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TMI Blog2003 (8) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, and the loss suffered by him in these transactions cannot therefore be set off against other income. (ii) The CIT(A) failed to consider the contention of the appellant that the appellant is an investor in shares of Tata Steel and during the year he entered into share badla (i.e. hedging transactions) of Tata Steel. (iii) The CIT(A) erred in rejecting the ground of appeal that the appellant has incurred net loss of Rs. 4,59,740 in share badla i.e. hedging transactions and he is entitled for set off of this loss against other income of the appellant. (iv) The CIT(A) failed to consider in proper perspective the written submissions before rejecting the grounds of appeal claiming the set off of loss of Rs. 4,59,740 against other income of the appellant. (v) The CIT(A) erred in rejecting the contention of the appellant that the transactions of the appellant is single transaction of speculation, and this transaction is distinct from speculation business. (vi) The CIT(A) further erred in holding that as this transaction was carried over, over seven settlement dates, this cannot be termed as single transaction. (vii) The CIT(A) further erred in holding that the appellant had ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to rejection of assessee's claim of set off of share badla business loss Rs. 1,14,375 is similar as in the case of Shri Kanubhai A. Patel and the only difference is that the transaction for purchase and sale of 500 shares of Reliance Industries Ltd. resulting in a loss of Rs. 1,14,375 as against the loss of Rs. 4,59,740 suffered in the case of Shri Kanubhai A. Patel in the transaction of 2000 shares of Tata Steel. 11. The learned representatives of both sides admitted that the facts relating to assessee's claim for set off of loss in respect of share badla business against other income in the same assessment year are similar in all the three cases. The learned representatives of both sides therefore contended that the arguments in the main case of Shri Kanubhai A. Patel [IT Appeal No. 579 (Ahd.) of 1998] will govern various grounds raised in all the three appeals. 12. The learned counsel submitted that these assessees derived income by way of share from partnership firms, income from property and income from other sources such as dividend income and interest etc. They were not dealers of shares. They made investments in shares of TISCO in their capacity as an investor and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dla date). Each time the assessee entered into hedging contract for purchase/sale of equivalent number of 2000 shares of TISCO with a view to insure the risk of loss in the investments made for purchase of 2000 shares of TISCO. The learned counsel submitted that the assessee made actual payment of Rs. 4 lakhs on 24-4-1992 to cover up the risk of the broker against the loss due to fluctuations in the price of TISCO shares. The loss so suffered by the assessee is a genuine and real loss. The genuineness thereof has not been doubted by the Assessing Officer. The said loss cannot be regarded as speculative loss as the assessee did not carryon any speculation business. The assessee was an investor and he already owned 542 shares of TISCO along with the investments in shares of various other companies. The assessee had renewed these contracts of purchase and sale of 2000 shares of TISCO during the period from April, 1992 to July, 1992 only with a view to limit the risk of loss in the said investments. The loss in question cannot therefore be treated as speculative loss. 14. Explanation to section 28 which provides that where a speculative transaction carried on by the assessee are of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence there is no question of claiming the loss as short-term capital loss. He strongly supported the order of the CIT(A). 16. We have considered the rival submissions made by the learned representatives of the parties and have carefully gone through the orders of the learned Departmental Authorities. It is an undisputed fact that the transaction relating to purchase and sale of shares in question was periodically as well as ultimately settled otherwise than by actual delivery of shares. Therefore such transaction comes within the ambit of 'speculative transaction' as defined in section 43(5) of the Act. 17. One of the exceptions provided in proviso (b) to section 43(5) provides that a contract in respect of shares entered into by a dealer or investor therein to guard against loss in his holdings of shares through price fluctuations, shall not be deemed to be a speculative transaction. We will therefore have to examine as to whether the transaction of purchase and sale of shares in the present case can be regarded as hedging transaction covered within the exceptions carved out in proviso (b) to section 43(5) of the Act. The hedging contract enables the person dealing with the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions neither delivery nor transfer is contemplated and yet they cannot be treated as speculative transactions in the commercial parlance. The technique of hedge trading is very pithily explained by a well known Economist, W.R. Natu, in his book Regulation of Forward Markets, at page 9, as under: The hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e. to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transaction on the forward market itself." 19. In the present case, there is no material on records to show that the assessee had any intention to take actual delivery of 2000 shares of TISCO originally purchased on 2nd April, 1992 which were purchased for total consideration of Rs. 14,00,000. No payment was made by the assessee to the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract for sale of 10,000 shares at the rate of Rs. 39.20 per share. If the assessee delivered the shares pursuant to the contract, the assessee would have made a profit out of this deal. The shares, however, were not delivered. But, on September 20, 1973, instead of delivering 10,000 shares at the rate of Rs. 39.30 per share, the assessee entered into another contract for purchase of 10,000 shares at the rate of Rs. 48.40 per share. This purchase of 10,000 shares was not followed up by taking delivery of the shares. But the contract for sale entered into on August 22, 1973, was settled by payment of the difference in price amounting to Rs. 91,000 to the share broker. On October 17, 1973, the assessee sold and delivered 10,000 shares of company O at Rs. 45.80 per share. The assessee claimed to have made a profit of Rs. 75,839 in the said transaction. The assessee claimed that the loss of Rs. 91,000 suffered in the transaction followed on 22-8-1973 settled by way of payment of difference amounting to Rs. 91,000 should be set off against the profit of Rs. 75,839. The Assessing Officer held that the loss of Rs. 91,000 arose out of speculative transaction and did not qualify for adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly on seven occasions, may be to renew the preceding transactions of purchase/sale of equivalent number of shares, surely come within the definition of "speculative transactions" as defined in section 43(5) and such speculative transactions clearly amount to adventure in the nature of trade. The transactions were settled without actual delivery of shares and, therefore, such adventure in the nature of trade will also constitute speculative business. Such loss in speculative business cannot be set off against any other income except against the profits and gains, if any, of another speculative business in view of clear provisions contained in section 73(i) of the Act. 23. Reliance placed by the learned counsel on the Departmental Circular No.23 dated 12-9-1960 does not in any manner support the assessee's claim, as the Board in the said Circular has also clearly mentioned that if on the facts of any case, it can be demonstrated that the forward transaction has been entered into only for safeguarding against loss through future price fluctuations, such a transaction should not be treated as a speculative transaction but as a case of hedging. We have already examined the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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