Delhi High Court
Asstt. Cit vs Subhash Chand Shorewala (Del) on 28 January, 2004
Equivalent citations: (2004)91TTJ(DEL)57
ORDER
G.S. Pannu, A.M.:
These two appeals are preferred by the revenue arising out of the order of the Commissioner (Appeals), dated 30-4-1997 and 28-12-1998, respectively and pertain to assessment years 1992-93 and 1993-94.
ITA No. 1167
2. In this appeal, the revenue has assailed the order of the Commissioner (Appeals) in deleting the addition of Rs. 25,000 made on account of penalty paid to the Delhi Stock Exchange.
3. The brief background to the dispute is as follows. The assessed individual is a member of the Delhi Stock Exchange engaged inter alia in the business of purchase and sale of shares on behalf of its clients. The assessing officer noticed that the assessed had claimed deduction of an expenditure of Rs. 25,000 on account of Delhi Stock Exchange fine account. The assessing officer disallowed the said expenditure noticing that the same was incurred by the assessed on account of its failure to comply with the rules and regulations governing its business and as such, it could not be said to be an expenditure incurred in the normal course of carrying on of its business. Aggrieved by the order of the assessing officer, the matter was carried in appeal before the Commissioner (Appeals) who has since allowed the claim of the assessed. Presently, the revenue is in appeal before us, After hearing the rival submissions on the issue, we are of the view that the impugned amount is liable to be disallowed. Admittedly, the impugned amount has been paid by the assessed as a result of its failure to adhere to regulatory procedure mandated by the Delhi Stock Exchange in relation to the assessed's business of broking. It is a well-settled legal proposition that the fine or penalty paid on breach of law is not a normal expenditure. A reference in this regard can be gainfully made to the following decisions
(i) Haji Aziz & Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC)
(ii) Saraya Sugar Mills (P) Ltd. v. CIT (1979) 116 ITR 387 (All) (FB)
(iii) CIT v. Dhanraj Mills (P) Ltd. (1994) 209 ITR 851 (Bom)
4. Hence, the orders of the Commissioner (Appeals) are reversed and the disallowance made by the assessing officer in this regard is hereby confirmed.
5. Accordingly, the appeal of the revenue stands allowed.
ITA No. 4025:
6. This is an appeal by the revenue arising out of the order of Commissioner (Appeals), dated 30-4-1997, and pertains to assessment year 1992-93.
7. The brief facts are that the assessed is a member of the Delhi Stock Exchange engaged, inter alia, in the business as share broker, entering into transactions for and on behalf of its clients and has also done some trading on its own behalf. In the course of assessment proceedings, the assessing officer noticed that the assessed has received from the market a sum of Rs. 87,06,621 and as against this, the assessed has paid to various clients a net amount of Rs. 90,48,581, thereby suffering a loss of Rs. 3,42,060 on such transactions. The assessed was asked to explain as to why the loss suffered by the assessed should not be treated as a speculative loss. The assessed explained by means of written submissions before the assessing officer that on some occasions, the loss on the share transaction was consequent to a breach of contract by the client and the same could not be said to be speculative loss. Secondly, it was also explained that in certain situations, a broker also acts as a jobber and the jobbing transactions are inherent in the business of share broking and the same is also not to be viewed as a speculative loss. The assessed also worked out the details of certain transactions, which resulted into excess of debit in the account of difference even in case where the actual delivery of shares took place. The assessed, in the said manner, contended that the said loss was not a speculative loss. The assessing officer, however, treated an amount of Rs. 3,42,060 as a net loss on account of speculation. Aggrieved, the matter was carried in appeal before the Commissioner (Appeals).
8. Before the Commissioner (Appeals), the assessed reiterated its stand taken before the assessing officer. It was emphasised by the assessed that the impugned loss has to be viewed as a business loss. It was explained that the assessing officer fell in error in not appreciating that as a share broker, the assessed entered into a contract for purchase and sale of shares on behalf of its clients; sometimes clients did not own up the transaction when they felt they were going to suffer a loss. In such situations, the assessed being a broker, was necessarily required to honour his commitment in the market and sometimes losses are incurred on such transactions. Thus, such a loss was to be held as on account of breach of contract and it could not be treated as a speculative loss. The assessed, in particular, referred to the decision of the Hon'ble High Court in the case of CIT v. Bhagwan Dass Rameshwar Dayal (1984) 149 ITR 387 (Del). The assessed also worked out the loss on this count at Rs. 2,04,860. Secondly, it was canvassed before the Commissioner (Appeals) that an amount of Rs. 96,925 was also incurred which related to the category of transaction recorded as job transaction. It was explained that such transactions were inherent in the broking business and the assessing officer had failed to appreciate the same in proper perspective. The Commissioner (Appeals), after considering the aforesaid submissions, has upheld the view of the assessed with regard to the loss incurred by the assessed on account of breach of contract of Rs. 2,04,860 and on job transaction amounting to Rs. 96,926. The balance of Rs. 40,275 was sustained as speculation loss. Hence, the present appeal of the revenue against the action of the Commissioner (Appeals) in upholding the stand of the assessed to the extent of Rs. 3,01,785.
9. The learned Departmental Representative, Shri R.R. Prasad, appearing on behalf of the revenue, has defended the orders of the assessing officer and the arguments advanced by him were in support of the reasons recorded by the assessing officer. It was also argued that the impugned losses were on the basis of transaction which was not permissible by the stock exchange. It was further submitted by the learned Departmental Representative that the onus was on the assessed to demonstrate that there was a breach of contract resulting in the impugned losses. The learned Departmental Representative also referred to a decision of the Tribunal in ITA No. 109/Del/2001 dated nil in support of his submissions.
10. On the other hand, learned counsel, Shri Sunil Jain, has not only defended the orders of the Commissioner (Appeals) but has referred to a decision of the Tribunal in ITA No. 2897/Del/1997, dated 27-5-2003 referred by the Tribunal on similar facts. According, to him, reliance placed by the learned Departmental Representative on the decision of the Tribunal in the case of SRJ Securities Ltd. v. Assistant Commissioner (2003) 81 TTJ (Del) 484 was distinguishable on facts as the Tribunal therein was primarily dealing with Explanation to section 73 which is not applicable in the instant case. Further, it is submitted by the counsel for the assessed that factum of the disputes being there in the business of broking on account of the failure of the clients to own their commitments is well- established and the same is normal phenomena in such trade.
11. We have heard the rival submissions and have also perused the orders of the lower authorities and the relevant material on record and proceed to dispose of the issue in the following lines.
12. At the outset,, we may state that the revenue has to fail for the reasons discussed hereinafter.
13. The two facets of the issue before us relate to : (a) loss as a result of the breach of contract by the clients; and (b) loss suffered on account of jobbing transaction. The order of the Commissioner (Appeals) on this issue is quite illustrative, a portion of which we reproduce as under :
"I have considered the arguments of the learned counsel. As regards the loss on account of breach of contract, the Hon'ble Delhi High Court in the case of Bhagwan Dass Rameshwar Dayal (supra) held that one can visualise a number of situations in which there may be no delivery for various reasons, i.e., because of failure of the party on account of insolvency or frustration, e.g., banning of business or mere breach, i.e., to say non-supply. All these cannot be classified as speculative within the meaning of section 43(5). What the section visualises is a contract which is settled by means of a cross contract. If the contract is settled for some other reasons by payment of damages or even without payment of damages it may or may not be speculation transaction depending upon the circumstances of the case. The Hon'ble court further held that if a contract is broken, i.e., for any reasons one party is unable to give delivery order the other party is unable to take delivery, it is a case of breach of contract. A breach takes place on repudiation of contract or failure to perform it. When the obligation to supply or to take delivery comes to an end, it does not make the transaction speculative. The Hon'ble court clarified that if it was settled by mutual consent to avoid delivery then it would be speculative. But if it was settled because of inability of the assessed to supply or on account of the fact that it did not have necessary resources to give the, delivery then it would be a breach of contract and not the speculative transaction.
In view of the decision of the jurisdictional High Court, I hold that the loss suffered by the appellant on account of breach of contract falls outside the purview of speculative transaction. Accordingly, the assessing officer was not justified in treating the loss as speculative loss. He is directed to treat the loss as business loss.
Even if the arguments of the assessing officer are accepted that such loss suffered by the appellant was on account of self-trading, still the loss cannot be termed as speculation loss. In normal terminology, the share trading business on behalf of oneself is known as jobbing. Section 43(5) defines the word speculative transaction, but there are three exceptions to it. The proviso (c) to section 43(5) reads as under : ' 'A contract entered into by a member of forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to hedge against loss which may arise in the ordinary course of his business as a mernber.' This proviso makes it very clear that any profit or loss on account of jobbing will not be in the nature of speculation profit or speculation loss. Thus, even if it is accepted that the loss suffered by the appellant was on account of self-trading in view of proviso (c) to section 43(5) such loss cannot be treated as speculation loss. The assessing officer is directed to treat the loss as normal business loss. Accordingly, I hold that the loss of Rs. 3,01,785 is normal business loss and not the speculation loss."
14. A perusal of the aforesaid leads to an inference that the legal aspect has been properly discussed and appreciated by the Commissioner (Appeals). Admittedly, the assessed, being in the business of broking, would be facing situations wherein some of the clients do not own up the transactions on anticipating losses. In such situations, the consequential loss incurred by the assessed to honour the commitments is to be viewed as an integral part of carrying on of assessed's business and is, therefore, not liable to be judged as a speculation loss. The decision of the jurisdictional High Court in the case of Bhagwan Das Rameshwaar Dayal (supra) supports the stand of the assessed.
15. Reliance placed by the learned Departmental Representative in the case of SRJ Securities Ltd. (supra) is, in our view, misplaced in so much as that the same is on different facts. Further, the decision of the Tribunal in the case of Dy. CIT v. S.C. Gupta reported in ITA No. 2897/Del/ 1997, dated 27-5-2003, is on similar facts. Therefore, following the same, as the facts are on similar footing, we dismiss the appeal of the revenue.
16. In the result, the appeal No. 1167 is allowed and appeal No. 4025 is dismissed.