TMI Blog1992 (9) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... law in entertaining the appeal of the assessee, rejecting the preliminary objection of the Revenue that the point at controversy was concluded by the decision of the Tribunal in Income-tax Appeals Nos. 225 and 226(Ahd.) of 1970-71 decided on September 11, 1972, against the order of the Commissioner of Income-tax ?" It may be stated that two reference applications being Reference Applications Nos. 42 and 43 were preferred before the Tribunal and two income-tax applications being Income-tax Applications Nos. 29 and 30 were preferred to this court when this court required the Tribunal to draw up the statements of case and refer the questions of law and thereupon the Tribunal has referred the aforesaid questions to us by two separate reference applications. These two references, therefore, ought to have been registered separately, but the Registry of this court has consolidated the same in view of the fact that only one statement of case is prepared by the tribunal. We, accordingly, direct the Registry of this court to register the aforesaid references as Income-tax References Nos. 153 of 1978 and 153/(A) of 1978. Before we proceed to deal with the aforesaid questions of law, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking over of shares on delivery basis in any of the said shares. He, therefore, disallowed the claim of the assessee for conversion of investment into stock-in-trade and he held that the shares in the aforesaid two scrips represented investment in shares and, therefore, he treated the income as gains income liable to tax. It may be stated that, for the assessment year 1964-65, by the same process of reasoning, the sale price of 200 balance shares of Atul Products was brought to tax as capital gains. (iv) Being aggrieved by the aforesaid order of the Income-tax Officer, the assessee carried the matter in appeal before the Appellate Assistant Commissioner. However, before the appeal could be decided, the Commissioner of Income-tax, acting under section 263 of the Act, initiated proceedings as he was of the view that the assessment order made by the Income-tax Officer was erroneous and was prejudicial to the interests of the Revenue. After giving opportunity to the assessee to file his reply and after hearing the assessee, the Commissioner of Income-tax came to the conclusion that the assessee was holding these shares as stock-in-trade right from the beginning when the said share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant to the assessment year 1963-64 was required to be decided. The Appellate Assistant Commissioner disposed of the said contention by holding that the assessee's claim for conversion of investment into stock-in-trade in respect of the, shares was not acceptable. (vii) Being aggrieved by the order of the Appellate Assistant Commissioner, the assessee preferred an appeal to the Tribunal and the Tribunal after considering the contentions advanced before it came to conclusion that the assessee had effected conversion of scrips of shares of Arvind Mills and Atul Products appearing on investment account into ready share accounts. The Tribunal also held that there was nothing on record to doubt the entries in the books of account of the assessee, more particularly, the entry dated November 9, 1961. On the question regarding the allowance of loss, the Tribunal found that, since the transaction in regard to the purchase and sale of shares were settled by way of differences ultimately did not exceed the total quantity of scrips handed over to the brokers, the claim of the assessee of hedging the loss was allowed. The Tribunal, therefore, allowed the appeals of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irinbai K. Kooka [1962] 46 ITR 86, a Bench of seven judges of the Supreme Court, speaking through S. K. Das 1. (<?xml:namespace prefix = st2 /> Sarkar I. , dissenting) was called upon to decide an identical question. Before the Supreme Court, the assessee, a Parsi lady, held by way of investment a large number of shares of different companies. The dividend income from such shares was assessed to income-tax for several years prior to April 1, 1945. The assessee converted her shares into stock-in-trade and carried on trading activity, namely, "business in shares". Her income for the assessment year 1946-47 was computed on the basis of the profits which she made by the sale of her shares as trading activity the profits being calculated on the difference between the ruling market price at the beginning of the accounting year and the sale proceeds. The Income-tax Officer calculated the profits by deducting from the sale proceeds the cost calculated on the basis of market price of shares at the beginning of the accounting year. The question before the court was : What should be the basis of computation of the profits made by the assessee by the sale of her shares in the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried on a stud farm the profits of which were agreed to be chargeable to income-tax under Case I of Schedule D. She also carried on the activities of horse racing and training, which were agreed not to constitute trading. Five horses were transferred from the stud farm to the racing stables. The cost of breeding these horses was debited to the stud farm accounts. On the question of the amount to be credited as a receipt, the assessee contended before the Special Commissioners that the proper figure to be brought in respect of the transferred horses was the cost of breeding. The Revenue contended that the market value of the animals which was considerably higher was the proper figure. The House of Lords decided in favour of the assessee. Lord Radcliffe pointed out that, when a horse was transferred from the stud farm to the owner's personal account, there was a disposition of trading stock, though the disposition might not be by way of trade. He then referred to the three methods of recording the result of the disposition in the stud farm trading accounts. One of them was that there might be no entry of a receipt at all and Lord Radcliffe pointed out that this method would give the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof is credited to the ready share business at purchase price debiting the ready share business account. The second entry on the debit side is that of Rs. 2,46,600, which is conversion of investment shares into business shares. It may be stated that the genuineness of this particular entry in the books of the assessee is not challenged by the Revenue at any stage and even before us the genuineness of this entry is not challenged. The entries in the books of account of the assessee were not challenged as a device or as a cloak to evade tax. Nowhere on the record, has the Revenue challenged that the entries did not reflect the real transaction between the parties. In the absence of any such challenge, it is not open to the Revenue to contend before us that the transaction of conversion from investment to stock-in-trade for ready share business was not a permissible transaction. In the case of CIT v. Amitbhai Gunvantbhai [1981] 129 ITR 573, the Division Bench of this court has observed as under (at page 580) : "The basic principle is the same in the law relating to income-tax as well as in civil law, namely, that if there is no challenge to the transaction represented by the entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e brokers. According to the assessee, the said three brokers entered into transactions of purchase and sale as per the instructions because they had in their hands share certificates with duly filled in and signed share transfer forms. The assessee, therefore, carried on business in ready shares of Atul Products and Arvind Mills Ltd. which would go to establish that the investment shares were converted into stock-in-trade for the ready share business. (g) Lastly, the assessee has also produced on pages 249 to 256 of the paper book the ready share business account of Samvat year 2018 from the books of account of the assessee. Various transactions reflected by the ankadas referred to hereinabove were duly incorporated by the entries in this "ready share business account". The genuineness of this ready share business account is also not in dispute before us. From the aforesaid evidence which was also in existence before the Assessing Officer and other authorities, it becomes clear that the transaction of conversion of investment shares as stock-in-trade on November 9, 1961, i.e., the opening day of Samvat year 2018, was fully supported by evidence on record and following the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch as it is purely a question of fact which the court is not required to answer in its advisory jurisdiction. By reference to the aforesaid documentary evidence, he submitted before us that the conclusion was based by the Tribunal on some evidence on which conclusion could be arrived at and, therefore, no question of law, as such, arises calling for opinion of this court. In the case of CIT v. Orissa Corporation P. Ltd. [1986] 159 ITR 78, the Supreme Court confirmed the judgment of the Orissa High Court which confirmed the action of the Tribunal in refusing to refer any statement of the case to the High Court. The Supreme Court found that the conclusions reached by the Tribunal were based on evidence. Such conclusions, therefore, cannot be said to be based on no evidence. Therefore, even if the High Court could have reached different conclusions on reappreciation of evidence, it was not open to it to interfere with such conclusions which were reached by the Tribunal. The findings reached by the Tribunal cannot be said to be unreasonable, perverse or based on no evidence and, therefore, according to the Supreme Court, the High Court was justified in not calling for the reference of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh we are of the opinion that question No. 1 partially requires this court to reappreciate the evidence and to record its findings as regards sufficiency or otherwise of the evidence for the purpose of reaching a finding which was reached by the Tribunal. (k) We, accordingly, answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue. Question No. 2-Hedging transaction: (a) It is the case of the assessee that, after converting investment shares in Atul Products and Arvind Mills Ltd. to stock-in-trade for business in ready shares, it gave delivery of ready shares to three brokers with view to hedging against loss in its holdings of stocks of shares through price fluctuations as permissible under clause (b) of sub-section (5) of section 43. It is the case of the assessee that, against the hedging of these, shares, it carried on business of purchase and sale by handing over the delivery of said shares of Arvind Mills Ltd. and Atul Products to three brokers along with delivery of share certificates and duly filled in and signed share transfer forms. According to the assessee, it carried on business in ready shares of Atul Products and Arvind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 73(1) of the Act of 1961, it is enacted that any loss in respect of a speculative business would not be set off except against profits and gains, if any, of another speculative business. In other words, the Legislature has, after carving out a subordinate source of business income styled as speculative business, enjoined that this loss cannot be set off against profits and gains, from any non-speculative transaction, though it may be part of the larger head of income of business or profession. In the income-tax law, this new class of speculation business, as defined in section 43(5) of the Act of 1961, has one more distinguishing feature than the one which is attributed to such transactions in the law of contract. The distinguishing feature is that the question of intention of seller or purchaser is not very material in the income-tax law, as it is settled otherwise than by actual delivery, it would amount to speculative transaction. However, clauses (a), (b) and (c) of the proviso to section 43(5), by a legal fiction, take out of the purview of speculative transactions forward contracts effected with a view to guarding against the loss due to adverse price fluctuations. In specu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if its purpose is to guard against any loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. While holding that the decision of the Division Bench in Chimanlal's case [1968] 69 ITR 129 (Guj) was not rightly decided, the Full Bench held that the hedging contracts, in order to be out of speculative transactions, must be in respect of only raw materials so far as the manufacturer is concerned though these contracts may be both with regard to sales and purchases. The court also held that the hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within the reasonable time not exceeding generally the assessment year. The court also held that, in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as stocks acquired under firm contracts of purchase. (f) In the aforesaid case, the Full Bench referred extensively to the techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end up with a profit on balance. . . . Thus, by resorting to counterbalancing transactions in the market for the ready commodity on the one hand and in the hedge market on the other hand, the hedger seeks to safeguard his position. The movement of prices in the two markets may not always follow an identical course and the hedger might at times gain and at times lose but such a gain or loss would be marginal and far less than what it would be if the person had not hedged at all. While, however, the hedging operation protects the hedger against loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. The forgoing of such a possible windfall profit is the price which he pays for the insurance against loss." Having so quoted the technique of hedge trading as explained by W.R. Natu, the Full Bench observed as under : "This well-known technique of hedge trading clearly implies forward contracts both ways, namely, for sale and purchase with a view to guarding against adverse price fluctuations. These forward contracts by way of hedge transactions usually afford a cover to a trader inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lative transactions and not from genuine hedging transactions." From the aforesaid decision of the Board, it becomes clear that, in order to be a genuine hedging transaction, the sale should be confined to the total stock of raw materials or merchandise in hand or of ready stock shares in possession. The forward sales should not exceed the ready stock. If the forward sales exceed the ready stock, the transaction would be a speculative transaction, and not a genuine hedging transaction. In other words, it is implicit that hedging transaction in order to be out of speculative transaction must not exceed the total stock-in-trade which would necessarily include existing stocks as well as firm contracts of purchase of stock-in-trade. (e) The Full Bench of this court, in the case of Pankaj Oil Mills [1978] 115 ITR 824, also found that there should be a reasonable nexus as to the time so as to enable a manufacturer or merchant to claim that his hedging transactions are not speculative transactions and the loss suffered thereunder be allowed to be set off against the profits and gains of any other business. What would be reasonable connection is always question of fact depending on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reafter, delivered his total holdings in the aforesaid two scrips to the brokers along with duly signed and filled-in transfer forms. What the assessee had, thereafter, carried on are hedging transactions to hedge against the said stock, Various entries made in the books of account of the assessee in support of such hedging transactions were also not doubted by the Income-tax Officer. True it is, that ultimately in such a transaction loss is caused to the assessee and, therefore, he has claimed the said loss as hedging loss. Section 43(5), proviso (b), permits hedging in respect of stock-in-trade to guard against fluctuations in prices. It is pertinent to note that the transactions connected with the purchase and sale of the said shares which were settled by way of payment of dues ultimately did not exceed the total quantity of scrips handed over to the brokers and, therefore, the genuineness or otherwise of the said transaction cannot be doubted. We are, therefore, of the opinion that when the assessee had, as permitted by law under proviso (b) to section 43(5) of the Act, entered into hedging transactions to hedge against price fluctuations in the aforesaid two scrips, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermissible under proviso (b) to section 43(5) of the Act. It will not be out of place to mention at this stage that the Income-tax Officer has verified the genuineness or otherwise of the hedging transactions by cross-checking the account books of the brokers and by tallying their accounts with the accounts of the assessee. The Income-tax Officer, therefore, did not and could not doubt the genuineness or otherwise of the hedging transactions which ultimately resulted in business loss to the assessee. It is also found that the assessee has given delivery of the share certificates to the brokers along with duly signed and filled in transfer forms of the said two scrips. It is also found that, at no point of time, the hedging transactions exceeded the stock of the assessee in the aforesaid two scrips and, therefore, the genuineness or otherwise of the transactions could not be challenged by the Income-tax Officer and the Tribunal, based on the aforesaid findings, reached the conclusion that the hedging transactions were permissible in law and the assessee was entitled to claim loss. It cannot, therefore, be said that the entire transaction was a device to evade the payment of tax. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that view of the matter, independently, we have also examined the entries in various transactions and we do not find that the entire transaction was a device to avoid tax. We, therefore, do not permit the Revenue to raise this new submission. (k) In the result, we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue. Question No. 3 : (i) As stated hereinabove, while stating the facts giving rise to the present reference against the judgment and order of the Commissioner of Income-tax in second appeal preferred to the Tribunal, the Income-tax Appellate Tribunal decided by its judgment dated September 11, 1972, that the Commissioner of Income-tax was not right and the Income-tax Officer was right in holding that the assessee was liable to tax on the capital gains as a consequence of sale of the said shares. However, it is required to be noted that the original order of assessment passed by the Income-tax Officer was subject to appeals preferred by the assessee which were pending before the Appellate Assistant Commissioner. During the pendency of the said appeals, the Commissioner of Income-tax exercised power under section 263 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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