1990-VIL-536-CAL-DT

Equivalent Citation: [1993] 199 ITR 173, 101 CTR 118, 79 TAXMANN 17

CALCUTTA HIGH COURT

Date: 11.01.1990

COMMISSIONER OF INCOME-TAX

Vs

GANGA PRASAD BIRLA (HUF)

BENCH

Judge(s)  : SUHAS CHANDRA SEN., BHAGABATI PRASAD BANERJEE 

JUDGMENT

SUHAS CHANDRA SEN J. -The Tribunal has referred the following questions of law to this court under section 256(1) of the Income-tax Act, 1961

" (1) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law holding that even if it is admitted that this was a speculative transaction, this cannot be taken as speculative business within the meaning of Explanation 2, section 28 of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that, in the instant case, as there was one isolated transaction, the finding of the Tribunal that it was a loss in business and not in speculative business was correct and it is in that view holding that the Appellate Assistant Commissioner was justified in allowing the loss in such transaction

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the loss of Rs. 91,000 ( rupees ninety one thousand ) arising from speculative transaction in purchase and also sale of shares should be allowed to be set off against the other income ?

(4) Whether, the finding of the Tribunal that the instant case is a case of damages paid for breach of contract is vitiated in law being based on partly relevant material or being based on no evidence or being based on evidence contradictory and/or being inconsistent with the evidence on record or whether such finding is otherwise unreasonable and perverse?"

The assessee is a Hindu undivided family. The assessment year involved is 1974-75 for which the accounting year ended on March 31, 1974. The claim of the assessee is that he carried on a business in purchase and sale of shares and securities under the name of Bikram Traders. The assessee made a declaration on March 30, 1972, that he had converted his investments in shares into stock-in-trade. During the previous year, the assessee had purchased 10,000 shares of Orient Paper Mills Ltd. at the rate of Rs. 38.30 per share from M/s. Kothari & Co., share brokers. The delivery of shares was taken by making a payment of Rs. 3,83,000 on August 22, 1973. On August 22, 1973, the assessee entered into contract for sale of those shares at the rate of Rs. 39.30 per share. The shares were, however, not delivered to the share brokers. On September 20, 1973, the assessee entered into another contract with the same share broker for the purchase of the same number of shares at the rate of Rs. 48.40 per share. There was no delivery of shares in this transaction also. The assessee paid the difference in price of Rs. 91,000 to the share broker. Ultimately, on October 17, 1973, the assessee entered into another contract for sale of 10,000 shares to the same share broker at Rs. 45.80 per share. The shares were actually delivered on that very date. The assessee claimed to have made a profit of Rs. 75,839 in the process of sale after deducting the transfer charges. The sale and repurchase effected on August 27, 1973, had resulted in a loss of Rs. 91,000. The assessee claimed this loss as business loss and wanted to adjust this loss against the profit of Rs. 75,839. The case made out before the Income-tax Officer and also the Appellate Assistant Commissioner was that the sale and purchase of the shares without delivery made on August 22, 1973, and September 20, 1973, respectively, were done by way of hedging loss. This assertion was negatived by the Income-tax Officer by holding that the sale was effected just one month before the declaration of the dividend and the repurchase was effected just nine days before the annual general meeting of the company where dividends were declared. At this time, the share prices were expected to be at the highest. The assessee, by virtue of his close association with the company, could not have been unaware of these facts. Therefore, the sale and repurchase of the shares were done not to guard against a failing market but at a time when the prices were going up higher and higher. It had also been stated on behalf of the assessee before the Income-tax Officer that the reasons for non-delivery of the shares after having sold them on August 22, 1973, was that the share scrips had been sent to the company for registration after purchase. The shares were received back on October 17, 1973, on which date the ultimate sale and delivery had taken place. The Income-tax Officer has pointed out that this case is not consistent with the claim of hedging against loss made out on behalf of the assessee. The Income-tax Officer was of the view that the real intention behind the transaction was to derive income from dividend from the shares which were exempt from tax under section 80K of the Income-tax Act. The Income-tax Officer held that the loss of Rs. 91,000 arose out of speculative transaction and did not qualify for adjustment against the other income of the assessee.

It was contended on behalf of the assessee before the Appellate Assistant Commissioner that it was a case of hedging and that the loss should be allowed as business loss. In the alternative, it was argued that, even if the transaction was treated as speculative being an isolated transaction, it would not be treated as " speculation business " within the meaning of Explanation 2 to section 28.

The Appellate Assistant Commissioner held that there was not single factor from which it could be inferred that there was a reasonable ground for apprehending loss. The appellant had failed to discharge the burden of proof cast upon him to show that the transaction in question was by way of hedging. There was a steady rise in the trend in the price of the shares. There was no price fluctuation. The appellant being closely associated with the company was well aware of the prosperous condition of the company.

The Appellate Assistant Commissioner, however, held that there was considerable force in the alternative argument that a single speculative transaction could not amount to speculative business in view of the judgment of the Bombay High Court in the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 (Bom). The Tribunal upheld the contention of the assessee and dismissed the appeal preferred by the Department by holding that a single speculative transaction will not amount to a speculative business.

In order to decide the controversy raised in this reference, the following statutory definitions have to be borne in mind :

" 2.(13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. "

" 28. Profits and gains of business or profession. -The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession', (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ...

Explanation 2. -Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as 'speculation business') shall be deemed to be distinct and separate from any other business.

" 43.(5) 'speculative transaction' means a transaction in which 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 :

Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him ;or

(b) a contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ;

shall not be deemed to be a speculative transaction."

"72. Carry forward and set off of business losses. - (1) Where for any assessment year, the net result of the computation under the head ' Profits and gains of business or profession ' is a loss to the assessee, not being a loss sustained in A speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year. "

Explanation 2 to section 28, undoubtedly, makes a distinction between speculative transactions and speculation business. When speculative transactions are of such a nature as to constitute business, then only income from such business will be computed under section 28, but such speculation business shall be deemed to be distinct and separate from any other business of the assessee. If any loss is suffered in speculation business, that cannot be set off or adjusted against any profit made in the other business activities of an assessee. It, however, does not mean that, where speculative transactions carried on by an assessee are of such a nature as not to constitute a business, the income from such speculative transactions shall be assessed as business income. If a speculative transaction is not in the nature of business, then it will not be assessed as income from speculation business or any other business. The income or loss from such a transaction will not be business income or business loss at all. In a case where the loss or gain is from a business activity, the question has to be considered whether such activity is of speculative nature and, if so, this will be treated as an activity quite distinct and separate from any other business and income or loss from such activity will be computed as income or loss from speculation business.

Whether purchase and sale of shares in a given case will amount to a business activity has to be judged by the ordinary yardstick of deciding whether an activity is business activity or not. If it is found that the activity of the assessee is of such a nature as to constitute a business but the transaction in question was settled otherwise than by actual delivery or transfer, then such a transaction will have to be regarded as speculation business.

To decide whether a transaction amounted to speculation business or not has to be judged in the same way as any other transaction is judged for the purpose of determination of the question whether the activity of the assessee amounts to carrying on of any business.

It is well-settled that even a single transaction may constitute business under the definition of the word " business " in section 2(13). But a single transaction will not be a trading adventure unless it bears clear indicia of trade. (Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC)). Whether a single plunge is enough to constitute an adventure in the nature of trade or not has to be decided having regard to the surrounding circumstances of the case. This view expressed by Lord President Clyde, in the case Balgownie Land Trust Ltd. v. IRC [1929] 14 TC 684, 691, was quoted with approval by the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594, 615. Therefore, the facts of the case will have to be looked into to decide whether a transaction is of business nature or not. Whether a transaction is of speculative nature or not does not make any difference to this principle. If a single plunge in trade may constitute business, the transactions will be an adventure in the nature of trade. If such a transaction was settled without the transfer of the contracted commodity, then the transactions will be an adventure in the nature of speculation business.

Moreover, as was observed by Lawrence LJ. in the case of Leeming v. Jones [1930] 15 TC 333, 354 (HL), where, in a case of isolated transaction of acquisition and sale of property, there is really no middle course open, it is either an adventure in the nature of trade or else it is simply a case of sale and resale of a capital asset. This view was also approved by the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594.

The problem that has arisen in this case will have to be solved bearing in mind the principles of law set out hereinabove. The assessee had made a declaration on March 30, 1972, that he had converted his investments in shares into stock-in-trade. During the previous year, on August 22, 1973, the assessee purchased 10,000 shares of Orient Paper Mills Ltd. at the rate of Rs. 38.30 per share and obtained delivery of those shares. The shares were in his possession when on that very date, i.e., August 22, 1973, the assessee entered into a contract for sale of 10,000 shares at the rate of Rs. 39.30 per share. If the assessee delivered the shares pursuant to this contract, the assessee would have made a profit out of this deal. The shares, however, were not delivered. But, on September 20, 1973, instead of delivering 10,000 shares at the rate of Rs. 39.30 per share, the assessee entered into another contract for purchase of 10,000 shares at the rate of Rs. 48.40 per share. This purchase of 10,000 shares was not followed up by taking delivery of the shares. But the contract for sale entered into on August 22, 1973, was settled by payment of the difference in price amounting to Rs. 91,000 to the sharebroker. On October 17, 1973, the assessee sold and delivered 10,000 shares of Orient Paper Mills Ltd. at Rs. 45.80 per share. This chain of events can hardly be considered as isolated transactions. It has been sought to be argued that the purchase of shares on August 22, 1973, which was followed by delivery and sale of shares as one transaction and the contract for sale of shares on August 22, 1973, and purchase of shares on September 20, 1973, without any delivery should be treated as another transaction. I do not see any reason for accepting this contention. The assessee converted his investments in shares into stock-in-trade. The manifest intention of the assessee was to do business in shares and not to hold the shares as investment. It has been found that the assessee had close links with the management of Orient Paper Mills Ltd. The assessee was well aware of the rising trend of the price of those shares. The date of the annual general meeting and the possibility of good dividend being declared were known to the assessee.

It was with the full knowledge of these facts that the assessee purchased 10,000 shares at Rs. 39.30 each on August 22, 1973, and took delivery of the shares. Thereafter, on August 22, 1973, he entered into an agreement to sell the shares. This was not followed up by delivery of the shares. On September 20, 1973, the assessee entered into a contract for purchase of another 10,000 shares of Rs. 48.40 each. No delivery was given pursuant to this contract. There is nothing on record to show that there was any dispute between the purchaser and the seller because of which delivery could not be taken by the assessee when he purchased the shares or delivery could not be given by the assessee when he sold the shares. The assessee had full knowledge of the trend of the market and also had inside knowledge of the working of the company. The contracts for purchase and sale of shares without delivery were clearly of speculative nature. This is a clear case of share speculation.

Having regard to the various transactions as narrated hereinabove, it will not be right to hold that there was only one solitary transaction. In any event, even if there is a solitary transaction, I fail to see how such a transaction cannot be regarded as a speculation business. The difference of a " speculation business " with any other business is that, in speculation business, actual delivery of the goods is not given pursuant to a contract for purchase or sale of any commodity.

The view that we have taken in this case is in consonance with the view adopted by the Madhya Pradesh High Court in the case of CIT v. Bhikamchand Jankilal [1981] 131 ITR 554, where it was held that a speculative transaction would amount to a speculation business if it fulfilled the definition of " business " under section 2(13) of the Income-tax Act, 1961, or if it amounted to an adventure or concern in the nature of trade. Neither repetition nor continuity of similar transaction was necessary to constitute a transaction an adventure in the nature of trade and even a single transaction may constitute business.

It was emphasised in that judgment that the object of Explanation 2 to section 28 was not to substitute a different definition of " business " from that contained in section 2(13). The object was merely to declare that speculation business was to be treated as distinct and separate from any other business.

It was further held that much significance cannot be attached to the use of the expression " speculative transactions " in the plural for the words in the singular included the plural and vice versa. There was nothing in the context of Explanation 2 to show that a single speculative transaction, even though it was an adventure in the nature of trade, could not amount to speculation business.

We are in respectful agreement with the views expressed by the Madhya Pradesh High Court. In our judgment, a solitary speculative transaction by an assessee will not prevent the transaction from being speculative business. If the transaction amounted to an adventure in the nature of trade, then the profits of such trade will have to be treated as business income. But, if the transaction was settled without actual delivery of goods, then the adventure in the nature of trade will be an adventure in speculative business. Speculative business is only a species of general business where contracts for purchase and sale of commodities are settled without actual delivery of the commodities.

There is a further point to be noted in the case that the assessee had entered into at least two transactions where goods were not delivered one for the sale of shares on August 22, 1973, and the other for the purchase of shares on September 20, 1973. Therefore, in our view, the Tribunal was in error in holding that, in the instant case, there was one isolated transaction. The Tribunal was also in error in holding that, even if the transaction in question was speculative, it could not amount to speculative business within the meaning of Explanation 2 to section 28 of the Income-tax Act, 1961.

The next question is the question of damages. It has been contended on the strength of the decision of the Bombay High Court in the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 that the assessee was unable to effect delivery of the shares and had committed a breach of the agreement to sell the shares. The settlement took place after the breach had occurred. Damages had to be paid by the assessee for the breach. This was not a case of settlement of the contract by making payment as contemplated by section 43(5) of the Act. It has been argued that what had taken place was not a settlement of the contract but settlement of the assessee's liability for damages for the breach of that contract. The Bombay High Court referred to two judgments of this court in the case of CIT v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal) and Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal) and also decision of the Mysore High Court in the case of Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401.

In the case of CIT v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal), the assessee, a private limited company, had entered into a contract with a Japanese company to supply iron ore. This contract was varied by consent of the parties subsequently. The contract was split up into three parts. Full delivery of goods was made under the first two parts of the contract. The third part was in respect of a consignment of 20,000 long tons of iron ore. In the third part, the Japanese company failed to take delivery, of 7,990 long tons. The Japanese company failed to open a letter of credit as agreed to in respect of this consignment. The claim for the difference was ultimately settled and the Japanese company paid an amount of Rs. 22,627 in settlement of the claim of the assessee. It was argued in that case that the contract was for supply of 52,000 long tons. A part of it was performed and only the third delivery remained unperformed. What was ultimately settled was not the contract itself but a claim for damages based on breach of contract and such settlement did not come within the language of Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, This argument found favour with the court. It was held ( at page 352 ) " in our reading of the expression 'contract settled' means ' contract settled before breach'."

The case of Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal) related to a contract for delivery of 200 tons of Indian crude groundnut oil at Rotterdam. The assessee, an Indian exporter, could not fulfil the contract because he was unable to secure the export licence for shipping the goods. An arbitrator was appointed in terms of the agreement to go into the dispute. The arbitrator gave an award directing the assessee to pay the difference between the market rate and the contract rate. The assessee claimed that this was business loss. The Income-tax Officer was of the view that the loss was of speculative nature. It was held by a Division Bench of this court that the case was not a case of settlement of contract itself but of payment of damages for breach or non-performance of the contract. That being the case, it was not a " speculative transaction ".

In the case of Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401, the Mysore High Court referred to the aforesaid two decisions of this court and remanded the case to the Tribunal for fresh enquiry and decision.

In the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 (Bom), the assessee-company had entered into an agreement for purchasing 250 M.Ts. of hot-processed naphthalene for export FOB Calcutta; delivery to be completed by September 30, 1961. Under the agreement, a letter of credit was to be opened by the assessee-company forthwith. A performance bond was to be executed by the assessee-company concurrently with the signing of the agreement for a sum equivalent to 3% of the contract value of the goods. The assessee-company failed to open a letter of credit and paid a sum of Rs. 20,000 in lieu of the performance bond. The price of the goods having gone down in the foreign markets, the assessee-company negotiated with H. S. company for an amicable settlement and addressed a letter dated October 30, 1961, stating that it had already paid a sum of Rs. 20,000 in lieu of the performance bond and forwarded therewith a cheque for Rs. 30,000 and requested the H. S. company to accept the total sum of Rs. 50,000 as a full settlement of this and another transaction. The sum was accepted by H. S. Ltd. as full settlement. The Bombay High Court came to the view that the payment that was made was not in settlement of the contract within the provision of section 43(5) of the Income-tax Act but was a settlement of the assessee-company's liability for damages for breach of that contract. The contract itself could not be said to be a speculative transaction by reason of such settlement.

The facts of the above two Calcutta decisions will go to show that there were contracts for sale and delivery of goods which were substantially fulfilled in the case of Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal) and could not be fulfilled because of non-availability of export licence as in the case of Daulatram Rawatmull [1970] 78 ITR 503 (Cal). In the case of Daulatram Rawatmull [1970] 78 ITR 503 (Cal), an arbitrator was appointed in terms of the agreement who gave an award against the assessee and the amount awarded was paid by the assessee. In the case of Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal), the contract was substantially executed. A small portion of the contracted goods could not be delivered and a claim for damages was settled by payment.

But, in the instant case, nothing has been brought on record to show that there was a dispute between the purchaser and the seller which was settled after breach of the contract. It has not been even explained why delivery was not given pursuant to the contract for purchase on September 20, 1973. It is for the assessee to bring on record the facts to establish that there was a breach of contract for which there were claims for damages and, ultimately, the matter was settled by payment. The transactions in question bear all the characteristics of a speculative transaction and the contracts were settled without delivery of goods.

Therefore, the questions are answered as follows:

Questions Nos. 1, 2 and 3 are answered in the negative and in favour of the Revenue. Question No. 4 is answered in the affirmative and in favour of the Revenue.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE J.-I agree.

 

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