivery. Once the due date has passed, it would be a case of breach of contract involving payment of damages or compensation. He thus argues that such a case would not fall within the ambit of section 43(5). In this connection, he relies on the following judgments :
(i) CIT v. Shantilal P. Ltd. [1983] 144 ITR 57/14 Taxman 1 (SC),
(ii) CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 (Cal.), and
(iii) Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401 (Mys.).
We find ample force in this argument of Shri Dastur. In fact, Supreme Court observed as follow in the case of Shantilal P. Ltd. (supra) :
"A transaction cannot be described as a 'speculative transaction' within the meaning of sub-section (5) of section 43 of the Income-tax Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5), however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it, any satisfaction which he thinks fit. It is this sense of the law which must prevail in sub-section (5) of section 43 and not that of the layman."
25. In the background of such legal position, let us now examine whether in the instant cases, the contracts were actually settled or the settlement took place after the breach of the contracts.
26. In the case of the contracts with ANZ, there is no doubt about the fact that the contracts were not fulfilled by both the sides. They accused each other with regard to non-fulfilment of the contracts and protracted correspondences and also consultations took place. Ultimately however, on 22-8-1992, the assessee agreed to make payment of Rs. 96,80,000 to ANZ, on account of breach of and in lieu of performance of the above-mentioned two contracts for purchase and sale. Although the CIT (Appeals) states that even on the day of delivery, i.e., 31-7-1992, there was the atmosphere of non-performance of the contract, we are, however, of the opinion that this fact by itself shows that the breach of the contract actually took place. The detailed correspondences between the two parties, copies of which have been placed before us clearly show that the settlement in this regard was ultimately arrived at on 22-8-1992 only, i.e., quite some time after the due date for performance of the contracts. Hence, we accept the contention of the assessee that the settlement in this case was of the breach of the contract and hence, the payment made by the assessee partook (sic) of the character of the damages paid by it towards such breach and would not therefore fall within the ambit of section 43(5). However, so far as the transactions with RCFT are concerned, both the contracts for re-sale were terminated in this particular case on 30-5-1992 by way of settlement of the contracts and making payments of the difference of amounts by the assessee. Shri Dastur also candidly admitted that in this case there was no actual breach of contract and hence, there is no bar to the transaction coming within the ambit of section 43(5) from that angle. However, his main argument with regard to these transactions is that the units dealt in, are neither commodities nor stocks and shares. We have already negatived such contention.
27. Let us now look into the problem of whether the contracts can be considered to be of the nature of ready-forward contracts. There is no doubt about the fact that the Reserve Bank of India, in its Circular No. Dir. BC.42/C/347-87 dt. 15-4-1987 advised all banks and financial institutions to refrain from entering into buy-back arrangements in Government and other approved securities except under certain conditions as laid down by the RBI. ANZ is certainly a bank and would, therefore, fall within the jurisdiction of the above circular. Shri Dastur has, however, pointed out that whereas ANZ entered into a contract for selling 5 crore units of UTI to the assessee, the buy-back arrangement was in respect of Rs. 1 crore units alone. He has furthermore argued that in a proper buy-back arrangement as meant by the Reserve Bank of India, there should be a contract to the initial sale by the bank or a financial institution and thereafter a purchase at a higher price. The higher price for purchasing back contract would compensate the gain derived by the bank/financial institutions during the period of interregunum between sale and the purchase on account of user of the sale consideration in that period. In the instant case however, the bank was required to sell the units at 14.381 and to purchase the same at 13.969. Shri Dastur thus argues that this is not a case of buy-back arrangement as considered by RBI in its circular mentioned above.
We feel inclined to agree with the arguments of Shri Dastur. In this case, the arrangement was quite strange from the view point of the assessee that it contracted to purchase certain units at a higher price and sell the same thereafter at a lower price. The CIT (Appeals) has, therefore been right in observing that from day one the contracts were intended to cause loss to the assessee. He also stated that he had serious reservation in accepting the transactions and loss arising therefrom as business loss at all.
However, we note that finally both the departmental lower authorities treated the loss incurred by the assessee as merely a speculative loss or illegal in view of the circular issued by the RBI refraining the banks and financial institutions indulging in buy-back arrangement. We have already held that so far as the transactions with ANZ are concerned, the same cannot be considered as speculative transactions. From the discussions as made above, we cannot also hold that this is a case of a buy-back arrangement of all the units contracted to be sold and purchased as envisaged in the circular of the RBI. Furthermore, the sale price by the bank being higher than the purchase price is also a pointer to considering the transaction to be not exactly of buy-back nature. Again, the banks might have been advised by RBI not to indulge in buy-back arrangement. It is a moot question as to whether the assessee which is neither a bank nor a financial institution can be considered to be suffering from such restrictive instructions of RBI. In any case, whether such instructions of RBI have got the legal effect of rendering any buy-back arrangement indulged in by a bank/financial institution to an illegal transaction, is still an unanswered question. Ultimately therefore, we would hold that the transactions of the assessee with ANZ cannot be considered to be falling within the scope of buy-back arrangement as mentioned in the circular of RBI. So far as the transactions with RCFT are concerned, the said circular of the RBI would not at all apply inasmuch as neither the RCFT nor the assessee is bank or a financial institution.
Ultimately therefore, we hold that the payment of Rs. 96,80,000 to ANZ can neither be considered as speculative transaction nor falling within the prohibitive instructions of RBI. Therefore, we reverse the decisions of the lower authorities and direct that this amount of Rs. 96,80,000 be allowed. At the same time again, we uphold the orders of the lower authorities that the other amount of Rs. 28.40 crores (sic) paid to RCFT is not allowable against other income inasmuch as the same constitutes loss incurred in speculative transactions.
28. In ground No. 7, an alternative ground has been taken by the assessee to the effect that the CIT (Appeals) should have directed that loss from speculative business be set off against business income under section 41(1) and/or 28(iv) by holding that such income was from speculation business. Since we have already held above that no deemed income can be assessed either under section 41(1) or 28(iv) in respect of the amount of Rs. 44,69,88,170, this particular ground loses its significance. Hence, this ground is being dismissed.
29. At the time of hearing of the appeal before us, the learned counsel for the assessee did not press ground No. 9 relating to the claim of cancellation of additional tax levied under section 143(1A). As such, this ground is also being dismissed.
30. In the result, the appeal filed by the assessee is partially allowed, to the above-mentioiied extent.