Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Bhargava Lodha Stock Brokers Pvt. Ltd., S

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 195 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Bhargava Lodha Stock Brokers Pvt. Ltd., S-11, Mahaveer Nagar, Tonk Road, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur with Mr. Prateek KedawatFor Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHOrder 05/09/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby Tribunal hasdismissed the appeal of the department. 2.This court while admitting the appeal on 29.4.2013 framedthe following substantial question of law:- “Whether in the facts and circumstances ofthe case, the ITAT was justified in law inconfirming the deletion of addition madeon account of disallowance of speculativeloss occurred on derivative transactionsholding the same as business loss? 3.The facts of the case are that the assessee company duringthe years was engaged in the business of borkerage for sharesand securities. The AO noticed that in the Profit & Loss account the assesee had claimed loss of jobbing to the tune ofRs.1,38,64,306/-/. After having gone through the details filed bythe assessee in this regard, the AO noted further that the asseseehad suffered the said loss on account of F & O transaction andheld the transaction as speculative as per section 43(5) of the Actand denied the claimed loss as business loss the AO, however,from the said loss has allowed set off of profit shown atRs.30,98,306/- and a net loss of Rs.1,07,66,000/- was disallowedbeing the speculative loss. 4.Counsel for the appellant has contended that the tribunal hascommitted serious error in interpreting the provisions of Section43(5) of Income Tax Act which reads as under:- “-Section 43(5) of the Income Tax Act,1995 " speculative transaction"means atransaction in which a contract for thepurchase or sale of any commodity,including stocks and shares, is periodicallyor ultimately settled otherwise than by theactual delivery or transfer of the commodityor scrips: Provided that for the purposes ofthis clause- (a)contract in respect of raw materials ormerchandise entered into by a person in thecourse of his manufacturing or merchantingbusiness to guard against loss throughfuture price fluctuations in respect of hiscontracts for actual delivery of goodsmanufactured by him or merchandise soldby him; or (b)a contract in respect of stocks andshares entered into by a dealer or investortherein to guard against loss in his holdingsof stocks and shares through pricefluctuations; or (c)a contract entered into by a member of aforward market or a stock exchange in thecourse of any transaction in the nature ofjobbing or arbitrage to guard against losswhich may arise in the ordinary course of hisbusiness as such member; shall not be deemed to be a speculativetransaction;” 4.1He contended that the AO while considering the case of theassessee has taken into consideration the Securities Contracts(Regulation) Act, 1956 which reads as under:- “Securities Contracts (Regu-lation) Act,1956 (42 of 1956) carried out in arecognised stock exchange; Purpose & intention for introducing thisclause is explained in Memorandumexplaining the provisions of Finance Bill2005, which is as under- (c)a contract entered into by a member of aforward market or a stock exchange in thecourse of any transaction in the nature ofjobbing or arbitrage to guard against losswhich may arise in the ordinary course of hisbusiness as such member; shall not be deemed to be a speculativetransaction;” 4.1He contended that the AO while considering the case of theassessee has taken into consideration the Securities Contracts(Regulation) Act, 1956 which reads as under:- “Securities Contracts (Regu-lation) Act,1956 (42 of 1956) carried out in arecognised stock exchange; Purpose & intention for introducing thisclause is explained in Memorandumexplaining the provisions of Finance Bill2005, which is as under- “Under the existing provisions [clause (5) ofsection 43], transaction for the purpose andsale of any commodity including stoks andshares is deemed to be a ‘speculativetransaction’, if it is settled otherwise thanby actual delivery. However, certaincategories of transaction are excluded fromthe purview of the said provision. Further,the unabsorbed speculation losses areallowed to be carried forward for eightyears for set off against speculation profitsin subsequent years. These restrictionswere essentially designed as an antievasion measure to prevent claim ofartificially generated losses in the absenceofanappropriateinstitutionalinfrastructure. Recent systematic andtechnological changes introduced by stockmarkets have resulted in sufficienttransparency to prevent generatingfictitiouslossesthroughartificialtransactions or shifting of incidence of lossfrom one person to another the screenbased computerized trading provides for anexcellent audit trail. Therefore, the present distinction between speculative and non-speculativetransactions,particularlyrelating to derivatives is no more required.The proposed amendment, therefore seeksto provide that an eligible transactioncarried out in respect of trading inderivatives in a recognized stock exchangeshall not be deemed to be a speculativetransaction.” From the above it is amply clear that priorto this amendment the transaction inderivatives was excluded from the purviewof the said provision. But todaytechnological changes have brought enoughtransparncy in such transaction thereforefrom 01/04/2006, these transactions areincluded in the proviso of section 43(5) asclause (d) and hence not consideredspeculative from 01/04/2006. viii) Further the assessee’s businesscomprises of two activities a. Income from share trading b. Brokerage income The assessee has suffered loss in F&Otransactions which forms part of activity ofshare trading. Ld. A/R could not prove thatthe losses were in the ordinary course ofbusiness. Further it could not be provedthat on account of anticipated losses forwhich client hedging had to be done. Also,the assessee has tried to set off the lossesin F&O transaction with its income frombrokerage receipts which is otherwise alsonot allowable, the later not being aspeculative transaction. Further, it is heldby Hon’ble Supreme Court in the case ofCIT V. Joseph John (1968) 67 ITR 74(SC)that the burden of proof is upon theassessee to show that transactions aremerely hedging transactions. In view of discussions in the foregoingparas, it is conclusively held that theassessee’s transactions in F&O do not fall inthe ambit of proviso (c) of section 45(3) soas to be excluded from the definition ofspeculative transaction. So, it is held thattransaction of the assessee in F&O arespeculative in nature, therefore loss to the tune of Rs.1,38,64,306/- is herebydisallowed because it shall be allowedagainst income from speculative transactionin future years. In view of discussions in the foregoingparas, it is conclusively held that theassessee’s transactions in F&O do not fall inthe ambit of proviso (c) of section 45(3) soas to be excluded from the definition ofspeculative transaction. So, it is held thattransaction of the assessee in F&O arespeculative in nature, therefore loss to the tune of Rs.1,38,64,306/- is herebydisallowed because it shall be allowedagainst income from speculative transactionin future years. ix) It is worthwhile to mention here that theassessee has alternatively submitted that ifhis contention with respect to section 43(5)(c) is not considered than he may be giventhe benefit of explanation of section 73 ofthe I.T. Act. It is stated by Ld. A/R in hisreply dated 24.12.2007 that since theopening stock was considered asspeculative purchase and sale by theassessing officer in the Assessment Year2004-05 by invoking explanation ot sec. 73of the I.T. Act, it is now submitted humblythat speculation profit of Rs.30,98,306should be set off against loss on jobbing ofRs.1,38,64,306. Submission of the Ld A/Rwith respect to above is consideredspecially in view of my predecessor’s orderdated 26.12.2006 in the instant case forA.Y. 2004-05 where in it was held thatexplanation to section 73 is applicable inthe case of the assessee. However, it needs to be stated thatalthough the assessee is making claim ofexplanation to section 73, but before theappellate authorities for the A.Y. 2004-05, itwas claimed that the section is notapplicable and it does not fall in the ambitof explanation to section 73. So, if anyalternate view is taken by the appellateauthority, benefit with respect toexplanation to section 73 shall bewithdrawn Thus, in view of above discussions loss tothe tune of Rs.1,38,64,306/- is herebydisallowed,however,profitofRs.30,98,306/- is allowed to set off againstit, being speculative in nature as discussedabove. So, sum of Rs.1,07,66,000/- ishereby disallowed being speculative loss.” 4.2Taking into consideration the above, he contended that the AO has rightly computed the income and disallowed Rs.1,07,66,000/- therefore, he submitted that CIT(A) hascommitted serious in interpreting Section 43(5) which has beenconfirmed by the tribunal. 4.3He has taken us to the order of CIT(A) which reads asunder:- Thus, in view of above discussions loss tothe tune of Rs.1,38,64,306/- is herebydisallowed,however,profitofRs.30,98,306/- is allowed to set off againstit, being speculative in nature as discussedabove. So, sum of Rs.1,07,66,000/- ishereby disallowed being speculative loss.” 4.2Taking into consideration the above, he contended that the AO has rightly computed the income and disallowed Rs.1,07,66,000/- therefore, he submitted that CIT(A) hascommitted serious in interpreting Section 43(5) which has beenconfirmed by the tribunal. 4.3He has taken us to the order of CIT(A) which reads asunder:- “I have considered the facts of the case andarguments taken by Sh. Bafna quitecarefully. It is a fact that the appellantcompany has a membership of NationalStock Exchange for cash segment and forfuture and option segment. Its main activityis borking. As per Regulations of NationalStock Exchange the appellant companycannot enter into transactions of purchasesand/or sales on its own. According toNational Stock Exchange of India Regulationof which the appellant is a member, theappellantcompanycannotmakeinvestment/purchase of shares in its ownname and if it intend to do so, it has tocomplete the formalities as necessitate byRBI and other authorities. The volume ofappellant company’s business on behalf ofthe client runs into thousands of the croresand average outstanding as per paper booksubmitted is Rs.21.15 crore. Under thesecircumstances in order to insure itselfagainst the loss which might occur duringthe course of business if the appellantcompany had entered into transactions inrespect of selected commodities then thesecontracts entered into by a member ofNational Stock Exchange which is thenature of jobbing or arbitrage to guardagainst loss which may arise in the ordinarycourse of its business and such membershall not be deemed to be as engaged inthe speculative transactions as provided inS.43(5) Proviso C of I.TY. Act. This issuehas also came up before the Hon’ble ITATJaipur Bench in the appellant’s own case forA.Y. 2004-05 in ITA No.74/JP/2008 dt.30.4.2008 in which Hon’ble ITAT has heldthat if the appellant has to buy or sale thestock/shares for and on behalf of the clientsso as to insure against any loss which might arise during the ordinary course of businessof borking then it is held as covered by thedefinition in S.43(5) of I.T. Act. Consideringsuch factual analysis and ITAT Jaipur Benchdecision in their own case under similarcircumstances, in my considered view theassessing officer was not justified indisallowing the said claim of loss atRs.1,07,66,000/- treating the same asspeculative loss and the AO is directed totreat the same as part of business loss only.Accordingly, the relevant ground of appealis hereby allowed.” 5.Counsel for the respondent contended that in view of thedecision of the Madras High Court in CIT vs. New Ambadi Estates(P) Ltd. in tax case appeal no.203/2005 decided on 10.2.2012which has been relied upon by this court in D.B. Income TaxAppeal No.254/2009 (CIT vs. Brig. Sh. P.S. Kapoor) decided on8.8.2017 and this court held as under:- 7.The Madras High Court decision in the caseof CIT Vs. New Ambadi Estates (P.) Ltd. in TaxCase Appeal No. 203 of 2005 decided on10.02.2012 has considered the decision ofBombay High Court in Commissioner of IncomeTax Vs. Shri Bharat R. Ruia (HUF) Phoenix MillsPremises (supra) and has observed as under:- 5.Counsel for the respondent contended that in view of thedecision of the Madras High Court in CIT vs. New Ambadi Estates(P) Ltd. in tax case appeal no.203/2005 decided on 10.2.2012which has been relied upon by this court in D.B. Income TaxAppeal No.254/2009 (CIT vs. Brig. Sh. P.S. Kapoor) decided on8.8.2017 and this court held as under:- 7.The Madras High Court decision in the caseof CIT Vs. New Ambadi Estates (P.) Ltd. in TaxCase Appeal No. 203 of 2005 decided on10.02.2012 has considered the decision ofBombay High Court in Commissioner of IncomeTax Vs. Shri Bharat R. Ruia (HUF) Phoenix MillsPremises (supra) and has observed as under:- “6. In respect of the second condition as towhether the expression "commodities" "shares"and "stocks include debentures; it was submittedthat the debenture would not come within thepurview of the expression "commodities" andfurther the expression "debentures", "shares"and "stocks" convey distinct and separatemeanings. Definition of Section 43(5) of the Actis inclusive one. It includes only shares andstocks. Debentures are not included. Therefore,the learned counsel appearing for the assesseesubmitted that the debentures, viz., in thepresent case, the transaction is relating to non-convertible security debentures, which will notfall within the definition of "commodity" or"stocks" or "shares". In support of his contention,he relied on the judgment of the Supreme Court cited supra in R.D. Goyal (supra) wherein it hasbeen held that debentures cannot come withinthe definition of shares as well as the stock. Theexpression debentures and shares conveyedseparate meaning and paragraphs 23 to 25 readsas follows: 23. Furthermore, the expressions debentures andshares convey distinct and separate meaningalthough they belong to the same genesis. In AllAbout Debentures by Mr T.M. Sen and Mr C.Chandrasekhar, the distinction between sharesand debentures has been stated thus: Debentures distinguished from: (a) Shares. Although shares and debenturesbelong to the same genesis yet they have distinctand different characteristics. The Companies Act,1956 deals with the issue of debentures in thesame manner as it deals with the issue of shares,but the similarity ends with the mode andmanner of issue, their allotment, theirtransferability and in the applicability of forfeitureprovisions. The corpus of the two issues formstwo different segments of capital sharesrepresenting the share capital and thedebentures representing the loan capital.Shareholders are the owners of the company tillthe company is folded up fully while debenture-holders are only creditors of the companysometimes secured and sometimes unsecuredand that too for a defined period. The rights ofthe shareholders and debenture-holders aredifferent as also their remedies. To the extent thecomparison could bear between the two, theprocedures are by and large the same for both inthe matter of issue, allotment, transfers andforfeiture. Shares, therefore, are distinct fromdebentures, although in the usual parlance theyboth are grouped together in many legislationsand referred to sometimes by the generic term ofscrip. It is on account of their free transferabilityand marketability, they are referred together. Thestamp duty on the share certificates anddebenture certificates and on their transfers istotally different and bears no comparison. Theincidents of debenture certificates as seen fromour discussion above are different from theincidents of share certificates and hence bear no comparison. Therefore, there is no equationbetween shares and debentures except asreferred to above. comparison. Therefore, there is no equationbetween shares and debentures except asreferred to above. 24. Share has been defined in Section 2(46) ofthe Companies Act to mean a share in the sharecapital of a company which in turn would meanthat it would represent contribution of theshareholder towards the share capital of thecompany. On the other hand, a debenture is aninstrument of debt executed by the companyacknowledging its receipt to repay the same at aspecified rate and also carrying an interest. It isin sum and substance a certificate of loan or abond evidencing the fact that the company isliable to pay a specified amount with interest andalthough the money raised by the debenturesbecomes a part of the company's capitalstructure yet it does not become a share capital.In any event, a debenture would not come withinthe purview of the definition of goods, inasmuchas, although the shares and stocks are includedin the definition of goods but debentures are not. 25. We may also note that having regard to theprovisions contained in Section 36-A of theMRTPAct, there cannot be any doubt whatsoeverthat an inquiry proceeding can be initiated whenan element of unfair trade practice arises in thematter of promoting sale, or use of any goods.Shares before their allotment, in our opinion, arenot goods. In Sri Gopal Jalan & Co. v. CalcuttaStock Exchange Assn. Ltd. it has been held thatin company law allotment means theappropriationoutofthepreviouslyunappropriated capital of a company, of a certainnumber of shares to a person. Till allotment ismade, shares do not exist as such. It is only onallotment in this sense that the shares come intoexistence. Therefore, till the shares are actuallyissued, the question of the company havingissued debentures as transferable property wouldnot arise and thus there cannot be any doubtwhatsoever that the shares before their allotmentwould not come into existence and they cannotbe regarded as goods. Debentures would also notcome within the purview of the definition ofstock. From reading of the above, it is clear that the debentures cannot come within the expression of"goods" nor "shares" or "stocks". The onlydistinction in the present case and the SupremeCourt case is that the expression "goods" is thesubject matter of the Supreme Court. But in thepresent case, the expression "commodity" is indispute. The said distinction does not make anydifference. So the principle enumerated in theabove judgment is squarely applicable. Further,the debenture is an instrument of debt executedby the company acknowledging its receipt torepay the same at a specified rate along withinterest. The learned counsel for the respondent-assessee contended that the word commoditycannot include debenture because debenture isan instrument. Therefore, in view of the first partof the transaction, that purchase or sale of anycommodity including stock and shares will notinclude debentures. Further, the learned counselalso relied on the same judgment for theproposition that no question of buying and sellingof commodities arises when there is noallotment. In the present case, no allotment hasbeen made and there is no dispute regarding thesame. The learned counsel also relied the R.D.Goyals case cited supra, wherein the Apex Courthas considered the scope of words "creation",issue" and "allotment" and paragraphs 38 and 39reads as follows: 38. It was noticed: (SCC pp. 86-87, para 10) 38. It was noticed: (SCC pp. 86-87, para 10) The words allot and distribute found in clause (b)of the resolution do not carry the matter further.Their meaning should be gathered from thecontext in which they were used. Clauses (b) and(c) of the resolution must be read harmoniouslywith clause (a). The word allotment has not beendefined in the Companies Act. The meaning ofthe word allot or allotment will have to begathered from the context in which those wordsare used. This Court considered the meaning ofthe word allotment in Sri Gopal Jalan and Co. v.Calcutta Stock Exchange Assn. Ltd.3 Therein, itreferred to a large number of English decisionswhich have considered the meaning of that word.In that decision this Court referred to theobservations of Chitty, J., in Florence Land andPublic Works Co., In re: To my mind there is no magic whatever in theterm allotment as used in these circumstances. It is said that the allotment is an appropriation of aspecific number of shares. It is an appropriation,not of specific shares, but of a certain number ofshares. In Sri Gopal Jalan case Sarkar, J. (as he thenwas), quoted with approval the following passagefrom Farwell, L.J., in Mosely v. Koffyfontein MinesLtd.: As regards the construction of these particulararticles, it is plain that the words creation, issueand allotment are used with the three differentmeanings familiar to business people as well asto lawyers. There are three steps with regard tonew capital; first, it is created; till it is createdthe capital does not exist at all. When it iscreated it may remain unissued for years, asindeed it was here; the market did not allow of afavourable opportunity of placing it. When it isissued it may be issued on such terms as appearfor the moment expedient. Next comesallotment. To take the words of Sterling, J., inSpitzel v. Chinese Corpn. he says: What is anallotment of shares? Broadly speaking, it is an appropriation by thedirectors or the managing body of the companyofshares to a particular person. After examining the various decisions, Sarkar, J.,observed: It is beyond doubt from the authorities to whichwe have earlier referred, and there are manymore which could be cited to show the sameposition, that in company law allotment meansthe appropriation out of the previouslyunappropriated capital of a company of a certainnumber of shares to a person. Till such allotmentthe shares do not exist as such. It is an allotmentin this sense that the shares come into existence. ------- In the present case, the convertible secureddebentures portion is given to the bank which isakin to giving up the right. Therefore, the abovejudgment also supports the case of the assessee.Following the principles enunciated in thejudgment of Apex Court in R.D. Goyals (supra) case as well as the judgment of the Calcutta HighCourt in Nirmal Trading Co. (supra) cited supra,we are of the view that the transaction relating tothe partial non-convertible security debentureswill not come within the expression "commodity"or "shares" or "stocks" and since there was noallotment the question of purchase or sale willnot arise.” 6.We have heard counsel for the parties. 6.1Taking into consideration the aforesaid factual position, inour considered opinion, the view taken by both the authorities, inview of the decision of the Madras High Court (supra) is requiredto be accepted. 6.2In that view of the matter, the issue is answered in favour ofthe assessee and against the department. 7.The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 36.