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TMI Blog2011 (3) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... business can be applied to Sections 70, 71 and 72 and in determining the gross total income the said Explanation to Section 73 can at all be applied while considering the set off of loss under Sections 70 and 71 and carry forward of such loss such Section 72 of the Act?" 2. The facts giving rise to filing of this appeal may be summed up thus: The assessee filed return on 30th December, 1991 disclosing a loss of Rs.1,31,043/- and it was selected for scrutiny and the notices under Sections 143(2) and 142(1) were issued and served on the assessee. The controversy arose regarding the loss disclosed by the assessee for the purpose of sale of shares amounting to Rs.87,000/- being treated as speculation loss in view of the Explanation added to Section 73 of the Income-tax Act. On appeal, the CIT (A) was of the view that the Explanation to Section 73 of the Act was attracted in the instant case and the loss was regarded as a speculation loss. The contention of the assessee, on the other hand, was that the Explanation to Section 73 of the Act was not applicable in this case. 3. The assessee appealed to the Tribunal. The learned Judicial Member accepted the claim of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; shall not be deemed to be a speculative transaction. Section 70. Set off of loss from one source against income from another source under the same head of income. - Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Section 71. Set off of loss from one head against income from another - (1) Where in respect of any assessment year the net result of the computation under any head of income other than "Capital gains", is a loss and the assessee has no income under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding. (2) Where any allowance or part thereof, is under sub-section (2) of Section 32 or sub-section (4) of Section 35, to be carried forward, effect shall first be given to the provisions of this section. (3) No loss other than the loss referred to in the proviso to sub-section (1) of this section shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Section 73. Losses in speculation business.-(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a specu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as they relate to direct taxes. Opportunity has been taken to sponsor some amendments on the basis of suggestions received from various other quarters as well. Technical difficulties arising in the operation of some of the provisions of these enactments have also been taken into account in formulating these proposals. "2. The main objectives of the amendments proposed to be made are to unearth black-money and prevent its proliferation; to fight and curb tax evasion; to check avoidance of tax through various legal devices, including the formation of trusts and diversion of income or wealth to members of family; to reduce tax arrears and to ensure that in future, tax arrears do not accumulate; to rationalise the exemptions and deductions available under the relevant enactments, and to streamline the administrative set-up and make it functionally efficient. "3. The Notes on Clauses, appended to the Bill, explain the various provisions thereof." "Treatment of losses in speculation business - section 73. "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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is not otherwise speculative, cannot be brought within the mischief of speculative transaction. 8. According to Dr. Pal an explanation added to the main Section cannot extend the ambit of the main Section and therefore, we should ignore the Explanation to Section 73 altogether. 9. In support of such contention, Dr. Pal places reliance upon the following decisions: 1. Commissioner of Income-tax, Madras Vs. Ajax Products Ltd. Reported in 55 ITR 741 (S.C.) at page 750; 2. Commissioner of Income-tax Vs. Mother India Refrigeration Industries P. Ltd. reported in 155 ITR 711 (S.C.) at page 718; 3. Commissioner of Income-tax, Madras Vs. Express Newspapers Ltd. reported in 53 ITR 250 (S.C.) at page 260; 4. K. P. Varghese Vs. Income-tax Officer, Ernakulam & Anr. reported in 131 ITR 597 (S.C.) at pages 603, 604, 605 & 612; 5. C. B. Gautam Vs. Union of India & Ors. reported in 199 ITR 530 (S.C.) at page 546; 6. State of Bihar & Ors. Vs. Bihar Distillery Ltd. reported in AIR 1997 S.C. 1511 at page 1519, paragraph 21; 7. Commissioner of Income-tax Vs. Alom Extrusions Ltd. reported in (2009) 319 ITR 306 (S.C.) at page 316, para-17; 8. Bihta Co-operative Development & Cane Marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transaction should be treated to be speculative transaction within the meaning of Section 73 of the Act notwithstanding the fact that according to the definition of speculative transaction mentioned in Section 43(5) of the Act, the transaction is not within its purview as there has been actual delivery of the scripts of share. 13. We should bear in mind that the benefits of Sections 70 to 72 claimed by the assessee are available in accordance with the other provisions of the chapter where those occur which includes the provision contained in Section 73 of the Act including the Explanation added to it. Therefore, by virtue of added Explanation given in Section 73 of the Act, even the transactions, which are not speculative transactions within the meaning of Section 43(5) of the Act, should be deemed to be speculative one if those come within the purview of the Explanation to Section 73 of the Act. 14. If we accept the contention of Dr. Pal that the earlier provision defining speculative transaction should prevail even if the case comes within the conditions of the Explanation to Section 73, we cannot give effect to the added Explanation at all and the said Explanation added b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. So construed, we have already stated earlier the result that flows from such a construction." 21. The Supreme Court then explained the effect of a fiction created by law by making the following observations: "This Court in 'Commr. of Income-tax Bombay City 1, v. Amarchand N. Shroff, (1963) 48 ITR 59: (AIR 1963 SC 1448), rightly administered a caution that fictions should not be stretched beyond the purpose for which they were enacted. In that case, the question arose whether under S. 24B of the Act the Income-tax Officer could levy tax on receipts by the legal representative of the deceased person in the years of assessment succeeding the year of account being the previous year in which such person died. Under S. 24-B the legal personality of the deceased assessee was extended for the duration of the entire previous year in the course of which he died and, therefore, the income received by him before his death and that received by his heirs and legal representatives after his death but in that previous year became assessable in the relevant assessment year. The Court held that the section was enacted to bring to tax after the death, income received during his life time. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be limited to that purpose and should not be extended beyond that legitimate field. According to the Apex court in that case, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to S. 10(2)(vi) was to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year, so that it is available, unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year. 25. In the case before us, we have already pointed out that by virtue of the legal fiction created by the added Explanation to Section 73 of the Act, even the transactions which are not speculative transactions within the meaning of Section 43(5) of the Act, should be deemed to be speculative one if those come within the purview of the Explanation to Section 73 of the Act. We, thus, find that the above mentioned decision cited by Dr. Pal is of no assistance to his clients. 26. In the case of The Commissioner of Income-tax, Madras Vs. The Express Newspapers Ltd., Madras (supra), the Supreme Court reiterated the well-settled proposition of law that a legal fiction is limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice under Section 148 of the Act seeking to reopen the assessment of the assessee for the assessment year 1966-67 and requiring the assessee to submit a return of income within thirty days of the service of the notice. The notice did not state what was the income alleged to have escaped assessment but by his subsequent letter dated 4th March 1969, the Income-tax Officer intimated to the assessee that he proposed to fix the fair market value of the house sold by the assessee on 25th December 1965 at Rs.65,000/ as against the consideration of Rs.16,500/- for which the house was sold and assess the difference of Rs.48,500/- as capital gains in the hands of the assessee. The assessee raised objections against the reassessment proposed to be made by the Income-tax Officer but the objections were overruled and an order of reassessment was passed by the Income-tax Officer including the sum of Rupees 48,500/- as capital gains and bringing it to tax. Though the sale of the house by the assessee was in favour of his daughter-in-law and five of his children who were persons directly connected with him, the Income-tax Officer could not invoke the aid of Section 52 sub-section (1) for bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (2), it was not at all necessary that there should be understatement of consideration in respect of the transfer and once it was found that the fair market value of the property as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared, Section 52 sub-section (2) was straightway attracted and the fair market value of the property as on the date of the transfer was liable to be taken as the full value of the consideration for the transfer. The writ petition was, accordingly, dismissed and the order of reassessment was sustained by the majority decision of the Full Bench. Hence the matter went to the Supreme Court at the instance of the assessee with certificate obtained from the High Court. 30. It will be noticed from the above statement of facts that the principal question that arose for determination in the appeal before the Supreme Court turned on the true interpretation of Section 52 sub-section (2). But in order to arrive at its proper interpretation, it is necessary to refer to some other provisions of the Act as well. Section 2 clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion of the Income-tax officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent of the value declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer." There was a marginal note to Section 52 which read: "Consideration for transfer in cases of understatement". It may be pointed out that originally when the Act came to be enacted, S. 52 consisted of only one provision which was quoted above and numbered as sub-sec. (1) and it was by Section 13 of the Finance Act 1964 that sub-section (2) was added in that section with effect from 1st April 1964. 31. Now on these provisions, the question that arose was about the true interpretation of Section 52(2) of the Act. The argument of the Revenue found favour with the majority Judges of the Full Bench that on a plain natural construction of the language of Section 52(2), the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d there was no understatement of the consideration, it would result in an amount being taxed which had neither accrued to the assessee nor been received by him and which from no view point could be rationally considered as capital gains or any other type of income. According to the Apex Court, it was a well-settled rule of interpretation that the Court should as far as possible avoid that construction which attributed irrationality to the legislature. 34. Besides, under Entry 82 in List I of the Seventh Schedule to the Constitution which dealt with "Taxes on income" and under which the Income-tax Act, 1961 had been enacted, the Parliament could not "choose to tax as income an item which in no rational sense could be regarded as a citizen's income or even receipt. Sub-section (2) would, therefore, on the construction of the Revenue, go outside the legislative power of Parliament, and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section (2) would also be violative of the fundamental right of the assessee under Article 19 (1) (f) which fundamental right was in existence at the time when sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to adopt the only possible interpretation of the Explanation added to Section 73 of the Act. The above decision thus is not applicable to the facts of the present case. 36. In the case of C. B. Gautam Vs. Union of India (supra), it was submitted by learned Attorney General that the provisions of sub-section (1) of Section 269-UD Income Tax Act, 1961 might be read down so as to mean that the property compulsorily purchased under an order made under Section 269-UD(1) would vest in the Central Government subject to bona fide encumbrances and leasehold interests subsisting thereon other than monthly tenancies. It was urged by him that in a pre-emptive purchase normally what would be purchased is only that which was put up for sale or sold and, if the same principle was applied to the compulsory purchase by the Central Government under Section 269-UD, the rights of the encumbrance holders and the holders of leasehold interests subject to which the property was agreed to be sold could be protected. In view of such a proposal given by the learned Attorney General, the Court agreed that in order to save a statute or a part thereof from being struck down it could be suitably read down. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the statutory provisions. 38. The observations of the Supreme Court in the case of State of Bihar and others Vs. Bihar Distillery Ltd. (supra), at paragraph 21, in our opinion, is totally irrelevant, although relied upon by Dr. Pal. Such observations are quoted below: "We may also refer to the following perceptive observations in the decision of Lord Denning in Seafood Court Estates Ltd. v. Ashher, (1949) 2 KB 481: "Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticized. A Judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the Judges trouble if Acts of Parliament were drafted with divine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity rather than in injustice, then such construction should be preferred to the literal construction." 40. It appears that the Supreme Court relied upon the aforesaid observation in the earlier case for the purpose of holding that the omission of the second proviso to Section 43B of the Income Tax Act, 1961 by the Finance Act, 2003, operated retrospectively with effect from April 1, 1988 and not from April 1, 2004. In the context of the said case, the above observations were definitely appropriate to give effect to the intention of the legislature. But in the case before us, Dr. Pal wants that we should totally ignore the Explanation the effect of which would be to act against the intention of the legislature which is apparent. We thus find that the said decision is irrelevant in the present case. 41. In the case of Bihta Co-operative Development and Cane Marketing Union Ltd., and another Vs. Bank of Bihar and others (supra), the Supreme Court was considering the scope of Section 48 of the Bihar and Orissa Co-operative Societies Act (6 of 1935) (as amended by Bihar Act 16 of 1948). Section 48(1) of the said Act is quoted below: "48. (i) If any dispute touching the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as commission and interest for the supply of sugarcane and referred the same to the first respondent. The preliminary objection of the appellant to the jurisdiction of the first respondent to adjudicate upon the dispute was overruled. The appellant went to the Patna High Court under Articles 226 and 227 of the Constitution for quashing the orders of the first respondent. The High Court following a previous decision in Union of India Vs. Registrar, Co-operative Societies, Patna, (1961) ILR 40 Pat 7, summarily dismissed the application. Before the Supreme Court in appeal, it was contended that the dispute was beyond the pale of Section 48 and as such, not referable there under. The Court took into consideration the various amendments which were introduced by the Act of 1948 and observed: "Before the amendments introducer] by the Act of 1948, the disputes which could be entertained by the Registrar were disputes among Novembers, past members of their heirs, or their sureties or between a society and its officers, agents or servants, or between a society and other registered societies (without meaning to exhaust all the categories). But before the amendments, one who was not a membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till be within the purview of the section by reason of the Explanation. In the context of the above submission, the Supreme Court observed as follows: "We find ourselves unable to accept this contention. Before the amendments introduced in 1948, the Explanation to the section made no mention of non-members and non-members had to be included in the Explanation because of the inclusion of this class of persons in category (e) of sub-s. (1) of S. 48. The Explanation must be read so as to harmonise with and clear up any ambiguity in the main section. It should not be so construed as to widen the ambit of the section. The scheme of sub-s. (1) of S. 48 seems to be that certain disputes touching the business of a registered society should not be taken to civil Courts and made the subject-matter of prolonged litigation. The legislature took pains to specify the persons whose disputes were to be subject-matter of reference to the Registrar. Non-members did not come into the picture at all. Non-members other than officers agents or servants of the society do not figure in subcls. (a) to (d) except as sureties of members. By sub-cl. (e) only those nonmembers who had disputes with a financing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is to understand the Act in the light of the explanation. (b) It does not ordinarily enlarge the scope of the original section which it explains, but only makes the meaning clear beyond dispute." (P. 329) 46. Swarup in 'Legislation and Interpretation' very aptly sums up the scope and effect of an Explanation thus: "Sometimes an explanation is appended to stress upon a particular thing which ordinarily would not appear clearly from the provisions of the section. The proper function of an explanation is to make plain or elucidate what is enacted in the substantive provision and not to add or subtract from it. Thus an explanation does not either restrict or extend the enacting part; it does not enlarge or narrow down the scope of the original section that it is supposed to explain.......... The Explanation must be interpreted according to its own tenor; that it is meant to explain and not vice versa." (Pp. 297-298) 47. Bindra in 'Interpretation of Statutes' (5th Edn.) at page 67 states thus: "An explanation does not enlarge the scope of the original section that it is supposed to explain. It is axiomatic that an explanation only explains and does not expand or add to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is - (a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same." (Emphasis supplied by us). 46. Thus, it is clear that although ordinarily the object of an explanation is not to enlarge the scope of the original section that it is supposed to explain, if on a true reading of an Explanation it appears that it has widened the scope of the main sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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