TMI Blog2011 (3) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section, effect should be given to the legislative intent notwithstanding the fact that the legislature named that provision as an Explanation. The loss suffered by the assessee in the purchase and sale of shares had fallen within the category of “speculation business” as per the Explanation to Section 73 of the Act and therefore, can be set off and carried forward only against profits and gains from speculation business and not from any other head. - Decision of ITAT maintained - Decided against the assessee - ITA No. 190/2003 - - - Dated:- 17-3-2011 - Hon ble Mr. Justice Bhaskar Bhattacharya Hon ble Mr. Justice Sambuddha Chakrabarti For the Appellant: Dr. Debi Prasad Paul. For the Respondents: Mr. M. P. Agarwal. [Judgment].- Bhaskar Bhattacharya, J.:- This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against the order passed by the Income-tax Appellate Tribunal A Bench, Kolkat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness and not from any other head. Consequently, the loss of Rs.87,000/- suffered in share trading business was directed to be carried forward as a loss in speculative business. Being dissatisfied, the assessee has come up with the present appeal: 5. After hearing the learned counsel for the parties and after noting the trend of argument advanced by Dr. Pal, the learned Advocate for the appellant, this Bench formulated the following question of law for determination: Whether the transaction arising from the business of purchasing and selling of shares where there has been actual delivery of transfer of the scripts come within the ambit and scope of speculative transaction as defined in Section 43(5) of the Act so as to apply Section 73 of the Act by taking aid of the Explanation to Section 73 of the Act. In order to appreciate the aforesaid question, the following provisions of the Income-tax Act, 1961,are quoted below: Section 28 Explanation-2 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (whether relating to short-term capital assets or any other capital assets). (3) Where in respect of any assessment year, the net result of the computation under the head Capital gains is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.] Section 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 he has no income under any other head, the whole loss shall, subject to the other provisions of the Chapter, be carried forward to the following assessment year, and (i) 1[* * *] (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on: Provided that where the whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of Section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation. Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources , or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. (Emphasis supplied by us). 6. The statement of objects and reasons for the added Explanation to Section 73 and the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business. 19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. 19.3 This provision will come into force with effect from 1-4-1977 and will apply in relation to the assessment year 1977-78, and subsequent years. 7. Dr. Pal, the learned senior counsel appearing on behalf of the appellant, strenuously contended before us that if the Explanation added to Section 73 of the Act is deleted, the claim of his client for loss of Rs.87,000/- suffered in share trading business could not be described as speculation business within the meaning of Section 43(5) of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax reported in 92 ITD 324 (Delhi Tribunal). 10. Mr. Agarwal, the learned counsel appearing on behalf of the Revenue, has, on the other hand, opposed the aforesaid contention advanced by Dr. Pal and has contended that in the case before us, unless we construe the Explanation to Section 73 in the way done by the Accountant Member and the Third Member of the Tribunal, the same will become otiose and therefore, the interpretation by the majority members should be the only possible interpretation. Mr. Awarwal, therefore, prays for answering the question in favour of revenue. 11. Before entering into the question involved in this appeal, we keep it on record that in this appeal under Section 260A of the Act there is no scope of any argument that the added Explanation is ultra vires the other provision of the Act and on that ground the said provision is to be ignored. Therefore, by treating the said explanation as intra vires, we propose to interpret the said provision. 12. After hearing the learned counsel for the parties and after going through the aforesaid provisions quoted above, we find that in case of an ordinary assessee, who has suffered loss from h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 and in that context it was contended on behalf of the Revenue that after the amendment, the proviso conferred a power on the taxing authorities to tax the surplus even though the assessee did not in fact conduct business during the previous year and though in fact the machinery was not used in the said business during a part of whole of the accounting year. It was contended that the proviso was a charging section and that though it was couched in the form of a proviso, it was really a substantive section imposing a charge on the assessee in respect of the surplus. 20. The Supreme Court highlighted the purpose of a proviso by its following observations: The function of a proviso has been considered by this Court in Commr. of Income-tax v. Indo-Mercantile Bank Ltd., (1959) 36 ITR 1 : (AIR 1959 SC 713). It is neatly summarised in the Head Note thus: "The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it is foreign to the proper function of a proviso to read it as providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be extended beyond that legitimate field. In the present case the fiction is limited to the cases provided in the three sub-sections of S. 24-B and cannot be extended further than the liability for the income received in the previous year." 22. By relying upon the above observations, the Supreme Court concluded that the fiction in the second proviso was a limited one. The surplus was deemed to be the profits of the previous year and as pointed out earlier, it adequately served the purpose of the section. According to the said decision, it was given a limited meaning under the earlier decisions and to sustain the argument of the Revenue, it had to be enlarged in its scope and many words were to be read into it which were not there. 23. In the case before us, on the other hand, if we are required to accept the contention of Dr. Pal, the explanation added should be totally ignored and thus, the only interpretation of the added Explanation is that a limited class of assessees would come under the said provisions although in accordance with the other provisions of the Act those are not doing speculation business. 24. In the case of Commissioner of Income-tax, Kanpur Vs.. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of that nature as there has been actual delivery of the scripts of share. Such legal fiction is not applicable to other types of assessees than a company as indicated therein. Thus, the said decision does help the appellants in anyway. 27. In the case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and others (supra), the principal question that arose for determination in that appeal by certificate was whether understatement of consideration in a transfer of property was a necessary condition for attracting the applicability of Section 52 sub-section (2) of the Income-Tax Act 1961 or it is enough for the Revenue to show 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. The facts giving rise to the appeal were as follows: 28. The assessee was the owner of a house situated in Ernakul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a condition precedent that there should be understatement of consideration in respect of the transfer and it was enough to attract the applicability of the sub-section if 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 by an amount of not less than 15% of the value so declared, which was indisputably the position in the present case, the Income-tax Officer assessed the sum of Rs.48,500/- to tax as capital gains. The assessee thereupon preferred a writ petition in Kerala High Court challenging the validity of the order of reassessment in so far as it brought the sum of Rs.48,500/- to tax relying on Section 52 sub-section (2) of the Act. 29. The writ petition came up for hearing before Isaacs, J., sitting as a single Judge of the High Court and after hearing both the parties, the learned Judge came to the conclusion that understatement of consideration in respect of the transfer was a necessary condition for attracting the applicability of Section 52 sub-section (2) and since in the present case, there was admittedly no understatement of consideration and it was a perfectly bona fide transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be received in India in such year by him or on his behalf or accrued or arose or was deemed to accrue or arose to him in India during such year or accrued or arose to him outside India during such year. Section 14 enumerated the heads of income under which income should, for the purposes of charge of income-tax and computation of total income, be classified and they include "capital gains". Section 45 provided that any profits or gains arising from the transfer of a capital asset effected in the previous year should be chargeable to income-tax under the head "capital gains" and should be deemed to be the income of the previous year in which the transfer took place. The mode of computation of capital gains was laid down in Section 48 which provided that the income chargeable under the head "capital gains" should be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, two amounts, namely, (1) expenditure incurred wholly and exclusively in connection with such transfer and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. Then followed Section 52, which was the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis. According to the Revenue, nothing more was necessary to be proved and to introduce any further condition such as understatement of consideration in respect of the transfer would be to read into the statutory provision something which was not there and would amount to rewriting the section. This argument was based on a strictly literal reading of Section 52(2). According to the Supreme Court, such a construction could not be accepted as it ignored several vital considerations which must always be borne in mind in interpreting a statutory provision. The task of interpretation of a statutory enactment, the Supreme Court proceeded, was not a mechanical task. 32. It was more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It was an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language was at best an imperfect instrument for the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction which renders the statutory provision constitutionally valid rather than that which makes it void. Consequently, the Supreme Court held that sub-section (2) of Section 52 could be invoked only where the consideration for the transfer had been understated by the assessee or in other words, the consideration actually received by the assessee was more than what was declared or disclosed by him and the burden of proving such understatement or concealment was on the Revenue. This burden, the Court proceeded, might be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference could be drawn that the assessee had not correctly declared or disclosed the consideration received by him and there was understatement or concealment of the consideration in respect of the transfer. Sub-section (2), according to the Supreme Court, had no application in case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there was no concealment or suppression of the consideration. 35. In the case before us, it is the intention of the legislature that any loss, comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible to read down the section as submitted by learned Attorney General. The Supreme Court, in such circumstances, struck down the expression free from all encumbrances in sub-section (1) of Section 269-UE and subsection (1) of Section 269-UE was directed to be read without the expression free from all encumbrances with the result the property in question would vest in the Central Government subject to such encumbrances and leasehold interests as are subsisting thereon except for such of them as are agreed to be discharged by the vendor before the sale is completed. It was pointed out that if under the relevant agreement to sell the property is agreed to be sold free of all encumbrances or certain encumbrances it would vest in the Central Government free of such encumbrances. Similarly, sub-section (2) of Section 269-UE would be read down so that if the holder of an encumbrance or a lessee is in possession of the property and under the agreement to sell the property it is not provided that the sale would be free of such encumbrances or leasehold interests, the encumbrance holder or the lessee who is in possession will not be obliged to deliver the possession of the property to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to give 'force and life' to the intention of the Legislature. That was clearly laid down by the resolution of the Judges in Heydon's case (1584 (3) Co. Rep. 7a), and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden..........Put into homely metaphor it is this: A Judge should ask himself the question: If the makers of the Act had themselves come across this ruck in the texture of it, how would they have straightened it out? He must do as they would have done. A Judge must not alter the material of which it is woven, but he can and should iron out the creases." 39. In the case before us, there is no scope of ironing out the Explanation to Section 73 and thus, the said observations are inappropriate in the facts of the present case. By referring to the decision of the Supreme Court in the case of CIT Vs. Alom Extrusions Ltd. (Supra), where the Supreme Court in paragraph 17 of the judgement relied upon the observations of the said Court in the case of CIT Vs. J. H. Gotla, reported in (1985) 156 ITR 323, Dr. Pal tried to impress upon us that we should not make literal construction of the Explanation but should make an equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, past member or deceased member, or sureties of member, past members or deceased members, whether such sureties are members or non-members, and the society, its managing committees or any officer, agent or servant of the society; or (c) between the society or its managing committee and any past or present officer, agent or servant of the society, or (d) between the society and any other registered society; or (e) between a financing bank authorised under the provisions of sub-s.(1) of S. 16 and a person who is not a member of a registered society such disputes stall be referred to the Registrar: Provided that no claim against a past member or the estate of a deceased member shall be treated as a dispute if the liability of the past member or of the estate of the deceased member has been extinguished by virtue of S. 32 or S. 63. Explanation. - (1) A claim by a registered society for any debt or demand due to it from a member, non-member, past member or the nominee, heir or legal representative of a deceased member or nonmember or from sureties of members, past members or deceased members, whether such sureties are members or non-members, shall be a dispute touching the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, which is not a registered society or a member of a registered society, could not have its claim, or a claim against it by a registered society, referred to the Registrar for decision, under this section." 43. According to the Court, the effect of the amendments introduced by the Act of 1948 was "that a claim by a financing bank against a non-member to whom the former had made an advance in cash or kind, with the sanction of the Registrar under S. 16 (1), would be entertainable by the Registrar, on a reference, but that does not mean that a claim which was not of the description referred to in Section 16 (1) read with Section 2 (c), by a registered society against any nonmember, who is not an agriculturist, is within the purview of Section 48 (1) read with the Explanation. The Explanation, the court proceeded, could not be read as adding a new head to the categories (a) to (e) under Section 48 (1) of disputes which might be referred to the Registrar. Originally, the Explanation had been added only to make it clear that even if a debt or demand is due and the only point at issue is the ability to pay or the manner of enforcement of payment the dispute would come within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and inexpensively adjudicated upon by the Registrar. Before the amendment of 1948, the Explanation only served to clear up the doubt as to whether a dispute was referable to the Registrar when the debt or demand was admitted and the only point at issue was the ability to pay or the manner of enforcement of payment As already pointed out by this Court, the Explanation had to include non-members after the insertion of category (e) in sub-s. (1) of S. 48. The purpose of the Explanation never was to enlarge the scope of sub-s. (1) of S. 48 and the addition of category (e) to that subsection and the inclusion of non-members in the Explanation cannot have that effect. In our opinion. the High Court was not justified in allowing the appeal of the bank on that ground. 45. By referring to the aforesaid observations, Dr. Pal wanted to impress upon us that the Explanation must be read so as to harmonise with and clear up any ambiguity in the main section and it should not be so construed as to widen the ambit of the section. In our opinion, in the present context, the view taken by us is the only possible view, otherwise, we are to totally ignore the Explanation and if we propose to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported by various authorities of this Court. To quote only a few, in Burmah Shell Oil Storage and Distributing Co. of India Ltd. v. Commercial Tax Officer (1961) 1 SCR 902 : (AIR 1961 SC 315), a Constitution Bench decision, Hidayatullah, J. speaking for the Court, observed thus : "Now, the Explanation must be interpreted according to its own tenor, and it is meant to explain cl. (1)(a) of the Article and not vice versa. It is an error to explain the Explanation with the aid of the Article, because this reverses their roles." 49. In Bihta Co-operative Development Cane Marketing Union Ltd. v. Bank of Bihar (1967) 1 SCR 848 : (AIR 1967 SC 389) this Court observed thus : "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." 50. In Hiralal Rattanlal's case (AIR 1973 SC 1034) (supra), this Court observed thus : "On the basis, of the language of the Explanation this Court held that it did not widen the scope of clause (c). But from what has been said in the case, it is clear that if on a true reading of an Explanation it appears that it has widened the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Dr. Pal relied upon the decision in the case of CIT Vs. Kulu Valley Transport Co. Private Limited (supra), for the purpose of submitting that while interpreting a taxing statute, if two views are possible, the one favourable to the assessee should be adopted. In our opinion, in the case before us, only one interpretation of the Explanation to Section 73 is possible and that goes against the assessee and thus, the said decision does not help the appellant in any way. 49. The cases of Mysore Minerals Ltd (supra), and CIT, West Bengal Vs. M/S Vegetable Product Ltd. (supra), were cited for the same submission that where two views are possible, the one favourable to the assessee should be followed. 50. We, thus, answer those decisions by our above observations while dealing with the case of Kulu Valley Transport Pvt. Ltd (supra). 51. The decision of the Delhi Tribunal in the case of Aman Portfolio (P) Ltd. (supra), in our view, does not reflect the correct interpretation of the Explanation to Section73 which is arrived at by the Tribunal in disregard to the clear language of the Explanation and on wrong interpretation of the Supreme Court decision in the case of K. P. Ve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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