Income Tax Appellate Tribunal - Hyderabad
Merfin (India) Ltd. vs Deputy Commissioner Of Income Tax on 24 July, 2001
Equivalent citations: [2002]80ITD399(HYD)
ORDER
M.V.R. Prasad, A.M.
1. This appeal filed by the assesses is directed against the order of the CIT(A)-IV, Hyderabad, dt. 5th Dec., 2000, for the asst. yr. 1997-98, wherein he confirmed the disallowance of a loss on sale of shares of Rs. 7,42,502 on the ground that it was not a trading loss, but a speculation loss in terms of Explanation to Section 73 of the IT Act, 1961.
2. The appellant company is a member of National Stock Exchange of India Limited and derived income by way of brokerage through the purchase and sale of shares on behalf of the clients. It also purchased and sold shares on its own account. It described such shares bought and sold on its own account as its investments and claimed that it had incurred a loss of Rs. 7,42,502 on the purchase and sale of such shares held as investments. The loss in question was worked out in Schedule XV to the printed final accounts as under :
SCHEDULE XV Loss on sale of investments Year ended 31-3-97 Year ended 31-3-96 Opening stock 8.84,242 24.33.100 Add : Purchase ol shares 13,02,475 10,25,611 21,86,717 34,58.711 Less : Closing stock 1,52,260 8.84,242 20,34.467 26,74.469 Less : Sale of shares 12,91,965 24,22.933 Loss on sale ot shares 7.42.502 1,51.536 It is, however, noticed by us that the above Schedule does not relate to any item reflected in the balance sheet as on 31st March, 1997 or P&L a/c for the year ended 31st March, 1997. It seems simply to be in addition to the other relevant Schedules. On the basis of the working given in the above Schedule the assessee claimed that it has incurred a loss on sale of investment of Rs. 7,42,502, which has to be set off against its other business income. The AO rejected the claim with the following remarks :
"However, an amount of Rs. 7,42,902 is claimed as loss on account of sale of investments. On verification it is found that it is actually loss occurring on purchase and sale of shares. As per the clear provisions of Explanation to Section 73, the loss accruing on this purchase and sale of shares cannot be allowed as business loss but has to be considered as speculation loss. As the assessee-company does not fall in the exempted categories of the companies mentioned in the Explanation, the same is considered as speculation loss. In this connection, I also rely on the decision of the Hyderabad Tribunal 'A' Bench No. ITA No. 366/Hyd/1999, dt. 30th Dec., 1999 in the case of M/s Prudential Construction Co. Ltd., for asst. yr. 1997-98 and also on the Calcutta High Court decision m the case of CIT v. Arvind Investments Ltd. (1991) 192 ITR 365 (Cal). Since the loss is considered as speculation loss it cannot be allowed to be set off against any other head of income for this year. The same has to be set off against any of the profits of speculation business. However, the same is allowed to be carried forward."
It may be observed that the AO has mentioned that the loss in question was not on sale of investments but only on purchase and sale of shares, which apparently means that they were only trading assets.
3. Before the CIT(A), the assessee reiterated his contentions that the loss of Rs. 7,42,502 was incurred in respect of shares held as investments and that it should be allowed as set off against his business income. The CIT(A) upheld the view of the AO that the claim was hit by the provisions of Section 73 of the IT Act, 1961, and accordingly rejected the claim of the assessee with the following remarks :
"3.1 Before me, the learned authorised representative of the appellant had submitted that loss has been incurred by the appellant in respect of shares which were held under investment by the appellant and for which the appellant had taken actual delivery. The learned authorised representative had argued that provisions of Section 43(5) r/w Section 73 had not application to the loss thus incurred and, therefore, the AO was not justified in disallowing the loss. In support of his contentions, the learned authorised representative had cited the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Lakshminarayana Trading Co. (1996) 219 ITR 90 (AP) and that of Hon'ble Kerala High Court in the case of Asstt. CIT v. Kethan Kumar A. Shah (2000) 242 ITR 83 (Ker).
3.2 There is no merit in the argument of the learned authorised representative. In the present case, we are concerned with loss which had arisen on account of purchase and sale of shares in companies. The P&L a/c of the appellant for the year under consideration shows that the appellant had earned its income mainly from brokerage on share purchase/sale by other persons. The case of the assessees mentioned in Explanation to Section 73. The loss on share dealings--even if the same was done on the basis of actual deli very--will, therefore, have to be considered as a speculation loss in terms of Section 43(5) has no application as the case of the appellant is squarely covered by the provisions of Explanation to Section 73. The case laws cited from the appellant's side also do not have any application because in those cases the assessees were not engaged in the business of purchase and sale of shares and they were dealing in other goods. The disallowance made by the AO is, therefore, confirmed." It may be observed that the CIT(A) did not specifically remark on the finding of the AO that the loss of Rs. 7,42,502 was not on account of sale of investments. He neither agreed with his finding nor disagreed with it. So, there was nothing in the order of the CIT(A) to dislodge the finding of the AO that the shares in question were not held as investment and were merely trading assets. The CIT(A) rejected the deduction of the loss of Rs. 7,42,502 from the business income on the short ground that whether the shares were held as investments or trading assets and whether they were actually delivered or not the provisions of Explanation to Section 73 are attracted. We have to consider the correctness of this finding. We also have to consider the question whether the shares in question were actually held as investment as claimed by the assessee or they were simply trading assets as held by the AO.
4. Before us, the learned counsel for the assessee reiterated the contentions made out before the CIT(A). The main plank of his argument is that the shares in question were held as investment and they were actually delivered and so, the assessee is not hit by the Explanation to Section 73. In this context, he has invited our attention to a portion of the statement of facts given before the CIT(A), which reads as under:
"The learned appellate authority did not consider the case laws cited by the appellant in (1996) 219 ITR 90 (AP) and (2000) 242 ITR 83 (Ker) whose facts are quite relevant to that of appellant's case. The appellate authority simply brushed aside the case laws by observing that "the case-laws cited from the appellant's side also do not have any application because in those cases the assessees were not engaged in the business of purchase and sale of shares and they were dealing in other goods." The appellate authority failed to appreciate the case laws in proper perspective since for the facts of the above cases, provision of Section 43(5) applied for delivery and transfer of goods."
Apart from the above, the learned counsel for the assessee also relied on the decision of the Hyderabad Bench of the Tribunal in the case of Prudential Construction Co. Ltd. v. Asstt. CIT (2000) 75 ITD 338 (Hyd) and also the decision of the Hon'ble Calcutta High Court in the case of CIT v. Arvind Mills Ltd. (1991) 192 ITR 365 (Cal). In the written submissions filed before us, he has also taken the following argument, which reads as under:
"Further, according to the opinion of AO and CIT(A) the appellant suffered loss in speculative business. Even according to the Explanation to Section 73 as clarified by the CBDT Circular No. 204, dt. 24th July, it is clear that, as the appellant's business is a speculation business and the loss can be set off."
5. The learned Departmental Representative on the other hand relied on the order of the AO and mentioned that the assessee does not fall under any of the excepted categories referred to in Explanation to Section 73 and so, the assessee is clearly hit by the provisions of the said Explanation.
6. We are of the view that the orders of the Revenue authorities deserve to be upheld. Before we give our reasons, it is worthwhile to refer to the provisions of Explanation to Section 73, which reads as under:
"Explanation : Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"), or a company (the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares."
It may be observed that the Explanation is a deeming provision. Under the specified circumstances, even a normal business is regarded as a speculation business. Because the Explanation is a deeming provision, the question whether the transaction is a speculative transaction in terms of Section 43(5) or not is irrelevant. Even if a transaction is not speculative because it satisfied the condition of physical delivery stipulated in Section 43(5), the transaction may have to be regarded as a speculative transaction as it is a part of the business of the purchase and sale of shares by a company, which does not fall into the excepted categories mentioned in Explanation to Section 73. So, the main contention of the learned counsel for the assessee before us that because the shares in question have been delivered physically, the loss of Rs. 7,42,502 cannot be regarded as a speculative loss has no merit. The question whether the loss of Rs. 7,42,502 is a speculative loss or not, has to be considered in terms of Explanation to Section 73 and not on the basis whether there is physical delivery or not. The question of physical delivery is relevant only in the context of Section 43(5). Even if there is a physical delivery, the loss may have to be regarded as a speculative loss if it is hit by the provisions of Explanation to Section 73.
7. Firstly, we have to mention that the finding of the AO that the shares purchased and sold by the assessee on its own account, are not held as investment has not been dislodged. We have already adverted to this aspect of the matter while referring to the findings of the CIT(A). We have also extracted hereinabove, the relevant portion of Schedule XV, figuring as part of the printed Annual Report for the year 1996-97. This report is not page numbered. The loss on sale of shares of Rs. 7,42,502 is included in administrative and other expenses of Rs. 36,91,726, the details of which are given in Schedule XV of the Annual Report. Another amount of Rs. 4,83,193 is also included under administrative and other expenses as loss on sale of shares. So, it is evident that the assessee has been dealing in shares apart from the purchase and sale of shares described as investment in shares. Now, the question is whether the loss on sale of shares of Rs. 7,42,502 can be regarded as loss on sale of investments or it is just' a loss incurred in dealings in shares, like the other amount of Rs. 4,83,193. It is interesting to note that the balance sheet as on 31st March, 1997, shows investments of Rs. 15,65,000 but under the column relating to the period of earlier years, no such investments are shown as on 31st March, 1996. The loss of Rs. 7,42,502 reflected as loss on sale of investments in Schedule XV does not seem to have anything to do with investments shown at Rs. 15,65,000. The computation of the loss of Rs. 7,42,502 starts with the opening stock of Rs. 8,84,242 which is shown as inventories as on 31st March, 1996 and included under the head "current assets". So, obviously, the opening stock of Rs. 8,84,242 was held only as stock-in-trade as on 31st March, 1996 and not as investments. It is not clear how the stock-in-trade got converted subsequently into investments. No declaration of such conversion has been filed before us or such conversion adverted to in the course of hearing before us or at any other stage. Even the closing stock of Rs. 1,52,250 as on 31st March, 1997 shown in Schedule XV is included as inventories in the balance sheet as on 31st March, 1997 as per Schedule VI. Actually, this amount of Rs. 1,52,250 is the value of 3,500 shares of Global Trust Bank, which were included in the opening stock of Rs. 8,84,242. This fact is evident from the details of the purchases and sales of shares filed before us as relating to the reflected loss of Rs. 7,52,502. From the same details it is also evident that the relevant purchases and sales of the shares claimed as investments before us, has been effected with a frequency, which is indicative of simply dealings in shares and not dealings in investments. This is evident from the following portion of the details relating to the said purchases and sales.
S No Name of scrip Date ol purchase Only Value Date ol sale Only.
Value
26. Soryalata Spg.
20-4-96 100 3.610 31-5-96 100 2.090
26. Amanaja Batt.
9-5-96 22,00 1,75,670 31-596 2,200 1,97.340
27.
-do-
15-5-96 200 16,400 13-6-96 200 17.700
28. NFCI, 20-4-96 18.00 37,350 13-6-96 1,800 24,760
29. IPCL 6-6-96 200 33,400 _ 18-6-96 200 33,400 24-9-96 400 45.240
30. Raasi Cement 19-4-96 750 67,950 24-5-96 760 59,885
31. BSES 25-4-96 300 61.875 13-6-96 300 64,130 From the above narration of facts, it appears that the assessee has simply taken out a portion of the shares dealt in and chose to call them as investment. There is no basis for the claim of the assessee that the loss of Rs. 7,42,502 was incurred in the context of purchase and sale of investments. It was like any other loss in share dealings and we have to proceed on this basis. At this stage, we may mention that loss on sale of investments has to be regarded as loss under the head 'Capital gains' and even loss under the head 'Short-term capital gains' cannot be set off against normal business profits. It is only to be carried forward and dealt with in terms of Section 74 of the IT Act, 1961. We have made this comment only to indicate that even if the loss of Rs. 7,42,502 is regarded as relating to sale of investments, the assessee is not eligible for set off of the same against the normal business profit for the asst. yr. 1997-98.
8. Now, the question remains to be seen whether the loss of Rs. 7,42,502 which has to be regarded only as loss in share dealing as distinct from loss on sale of investments, in only normal business loss or is speculative loss, in terms of Explanation to Section 73, as held by the Revenue authorities. If it is normal business loss, it can be set off against the income shown by the assessee under the head 'brokerage'. If it is speculative loss, it can only be carried forward for set off against future speculative profit, in terms of Section 73 of the IT Act. We do not see how the assessee can escape the terms of the said Explanation to Section 73. We have pointedly enquired of the learned counsel for the assessee as to whether it falls under any of the exceptions mentioned in the Explanation i.e., whether the assessee-company can be regarded as deriving income mainly under the head :
(a) 'interest on securities', or
(b) 'income from house property', or
(c) 'capital gains' or
(d) 'income from other sources' Learned counsel for the assessee avoided the question and did not really reply to us. Actually, we do not see how the assessee-company falls under any of the said exceptions. Its income is mainly by way of brokerage. The only receipt shown in the P&L a/c of the assessee-company is Rs. 55,45,439 described as brokerage and other income. The details of this amount are given in Schedule XI which reads as under:
"Sch.
XI Year ended Year ended 31-3-97 31-3-96 Brokerage and other income Dividend 3,359 3,080 Brokerage 60,00,046 Bad delivery charges 4,961 NSE penalty points 38.665 Delivery handling charges 68.136 Interest received 1,86.174 6.07.969 Interest on F.D.R. 2,42,099 Lease rentals 2,76,480 Total 55,43,439 8,86,529 It is evident from the above details that the assessee derived its income mainly by way of brokerage, i.e. by dealing in shares, not on own account, but on behalf of clients. The loss of Rs. 7,42,502 is incurred in dealings in shares on own account. The assessee, being a company, is squarely hit by the terms of Explanation to Section 73, as it is not a banking company and as its gross total income does not consist mainly of income, which is chargeable under the head 'Interest on securities', 'Income from house property' and 'Income from other sources'. The gross total income of the assessee mainly consists of business income and the assessee is not carrying on the business of banking or the business of granting loans and advances and so, it does not fall in any of the exceptions given in Explanation to Section 73. A part of the business of the assessee-company consists of purchase and sale of shares of other companies and it is in such business of purchase and sale of shares, the assessee incurred the said loss of Rs. 7,42,502 and so, it is hit by the Explanation to Section 73. We have perused the case law relied by the learned counsel for the assessee and we do not see how the assessee can derive any assistance from the said case law.
8.1. The decision of the Hyderabad Bench of the Tribunal in the case of Prudential Construction Co. Ltd (supra), actually is in favour of the Revenue. In this case, the Tribunal gave a finding that the assessee was carrying on business of trading in shares and did not fall in the exceptions provided in Explanation to Section 73 and the loss in question was a speculative loss in terms of Explanation to Section 73.
8.2. The decision of the Hon'ble Calcutta High Court, in the case of CIT v. Arvind Mills (supra), is also on similar lines and actually favours the Revenue. The decision of the Hon'ble Andhra Pradesh High Court in the case of Lakshminarayana Trading Co. relied on by the assessee before the CIT(A), is in the context of Section 43(5) of the IT Act and considers the issue whether when goods are despatched by seller goods and the buyer sells the goods by transfer of the railway receipt in favour of a third party, there is delivery of goods, within the meaning of Section 43(5) of the IT Act. The Hon'ble Andhra Pradesh High Court came to the conclusion that in such a situation, there is actual delivery by the original seller to the assessee-buyer and so, the transaction is not speculative in terms of Section 43(5) of the IT Act.. This issue is totally different from the one falling for consideration before us, i.e. whether the provisions of Section 73 are attracted.
8.3. In the case of Kethan Kumar A- Shah (supra) the Hon'ble Kerala High Court held that when the shares are held as personal assets, by a broker, the gains arising on the sale of such shares is assessable under the head 'Capital gains'.. We have given a finding that the shares in question are not held as investments. We have observed that the findings of the AO that the loss has not been incurred in the context of sale of investments has not been dislodged. We have no quarrel with the proposition that if the loss is on the sale of investments it has to be assessed under the head 'Capital gains'. But that is not the situation in the case before us. In the circumstances, we do not see how the said decision of the Hon'ble Kerala High Court applies to the assessee's case. .
9. We have also perused the Board Circular No. 204, dt. 24th July, 1976 referred to in a portion of the written submissions filed before us, which we have extracted hereinabove. Relevant portion of the Circular reads as paras 19.1 and 19.2 at pp. 32 and 33 (St) Vol. 110.
"19.1. Section 73 of the Act provides that any loss computed in respect of speculation business carried on by an assessee will not be set off except against the profits or gains, if any, of another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to be carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The Amending Act has added an Explanation to Section 73 to provide that the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business.
19.2. The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control."
The above circular is only a paraphrase of the Explanation to Section 73 and is of no assistance to the assessee. We may also mention that in the portion of the written submissions, which we have extracted hereinabove, it is mentioned that the "appellant's business is a speculative business and the loss can be set off." We cannot see the import of the sentence. It makes no sense and has no relevance.
10. For the foregoing reasons, we uphold the findings of the Revenue authorities that the loss of Rs. 7,42,502 is to be regarded as loss under speculation and has to be treated accordingly for the purpose of set off and carry forward in future years. 11. In the result, appeal of the assessee is dismissed,