TMI Blog1978 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... o inherent in his business and of such a nature that it must have actually arisen in a number of cases and in a number of years. It must have been dealt with in such cases on some basis satisfactory or acceptable to both parties, for learned counsel on both sides stated that the question has not been directly taken to court in any earlier case and that the matter is res integra before us. The question raised is a pure question of law as to the interpretation of Explanation 2 to s. 24(1) of the Indian I.T. Act, 1922, defining a speculative transaction. The Explanation, in so far as it is relevant for our present purposes, reads as follows : " A speculative transaction means a transaction in which a contract for purchase and 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." There is a proviso to this Explanation which carves out certain exceptions but as it is not the case of either party that the transactions in the present case are covered by any of the exceptions we shall leave the proviso out of account. The short question for decision in this case is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the commodity was not one lending itself to possibilities of speculation or that the intention of the parties at the time when the contracts were entered into might have been to take actual delivery but this intention could not be effectuated for one reason or the other. These principles have been laid down in a series of decisions : Juvvi Subbaramaiah and Co. v. CIT [1964] 51 ITR 742, 752-3 (AP), Hoosen Kasam Dada (India) Ltd. v. CIT [1964] 52 ITR 171 (Cal), Abdul Gani Haji Habib v. CIT [1969] 72 ITR 6, 13 (Cal), ClT v. Ratanlal Mohanlal [1972] 86 ITR 200 (All), P. L. KN. Meenakshi Achi v. CIT [1974] 96 ITR 375 (Mad) and A.Muthukumara Pillai v. CIT [1974] 96 ITR 557 (Mad). Indeed, there is no controversy before us regarding this principle. It is in the context of the above statutory provision that the facts of the present case have to be considered. The assessee, M. R. Dhawan, is an individual. He is a dealer in shares. He is also a member of the Delhi Stock Exchange as well as stock exchanges at certain other places in India. In regard to his transactions in shares, he maintained two trading accounts in his books. One was called the " Securities Account " and the other was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned here that if subsequent to the first contract, no contract is made with the same party up to the date of the settlement, then physical delivery of the shares have to pass. It will thus be appreciated that the intention at the time of making the original contract is to give or take the delivery, as the case may be. Such deliveries are effected by the subsequent contract made up to the day of settlement. The procedure followed is that if we have to deliver 100 shares and take delivery of 80 shares, then instead of actually delivering 100 shares and taking the delivery of 80 shares, only balance 20 shares are delivered. In the books of account, entries in respect of 80 shares (whether profit or loss) will be made in the Difference Account whereas in respect of 20 shares, the entries will be made in the Securities Account. It will not be out of place to mention here that if entries in respect of sale of 100 shares and purchase of 80 shares were passed in the Securities Account, the result would have been the same. (b) According to the rules of the stock exchange it is permitted to set off the contracts of sales and purchases to effect the delivery of minimum number of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing result of both the accounts returned by the assessee as the profit or loss from the share business---for the several years were as follows : Rs. Assessment year Profit (P) or Loss (L) 1955-56 29,758 (L) 1956-57 1,27,295 (L) 1957-58 66,765 (P) 1958-59 70,960 (L) 1959-60 1,43,342 (L) 1960-61 1,20,058 (L) He, therefore, treated the losses, figures which have been set out above, as losses in speculative transactions allowable for set-off only against profits in such transactions. Aggrieved by the order of the ITO, the assessee preferred appeals to the AAC. The appeals for 1955-56 and 1956-57 were heard in the first instance in October, 1961. By an order dated October 24, 1961, the AAC considered it necessary to call for a remand report from the ITO. It had been contended before him : (i) that the transactions in both sets of accounts formed part and parcel of the same business and they could not be treated as separate businesses, merely because, for the sake of convenience, two separate accounts were kept ; (ii) that, on every one of the transactions entered in the Securities Account, there had been actual delivery given or taken of the excess of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount was not justified. The AAC appears to have agreed in respect of the transactions entered in the Difference Account that delivery was neither taken nor given of the scrips. But, notwithstanding the above finding, he held that the assessee carried on one integral business of which these transactions also formed a part and this being so the profit or loss should be considered of the business as a whole and that the segregation of the transactions in the Difference Account was not justified. He observed : " But the ITO is not applying the test to any whole transaction but to the part result of a group of transactions, jointly finalised on clearing dates. He cannot give separate treatment to part results of a group of transactions jointly finalised. In a way, by strict application, I will even say that all the transactions are speculative in nature. The circumstances that, out of the total volume of business done by the assessee between one clearing date and another, a small fraction happens to be performed by actual delivery, would not take away the impress which every one of the contracts (including the fraction performed by actual delivery) had at the time it was entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions in the purchase and sale of share scrips was settled without actual delivery of the share scrips, the loss arising on such transactions was not a loss in speculative transaction within the meaning of Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922. We accordingly hold that the loss arising to the assessee in the Difference Account in the various years under consideration was a loss sustained by him in a business consisting of speculative transactions and therefore could be set off only against the profits and gains of like business and not against his other business profits. " The assessee is dissatisfied with the order of the Tribunal and, hence, the reference before us. The departmental authorities and the Tribunal did not look into the relevant rules of the Delhi Stock Exchange. But Sri Manchanda referred us to these bye-laws and regulations in order to bring out his contentions and it may be convenient to refer to the relevant ones at this stage. Under bye-law 9, only a member or a person authorised by him will be allowed on the floor of the exchange. Except as provided in the bye-laws and regulations there can be no dealings in securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange shall maintain a clearing house and explains its functions : " The clearing house shall act as the common agent of the members for clearing contracts between members and for delivering securities to or receiving securities from members and for receiving or paying any amounts payable to or payable by such members in connection with any of the contracts and to do all things necessary or proper for carrying out the foregoing purposes." Bye-law 96 entitles the clearing house " at its discretion to deliver securities which it has received from a member (or to instruct a member to give direct delivery of securities which he has to deliver) under these bye-laws and regulations to another member who is entitled under these bye-laws and regulations to receive delivery of securities of a like kind", and members giving and receiving such delivery shall be deemed to have made a contract with each other as sellers and buyers. Only members are entitled (vide bye-law 106) to clear and settle contracts through the clearing house. Bye-law 113 requires all clearing forms to be in a form prescribed by the regulations. Bye-law 349 provides that a member will be guilty of misconduct if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. 8.30 (a) ......... (b) Securities which are to be delivered to a member shall, unless it is otherwise ordered by the board of directors or unless there be a debit balance to his account, be delivered to him by the clearing house on application on the settling day or as soon thereafter as practicable. The member taking the delivery of securities from the clearing house shall sign therefor with a form attached to the Clearing House Securities Particulars Form (Form No. 12). 8.40 The clearing house shall hand over to the delivering members Clearing House Delivery Orders (Form No. 36) showing the number of securities to be delivered and the names of the members to whom deliveries are to be made." The transactions of the assessee on the stock exchange, it is common ground, were carried out in accordance with the bye-laws and regulations set out above. Payments of differences were effected through the clearing house and delivery of bargains were taken or given under instructions from the clearing house in respect of the transactions in question. The differences account principally comprised of transactions in the shares of the Indian Iron and Steel Company, which were adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... May 31, 1955. Now, what about the delivery of the shares ? The rules of the stock exchange also provide that, in the case of a member, he need not give or take delivery of all the shares agreed to be sold or purchased by him. It was sufficient if he gave or took delivery of the surplus of sales over purchases and vice versa. Thus, on May 27, 1955, the assessee was obliged to take delivery of only 2,900 (i. e., 7,600 minus 4,700) shares. These shares, as well as their value of Rs. 95,881-4-0, were debited to the Securities Account. We may also mention that these 2,900 shares were to be delivered to the assessee, not necessarily by the members with whom he had entered into contracts of purchase. The stock exchange, on the same basis as above, finalised the accounts of all its members and depending upon the outcome in each case, gave appropriate directions to any of its members to deliver to any other specified member(s) a specified number of shares. Thus, the assessee received 2,900 shares from such member(s) of the exchange as had been directed to deliver those shares to the assessee. Will this delivery be sufficient to take the transactions of purchase and sale of 7,600 and 4,700 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is that delivery is not effected of all the shares dealt in by the assessee. In fact, that is the basic difference between the Securities Account and the Difference Account. The moment the assessee receives delivery of any shares from the clearing house, he takes them into the stock of the securities account and further dealings therein are recorded in that account. When the assessee agrees to purchase or sell a share on the floor of the exchange, he may be doing it for himself and on behalf of a constituent. If it is on behalf of a constituent, then he has to actually take delivery of those shares and hand them over to the constituent. He either does this by passing on the shares agreed to be purchased by him or where the purchases and sales in a clearing off set each other, he has to actually make arrangements to purchase and deliver the shares to the constituent outside the exchange. In either case, these shares go into the Security Account. So, the transactions on behalf of the constituent do not at all figure in the Difference Account. So far as this account is concerned, therefore, the purchases and sales are those deals entered into between the assessee and other members o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from them 7,600 shares, he would be content to accept delivery of the resultant balance of 2,700 shares. But the assumption underlying this argument that the assessee had 4,700 shares on hand is without basis. We called upon counsel either to show from the assessee's books that he had 4,700 shares physically which he could have delivered or show, by reference to some bye-law or regulation of the exchange, that he could not have agreed to sell 4,700 shares without actually having these shares in his possession. We are not saying that he entered into fictitious transactions for that is prohibited by the bye-laws but he could have lawfully entered into the sale contracts on the strength of the purchase contracts he had entered into. He could also do this without risk because he knows that, under the regulation, he is not bound to deliver all such shares but is entitled/bound to receive/give delivery only of the surplus transactions on the settlement day. Similar is the position with the other members. The rules also envisage a member agreeing to sell more shares than he purchases in which event he will have to give delivery of the excess of sales over purchases only. It is, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the more recent case of Davenport Co. P. Ltd. v. CIT [1975] 100 ITR 715, in which the earlier cases have been reviewed and it has been held, overruling Poddar's case [1973] 90 ITR 140 (SC) : " The words ' actual delivery ' in Explanation 2 to section 24(1) mean real as opposed to notional delivery. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of ' delivery ' in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place ; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips. The Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far-fetched but will also lend itself to wide abuse and frustrate the very object and purpose of the Explanation. We, are therefore, unable to accept this contention of Sri Manchanda. Sri Manchanda then addressed certain subsidiary arguments in which we do not find much substance and we shall briefly deal with them. (a) He drew our attention to the observations in the orders of the ITO and AAC that the assessee had maintained regular, correct and complete books of account. We do not see how these observations help us in deciding the nature of the transactions in the Difference Account. (b) He then contended that two accounts were kept only for the sake of convenience, that the resultant position would have been the same even if there had been only one and that the assessee should not be penalised for recording his transactions more fully and precisely. This argument proceeds on a misapprehension. No one is thinking of penalising the assessee for maintaining separate books. Even if all the transactions had been recorded in a single-set of books, the ITO was bound to have investigated the question as to which of them were settled by delivery and which not. The maintenance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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