TMI Blog2016 (3) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... o. As the main activity is only in manufacture and sale of yarn, the purchase of shares, having not been regular, should be construed only as an investment. When there is no systametic or organised course of activity and when there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition of business, under Section 2(13) of the Income Tax Act, 1961, there is no point in contending that the assessee is engaged in the business muchless in a speculative business. Therefore, the Assessing Officer ought to have allowed the loss, as short term capital loss and set off against the other business income of the appellant Company. As the appellant Company had properly delivered the shares at the time of selling, the transaction would not come under the provisions of Section 43 (5) of the Income Tax Act, 1961. When the provisions of Section 43 (5) is not applicable to the facts of this case, the contention that the case of the assessee would be covered under explanation to Section 73 of the Income Tax Act, 1961, cannot be accepted. As the genuineness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e set off against the income from its regular business and thus, cancelled the reassessment Challenging the order of the Commissioner of Income Tax (Appeals), an appeal was filed before Income Tax Appellate Tribunal. The Appellate Tribunal reversed the findings of the Commissioner (Appeals) and restored the findings of the assessing officer. Therefore, the assessee is on appeal raising the following substantial question of law: 1. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the short term capital loss on sale of shares made by the appellant company is to be treated as a speculative loss by virtue of Explanation to Section 73 of the Act when actual delivery and possession has been made in respect of sale of shares? 2. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the short term captial loss on sale of shares made by the Appellant Company is deemed to be speculative loss even though the transactions of sale of shares are not covered under Section 43 (5) of the Act? 3. It is not in dispute that the assessee is a manufacturing Company engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense. The definition being inclusive and not exhaustive, is indicative of extension and expansion and not restriction. The word business is one of large and indefinite import and connotes something which occupies the time, attention and labour of a person normally with the object of making profit. Mere holding of property or investments cannot amount to a business, as held in the case of East India Prospecting Syndicate v. CEPT, (1951) 19 ITR 571 (Cal). A person, who merely invests in shares for the purpose of earning dividends, does not carry on business. He may, at any time, convert those shares into his stock-in-trade and carry on business in that commodity [Bengal Assam Investors Ltd. vs. CIT, (1966) 59 ITR 547 (SC)]. In order to constitute an activity as business activity, there are certain essential requirements which must be fulfilled. Firstly, it must be a continuous course of dealing and, secondly, it must be carried on with a profit motive [Mrs.Kamala Muthia v. CIT, (2003) 259 ITR 184, 187 (Mad)]. 4.3. 28. Profits and gains of business or profession T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are to be periodically or ultimately settled; and (ii) the settlement would be otherwise than by actual delivery or transfer of commodity or scrips. In other words, in order that a transaction may fall within the scope of the expression speculative transaction , it must be a transaction in which a contract for 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, as held in the case of Bhandari Rajmal Kushalraj v. CIT, (1974) 96 ITR 401, 403 (Mys). The expression ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips in the Income-tax Act definition means, by implication, that even at the outset the parties to transaction intended the performance or to claim the difference in price, if ultimately the contract is settled otherwise than by actual delivery or transfer of the commodity or scrips, it is a speculative transaction. The effect of the Income-tax Act definition is two-folds: (i) where actual delivery of goods, or transfer of the commodity or scrips, takes place, the transaction is not a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r mutual funds on a recognized stock exchange; ;and (B)which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) recognized stock exchange means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] 7. It is apparent, facially, that the term speculative transaction has been defined only in Section 43 (5). At the same time, it is qualified, i.e. that the scope of the definition is restricted in its application to working out the mandate of Sections 28 to 41 of the Act. In terms of the Explanation to Section 73 (4) in the case of a company, business of purchase and sale of shares is deemed to be speculation business. However, certain companies are excluded from this Explanation which are:- (i) a company whose gross total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of section 73 deemed to carry on a speculation business, to the extent to which the business consists of the purchase and sale of shares - [CIT v. Lokmat Newspapers P. Ltd., (2010) 322 ITR 43 (Bom)]. By virtue of the legal fiction created by the Explanation inserted to section 73, even transactions which are not speculative transactions within the meaning of Section 43(5), should be deemed to be speculative if those come within the purview of the Explanation to Section 73 - RPG Industires Ltd. v. CIT, (2011) 338 ITR 313 (Cal). In order to fall within the net of section 73, there need be a business of speculative transactions and it must be carried on . Whether a number of transactions are or are not part of assessee's business was examined in Juvvi Subbaramaiah Co. v. CIT (1964) 51 ITR 742 (AP). The loss on account of sale of units of the UTI within one month of their purchase was not a speculative loss. It was so held in the case of CIT v. Lakshmi Mills Co. Ltd, (2007) 290 ITR 663 (Mad). The scope of section 73 read with section 28 Explanation 2 is to deal with the situation where loss in speculative transaction is sought to be set off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re or any adventure or concern in the nature of trade, commerce or manufacture. It is to be noticed that any kind of venture will not fall within this inclusive definition. The venture or the adventure will have to be in the nature of trade, commerce or manufacture. Basically, the concept of business involves a frequent activity of a particular nature. An isolated activity is opposed to the concept of business. As observed by an English court (extracted from p. 114 of Kanga and Palkhivala's The Law and Practice of Income Tax - Vol. 1, 7th edition). A single plunge may be enough provided it is shown to the satisfaction of the court that the plunge is made in the waters of trade; but the sale of a piece of property - if that is all that is involved in the plunge - may easily fall short or anything in the nature of trade. Transaction of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances. (ii) Commissioner of Income Tax vs. Lakshmi Mills Co. Ltd. (2007 290 ITR 663 (Mad)):- In the decision of the Supreme Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax (2002) 255 ITR 273, wherein it is held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the party who broke the contract compensation for any loss or damage caused to him thereby. There is no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of 'speculative transaction'. The award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the lay may would understand that the contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. The law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with the sense of law, and it is that sense which must prevail in sub-section (5) of section 43. Accordingly, we hold that a transaction cannot be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is a hedging contract to protect onself against loss on account of adverse price fluctuations. The pre-requisites for being classed as a hedging contract and to fall within the ambit of the said proviso are : (i) a contract in respect of stocks or shares, and (ii) entered into guard against loss in the holdings of stocks and shares through future price fluctuations. The question about the existence of the contract and the intention to enter into such a contract, on which the answer to the question whether a transaction is a hedging transaction or not rests, is primarily one of fact, necessarily to be determined on appreciation of facts surrounding the transaction. (vi) Commissioner of Income Tax vs. H.Holock Larsen (160 ITR 67 (SC)):- Held, (i) that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact. In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation' 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 substract 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. (P.P. 297-298.) 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 scope of the original section.. The purpose of an explanation is, however, not to limit the scope o the main provision.. The construction of the explanation must depend upon its terms, and no theory of its purpose can be entertained unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that -..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down....? The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: 5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines derivatives as follows: A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes calle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in sub-section (1) covers all types of assessees as mentioned in section 2(7) of the Act which includes individuals and companies. Sub-section (2) of section provides that where the loss arising out of speculation business which cannot be set off in a particular assessment year fully the balance may be carried forward for the next assessment year and so on not exceeding eight assessment years immediately after succeeding year as provided in sub-section (4). Under the Explanation, all companies are not included within the word assessee as mentioned in Section 73. Companies other than those whose gross total income consists mainly of income which is chargable 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 granting of loan and advances consists in purchase and sale of shares of other companies, shall be for the purpose of this section, be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of shares. Thus, the Explanation has really employed a restricted meaning of the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... randum of Association to invest surplus funds in shares, the appellant has chosen to invest fund in shares. Moreover, the transaction is not periodic. It was also not settled otherwise than by actual delivery. Only when there is settlement otherwise than by delivery speculative transaction can be thought of. In the present case, it is not so. As the main activity is only in manufacture and sale of yarn, the purchase of shares, having not been regular, should be construed only as an investment. When there is no systametic or organised course of activity and when there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition of business, under Section 2(13) of the Income Tax Act, 1961, there is no point in contending that the assessee is engaged in the business muchless in a speculative business. Therefore, the Assessing Officer ought to have allowed the loss, as short term capital loss and set off against the other business income of the appellant Company. As the appellant Company had properly delivered the shares at the time of selling, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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