Income Tax Appellate Tribunal - Amritsar
Ram Lal & Sons vs Income-Tax Officer on 28 January, 1999
ORDER
Sh. G. L. Garoo, A.M.
1. The appellant has filed appeal against the order passed by the CIT(A) vide A. No. CIT(A)/IT/BTI/540/87-88 dated 26-5-1992 and taken following grounds in appeal :-
"1. That the ld. CIT(A) was not justified in confirming the addition of Rs. 51425 by disallowing a loss of Rs. 51425 when the loss was a genuine loss in business of shares.
2. That the ld. CIT was not justified in confirming the above said loss as a speculative loss.
3. That the appellant requests for leave to add or amend the grounds of appeal before the appeal is heard or disposed of."
2. During the assessment proceedings, the Assessing Officer observed that an amount of Rs. 51,425 on account of loss suffered on purchases and sales of shares was debited by the appellant. The Assessing Officer observed that this type of transaction was done by the appellant for the first time, as such the appellant was asked to file the details of the purchase and sale of shares alongwith the names and complete address of the parties from whom these shares were purchased. The appellant filed copies of purchase and sale of shares showing that 190 shares of ACC were purchased from M/s. Bharat Bhushan & Company, share broker, New Delhi and 4000 shares of Kular Construction Company were purchased from M/s. Deepti Chawla & Company, Stock, Share and Finance Brokers, New Delhi. The Assessing Officer observed that the shares were allegedly shown to have been sold to the same parties from whom shares were purchased. The copies of account of both the share brokers were kept on record. The Assessing Officer observed in accordance with the Bye-laws of Delhi Stock Exchange and as per Bye-Laws, the bargain of shares is either for 'Spot Delivery' i.e., delivery and payment on the same day or on the next day or 'Hand Delivery' i.e., delivery and payment within a maximum period of 14 days following date of contract. The Assessing Officer has observed that the contract notes are not mentioning the nature of delivery. The Assessing Officer further observed that the appellant has not made full payment at the end of purchase of shares or on the following day, therefore, the same cannot be treated as 'spot delivery'. The alleged shares of ACC were purchased on 9-8-1985 and sold on 1-10-1985 to the same person from whom shares alleged to have been purchased. Similarly shares of M/s. Kular Construction Company were purchased on 27-5-1985 and sold on 24-9-1985 to the same party. The Assessing Officer has observed the circumstantial evidence clearly indicate, it is not feasible that the share brokers will deliver the shares worth Rs. 11, 150 and Rs. 40,120 after purchasing the same from the market for monies worth to the assessee without receiving the consideration when both the parties are stranger to each other. More so, when sale and purchase of shares are governed by the respective Bye-Laws of stock exchange under which the broker is working as a registered broker. The Assessing Officer did not treat the transaction as genume and disallowed the loss claim made by the appellant. The Assessing Officer has also taken alternative plea that the facts revealed that in both the transactions neither any payment at the time of purchase of shares was made to either party, only differential of sale and purchase value was paid, which proves beyond doubt that the transaction was settled otherwise than the actual delivery of the shares. He relied on the judgment of Davenport & Co. Ltd. v. CIT [1975] 100 ITR 715 (SC). He treated the loss as speculative loss.
3. Agitated against the order passed by the Assessing Officer the appellant filed appeal before the ld. CIT(A) and the ld. CIT(A) has given following observations :
5. I have given careful consideration to the arguments of the ld, Counsel and I find that transactions in question are not in accordance with the Rules of the Delhi Stock Exchange and the appellant never remitted the purchase price of shares to M/s. BB & Company or M/s. Deepti Chawla & Co. as required under the Bye-laws. The Assessing Officer was, therefore, fully justified in doubting the capacity of the Broker in taking actual delivery of the shares in the absence of remittance of purchase price. Only small advance of Rs. 5,000 and Rs. 7000 was given by the assessee whereas investment in shares of ACC through M/s. BB & Company was to the tune of Rs. 1,11,150 and through M/s. Deepti Chawla & Co. to the tune of Rs. 40,120. Moreover, in spite of sufficient opportunity at assessment and appeal stage, the name of the parties from whom shares were purchased or subsequently sold were not given and as such the actual delivery of shares is not proved. The Assessing Officer was, therefore, fully justified in treating the transactions as ingenuine and alternatively speculative in nature keeping in view the decision of the Hon'ble Supreme Court in the case of M/s. Davenport & Co. 100 ITR 715 and M/s. Jute Investment Company 121 ITR 56 (SC)".
4. The ld. Counsel of the appellant pleaded that they have established beyond doubt that the transaction is genuine one because the brokers who have purchased shares on our behalf have not denied the fact that the transaction was made by these brokers for and on behalf of the appellant. The ld. Counsel has pleaded that the loss incurred has been duly paid by the assessee to M/s. B. B. & Company and M/s. Deepti Chawla & Company. The ld. Counsel has pleaded that the delivery of shares is mentioned in Form No. 125965 which is duly signed by M/s. B. B. & Company. The Id. Counsel relied on the decision of CIT v. Nirmal Trading Co. [1971] 82 ITR 782 (Cal.).
5. The ld. DR Relied on the orders passed by the authorities below.
6. There are two issues linked with the controversy which requires our attention. The first issue is genuineness of the transaction. So far as the genuineness of the transaction is concerned, the appellant has entered into deal with two broker firms. However, there are circumstantial situations which throw complete shadow of doubt on the genuineness of the transaction. The first circumstantial happening is a peculiar situation where shares were purchased from the same person, at a higher price and sold to the same person at a considerable low price. Shares of M/s. Kular Construction & Company were purchased at Rs. 10.03 per share and within a short period sold at Rs. 3.04 per share. It is also interesting to note that in the books of account, the brokers have received the advance but sale and purchase of the shares is mentioned on the same date.
7. The totality of the situation is that money was sent to both these brokers by drafts which was credited in the respective account in their books of account and these transactions are not denied in any manner and in any case.
8. There is no evidence either in the assessment record or in the paper book before us which can establish the effective delivery of the shares in the name of the appellant-firm. The ld. Counsel has also brought nothing on record to establish that the observations of the authorities below were actually incorrect when they have given the finding that the capacity of broker in taking actual delivery of shares cannot be believed because there is no proof of remittance of purchase price. These factual situations lead us to come to the conclusion that the transaction was not a proper business transaction and only fact on record is that a compensatory payment has been made by the appellant for a transaction which is not clear so far as the records are concerned.
9. Section 43(5) deals with the definition of speculative transaction and according to sub-section 5 of section 43, the '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. From the facts before us, there is no transfer of shares in the name of the appellant at the time of purchase of shares. The only leading evidence for this purpose will be the share transfer application form duly signed by the appellant and submitted to the Company for transfer of the shares in the name of the appellant. The legislature has given clear and unambiguous intention that the transaction has to be settled periodically or ultimately that means the transaction will be settled only when the name of the purchaser of the shares is entered in the shareholders register of the respective company. The legislature has also mentioned that there has to be actual delivery of the shares and also there has to be transfer of senps. The case of the appellant fails on account of effecting the actual delivery as well as transfers of the scrips.
10. The Hon'ble Supreme Court has given the interpretation of 'speculative transaction while deciding the issue in the case of Jute Investment Co. Ltd. v. CIT [1980] 121 ITR 56/[1979] 2 Taxman 421. The Hon'ble Supreme Court has given valuable guidance which is reproduced as follows :-
"In this appeal, it is contended on behalf of the assessee that the High Court erred in holding that in order to take a transaction out of the definition of 'speculative transaction' in Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, there must be actual delivery of the commodity itself and that delivery of pucca delivery orders without anything more did not constitute 'actual delivery' within the meaning of that provision. It, is urged that the giving and taking of the pucca delivery orders amounts to actual delivery of goods. Pucca delivery orders, it is stated are documents of title to goods. In our opinion, the contention cannot be accepted. Explanation 2 to section 24(1) defines a speculative transaction as a 'transaction in which a contract for purchase and 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 scips. . .' It is apparent that what is contemplated is a real or factual delivery or transfer, and not a notional delivery or transfer.
The Calcutta High Court, in a series of decisions including D. M. Wadhawana v. CIT [1966] 61 ITR 154. Budge Budge Investment Co. Ltd. v. CIT [1969] 73 ITR 727, held that unless the transaction was settled by actual delivery or transfer of the commodity it would be a speculative transaction by reason of Explanation 2 to section 24(1). Subsequently, in Raghunath Prasad Poddar v. CIT [1973] 90 ITR 140, the Supreme Court took a more liberal view and laid down that if the original transaction of sale and purchase of goods was followed by one or more subsequent contracts in respect of the same goods the original transaction would not be a speculative transaction if actual delivery of the goods sold was effected to the ultimate purchaser of the pucca delivery orders. The restricted view taken by the Calcutta High Court in Nanalal M. Verma & Co. (P.) Ltd. [1969] 73 ITR 713 was disapproved. But recently a larger Bench of this court in Davenport & Co. (P.) Ltd. v. CIT [1975] 100 ITR 715 has overruled Raghunath Prasad Poddar [1973] 90 ITR 140 and preferred the strict view adopted by the Calcutta High Court. The case before us, however, is a simple one. The transactions took place between the assessee and M/s. Kesardeo Shyamsunder alone. It is not disputed that there was no actual delivery or transfer of gunny bags. The contracts were settled between the parties by transfer of pucca delivery orders."
The Hon'ble Supreme Court has given their opinion about 'Pucca delivery orders'. The Hon'ble Supreme Court has held that the transaction means a real order, actual delivery or transfer of commodity and does not relate to notional delivery, constructive delivery or notional transfers and delegated transfers. The Hon'ble Supreme Court has already dealt this issue while deciding the case of Davenport & Co. (P.) Ltd. (supra). The Hon'ble Supreme Court has given guidance which is reproduced as follows :-
"Section 6 of the Indian Income-tax Act, 1922, enumerates the heads of income chargeable to Income-tax. Section 24(1) of the Act provides that where an assessee sustains a loss under any of these heads in any year, he shall be entitled to have the loss set, off against his income, profits or gains under any other head in that year. This general provision is qualified by the first proviso which permits the set off against his income, profits or gains under any other head in that year. This general provision is qualified by the first proviso which permits the set off of a loss in speculative business only. Explanation 1 says that where the speculative transactions are of such a nature as to constitute a business. Explanation 2 defines a 'speculative transaction' as a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. The words 'actual delivery' in Explanation 2 mean real as opposed to notional delivery. For income-tax purposes speculative transaction means what the definition of that expression in Explanation 2 says. 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 symbolic, delivery has no bearing on 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 Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for purposes of income-tax only in D. Wadhawana v. CIT on which the Tribunal's decision in this case is based, the Calcutta High Court observed :
"The Explanation to section 24(1), however, does not prevent persons from entering into contracts in which the buyers and sellers may not actually hand over the goods physically. The Explanation is only designed at segregating for income-tax purposes loss sustained in transactions of a certain kind. It may be that such transactions are not speculative in the light of section 30 of the Contract Act.... In enacting the Explanation 2 of section 24(1) of the Income-tax Act, the legislature did not intend, to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, the loss, if any, would be a loss in a speculative transaction which could be allowed to be set off only against a profit in a transaction of the same nature .... The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the goods but only to brand them as 'speculative transactions' so as to put them in a special category for income-tax purposes."
The Hon'ble Supreme Court has held that delivery has to be actual and effective. The Hon'ble Supreme Court has held that it is not sufficient to bring on record that a constructive or symbolic delivery has taken place.
11. We are, therefore, of the opinion that an appropriate indication of word 'actual' has to be given with proper legal meaning to word 'actual'. The 'Black's Law Dictionary' defines 'actual' as follows :
'Real; substantial; existing presently in fact; having valid objective existence as opposed to that which is merely theoretical or possible. Oppose to potential, possible, virtual, theoretical, hypothetical or nominal Something real, in opposition to constructive or speculative, something existing in act. It is used as a legal term in contradistinction to virtual or constructive as of possession or occupation. Actually is opposed to seemingly, pretendely or feignedly, as actually engaged in forming means really, truly in act. As to actual Bias, Damages, Fraud, Notice, Occupation, Ouster, Possession; Residence, Scisin; Total loss,"
The actual has to be in contradistinction to symbolic or constructive possession or occupation.
12. We are, therefore, of the opinion that the transaction entered by the appellant with both the share brokers is a speculative transaction and as such the loss entered/earned in such transaction will not be adjusted with the profits earned from another business. The appeal of the appellant is accordingly dismissed.
13. In the result the appeal of the appellant is dismissed.