Commercial Motors Ltd. vs Deputy Commissioner of Income Tax

Satish Chandra, J.—Both the present appeals have been filed by the assessee as well as Revenue u/s 260A of the income tax Act, 1961, against the judgment and order dated 09.02.2007 passed by the Income Tax Appellate Tribunal, Lucknow, in I.T.A. No. 735/Luc/2001, for the assessment year 1997-98.

On 03.07.2007, a Coordinate Bench of this Court has admitted the appeal on the following substantial questions of law:--

(2) Whether on the facts and in the circumstances of the case, will the word actual delivery under the provisions of Section 43(5) will mean the actual delivery to the assessee and not to his agent.

(3) Whether the learned Tribunal was justified in ignoring the fact that a Bank Draft of Rs. 19,80,020/- dated 29th March, was sent to the broker which includes the brokerage of Rs. 45,495/- and therefore he acted as an agent of the appellant.

(4) Whether the learned Tribunal was justified in not allowing the claim of short term capital loss against the long term capital gain declared by the appellant during the year under consideration merely on the ground that broker had taken the delivery.

The brief facts of the case are that the appellant is a dealer in Bajaj Vehicles and its spare parts. During the assessment year under consideration, the appellant-assessee had disclosed the long term capital gains of Rs. 75,78,507 and has also tried to set off short term capital loss of Rs. 19,43,891, but the A.O. has not allowed the set off on the ground that loss was bogus. The A.O. also doubted the genuineness of the transaction. Finally, he made the addition of Rs. 19,43,891/- which was deleted by the first appellate authority. Being aggrieved, the department has filed an appeal before the Tribunal who upholds the order of the A.O. by setting aside the order of first appellate authority. Not being satisfied, the assessee has filed the present appeal.

With this background, Sri Pradeep Agrawal, learned counsel for the assessee relied on the order of the CIT(A). He further submits that the transaction was done with M/s. Vikas Somani Securities Pvt. Ltd., Calcutta who has supplied the necessary information pertaining to the share dealing to the Director Investigation, Calcutta vide letter dated 10.03.2000 and copy was forwarded to the assessee vide letter dated 06.06.2000. In the said letter, the share broker has admitted the receipt of a cheque of Rs. 19,80,020/-. According to the learned counsel, the findings of the A.O. are based on irrelevant material and conclusions are based on conjectures, surmises and suspicions only. It is submitted that the short term capital loss was accepted as genuine by the first appellate authority. For this purpose, he read out the order passed by the first appellate authority, where it was stated that the identity of the share broker was established. Share dealing business were done in the name of the company M/s. Vikas Somani Securities Pvt. Ltd. The registration number of share brokers with SEBI is INB-03 08 78935. The PAD used giving distinctive numbers of share purchases and sold were given by the broker M/s. Vikas Somani Securities Pvt. Ltd. and the broker has confirmed the receipt of demand draft of Rs. 19,80,020/- The conclusion reached by the Assessing Officer has no direct nexus with primary and basic facts.

Learned counsel further submits that the share broker has also supplied photocopies of the daily saudas to the DDIT (Investigation), Calcutta, but the same was not produced before this Court. It is also a submission of the learned counsel that the transaction was not at all otherwise by than actual taking the delivery and, therefore, if would not be caught within the mischief of ''Speculative Transaction'' u/s 43(5) of the Act. Lastly, he relied on the ratio laid down in the case of Commissioner of Income Tax Vs. Aditya Mills Ltd., , where it was mentioned that:--

''Section 43(5) of the income tax Act, 1961, lays down that a speculative transaction means a transaction in which a contract for the purchase or sale of any commodity is periodically settled otherwise than by the actual delivery or transfer of the commodity. The said section is not restricted to a contract where the settlement is only in respect of the entire contract. The word "periodically" or "ultimately" makes it clear that the provisions of section 43(5) are applicable where a part of the contract or the entire contract has been settled otherwise than by actual delivery of the goods.''

Further, he also relied on the ratio laid down in the case of D. M. WADHWANA Vs. COMMISSIONER OF Income Tax, WEST BENGAL., but the same was related to the income tax Act, 1922 and certainly, it is not applicable to the present Act.

Lastly, he made a request to restore the order passed by the CIT.

On the other hand, Sri D.D. Chopra, learned counsel for the respondent has justified the impugned order passed by the Tribunal. He submits that the assessee has shown the long term capital gain represents profit from sale of shares of very reputed companies like Bajaj Auto Ltd., Telco and TISCO. The short term capital loss represents loss on sale of shares of little known companies. During investigation, it was found by the Assessing Officer that the alleged capital loss have been incurred in the transaction of shares but the share broker has never insisted for any payment. In other words, the assessee has not made any payment for the purchase of the shares to the brokers. So, the transaction was not genuine. The said transaction was alleged between the period April 1996 to March 1997 and during this period the share broker could not book a single profit making any transaction. The A.O. rightly observed that the broker did not realize the money due to him from time to time and had charged only brokerage of Rs. 45,495/- Surprisingly, the broker did not insist the payment of the same. For this purpose, he relied on the ratio laid down in the case of Commissioner of Income Tax Vs. Ashokbhai B. Shah, , where it was observed that:

when the speculative transaction was not held genuine, then the assessee was not allowed to claim the loss.

He also relied on the ratio laid down in the case of Shakuntala Devi Killa Vs. Commissioner of Income Tax, , where it was observed that:--

as a prudent person, if delivery took place subsequently, the assessee would have taken precautions to obtain necessary documents in proof of delivery. The assessee also failed to produce materials suggesting actual delivery. Therefore, the transactions were completed otherwise than by actual delivery or transfer of shares. The transactions were speculative transactions as defined in section 43(5) and the loss resulting from the share transactions was a speculation loss and not a loss arising from business.

Lastly, he justified the A.O. order as well as Tribunal order.

We have heard both the parties at length and on perusal of record, it appears that in the instant case, the assessee has made no payment for the purchase of the shares though the identity of the broker was established. The broker has not shown a single profit pertaining the assessee during the relevant period. At the most, even if the assessee had actually entered in the purchase and sale of the shares, it was ultimately settled otherwise without taking delivery and, therefore, the said transaction is a speculative transaction as per Section 43(5) of the Act.

Section 43(5) of the income tax Act, 1961 on reproduction reads as under:--

S. 43(5) "speculative transaction" to mean a transaction in which a contract for the 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.

However, it also provides certain exceptions to the aforesaid provision. Clause (b) of the proviso to sub-section (5) provides that a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations, shall not be deemed to be a speculative transaction. The only condition which should be satisfied before an assessee can claim that a contract entered into by him should not be considered as a speculative transaction is that he must have entered into such a contract to guard against the loss due to adverse price fluctuations of shares in respect of which he might have entered into contracts of sale by actual delivery.

Thus, Section 43(5) of the income tax Act, 1961, lays down that a speculative transaction means a transaction in which a contract for the purchase or sale of any commodity is periodically settled otherwise than by the actual delivery or transfer of the commodity. The said section is not restricted to a contract where the settlement is only in respect of the entire contract. The word "periodically" or "ultimately" makes it clear that the provisions of section 43(5) are applicable where a part of the contract or the entire contract has been settled otherwise than by actual delivery of the goods.

From the record, it also appears that there was no actual delivery taken by the assessee at any point of time in respect of the shares on which the assessee has claimed the alleged short term capital loss. When neither any payment was made nor any delivery was taken, then the transaction cannot be held genuine specially when there was no DEMAT Accounting System during the assessment year under consideration.

In view of above, we find no reason to interfere with the impugned order passed by the Tribunal and the same is hereby sustained along with the reasons mentioned therein.

The answer to the substantial questions of law is in favour of the revenue and against the assessee.

Income Tax Appeal No. 70 of 2007

This is a cross-appeal filed by the Department. But in the present appeal, tax effect is merely, Rs. 2,23,851/- i.e. below the prescribed limit by the CBDT circulars. Hence, the appeal is not maintainable as per Section 268A of the Act and the same is dismissed in limine.

In the result, both appeals are filed by the assessee as well as department are hereby dismissed.