Kanubhai A. Patel vs Asstt. Commissioner of Income Tax

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K.S. Jhaveri, J.—As all these appeals arising out of the common judgment of the Tribunal, they are being disposed of by this common judgment.

By way of all these appeals, the appellant has challenged the order dated 22.8.2003 passed by the Income Tax Appellate Tribunal (for short the "ITAT") in I.T. Appeal Nos. 579 of 1998, 1723 of 1998 and 1727 of 1998.

The facts stated briefly are that the appellant-assessee filed his return of income on 2.11.1993 for the assessment year 1993-94, previous year being 1992-93, declaring income of Rs. 4,17,944. The assessment was processed u/s. 143(1)(a) and an adjustment was made of Rs. 4,59,740/- to the income returned by the appellant. The said adjustment was challenged by the appellant u/s. 154 of the Income Tax Act, 1961. By order dated 5.8.1994, the said adjustment was rectified and deleted and the income was computed u/s. 143(1)(a) at Rs. 4,17,944/- as returned by the appellant.

Thereafter, notice was served u/s. 143(2) and assessment order was passed u/s. 143(3) on 30.1.1996 computing the total income at Rs. 8,77,684/-. The main addition was on account of disallowance of loss of Rs. 4,59,740/- in certain share transaction carried out by the appellant on the ground that the same were falling u/s. 43(5) as speculative transactions which were settled without giving or taking delivery. The appellant contended that the same were not speculative transactions relying on proviso (b) to section 43(5) as well as the Circular of the CBDT dated 12.9.1660.

The case of the appellant was that he bought 2000 shares of TISCO on 2.4.1992 and the same were carried forward from settlement to settlement by way of badla and were finally settled on 29.6.1992 and the appellant paid the amount of difference payable to the broker and the said transaction in TISCO resulted in loss of Rs. 4,59,740/- which was not a speculative loss as defined by section 43(5) of the Act. The A.O rejected the contention of the appellant and treated the said loss as a loss in speculation business and disallowed the set off thereof against other income of the appellant particularly the shares in the partnership firm and arrived at a total income of Rs. 8,77,684/-.

The appellant preferred an appeal against the said assessment order and the same was dismissed by the CIT(A) II on 12.1.1998. The CIT(A) also rejected the contention of the appellant that the transaction in TISCO which was carried forward from settlement to settlement did not result in loss from speculative business and was, therefore, allowable to be set off against other income of the appellant.

The appellant, thereafter, preferred appeals to the Income Tax Appellate Tribunal being I.T. Appeal No. 579/Ahd/1998, 1723/Ahd/1998 and 1727/Ahd/1999 challenging the order of CIT(A) disallowing the loss claimed by the appellant. The Tribunal confirmed the order of CIT(A) and dismissed the appeal of the appellant holding that the appellant was not justified in contending that the said transaction in TISCO were not speculative transactions. The Tribunal heard the appeal of the appellant along with the appeals of his brothers, Kantibhai A. Patel and Chandrakant A. Patel whose appeals also involved similar point of disallowance of loss. The Tribunal had, therefore, delivered a common judgment rejecting the contention of the appellant and his two brothers that the loss was not arising from speculative transactions. Hence, this appeals are filed at the instance of the assessee.

While admitting the appeal, the court had formulated the following question of law:

"Whether, on the facts and circumstances of the case, a single transaction of purchase of shares of TISCO carried forward from settlement to settlement can be said to be series of transactions so as to constitute a speculation business within the scope of Section 73 of the Act depriving the appellant of set off of loss therein against other business profits?"

Mr. Kazi, the learned advocate appearing on behalf of the appellant-assessee contended that the CIT(A) erred in holding that the appellant had entered into series of speculative transaction amounting to speculation business and the loss suffered by him in these transactions cannot therefore be set off against other income. Mr. Kazi further contended that 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. He has further contended that the CIT(A) rejecting the contention of the appellant that the transaction of the appellant is single transaction of speculation, and this transaction is distinct from speculation business. It is further contended by the learned advocate for the appellant that as this transaction was carried over, over seven settlement dates, this cannot be termed as single transaction.

In support of his contentions, the learned advocate relied upon the decisions of the Supreme Court as well as different High Courts. Reliance is placed on Commissioner of Income Tax Vs. Sharwan Kumar Agarwal, , Commissioner of Income Tax Vs. Mohanlal Ranchhoddas, and in the case of Commissioner of Income Tax v. Indian Commercial Co. P. Ltd., 106 ITR 465.

On the other hand, learned advocate for the respondent has opposed the contentions of learned advocate for the appellant-assessee. He further contended that these appeals require to be dismissed in view of the concurrent findings of the authorities below and facts. He next contended that the Tribunal, after considering all the facts, has partly allowed the appeals. Therefore, he requested this court not to interfere with the impugned orders.

We have heard learned advocate for both the parties and perused material on record. While deciding the appeals, the Tribunal in paragraph-18 has observed as under:

"The Full Bench of the Hon''ble Gujarat High Court in the case of Pankaj Oil Mills Vs. Commissioner of Income Tax, Gujarat, has explained the subtle and significant distinction between speculative transaction and hedging transaction. It will be imperative to reproduce the relevant extracts from the said judgment in order to properly understand the true meaning and scope of these expression:

"It would be profitable to appreciate in proper perspective how hedge transactions are commercially understood before we determine about the true scope and width of prov. (a) to section 43(5). As the very name suggests, hedge contracts are those contracts which hedge against prejudicial price fluctuations. Speculative transactions are not the same as agreements by way of wager. In speculative transactions the modus operandi of persons indulging in them is that when one enters into a contract of purchase, he also simultaneously enters into one or more contracts of sale against the same quantity deliverable at the same time either to the original vendor or to some one else, so as either to secure profit or to minimise loss, before the Vaida day; and similarly when he enters into a contract of sale, he simultaneously enters into one or more contracts to purchase the same quantity before the Vaida day. The result of such dealings, when the sale and purchase are to and from the same person, has the effect of cancelling the contracts leaving only differences to be paid (vide Tod v. Lakshmidas Purushottamdas (1892) ILR 16 Bom. 441; Perosha Coursetji Parakh v. Manekji Dossabhai Watcha (1898) ILR 22 Bom 899 and Sassoon v. Tokersey Jadhawjee (1904) ILR 28 Bom 616). The principle enunciated in these cases is to the effect that there is a possibility of confounding speculative transactions with agreements by way of wager but the distinction between the two as to their legal results is vital. In speculative transactions a seller might never have intended to give delivery and the purchaser did not expect him to deliver, but that does not convert a contract otherwise innocent into a wager. Heading transactions are, however, to be distinguished from the speculative transactions, inasmuch as they are genuine transactions entered into for purposes of insuring against adverse price fluctuations. In hedging 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 the 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."

Considering the facts of the case, we are of the view that the Assessing Officer was justified in treating the loss suffered by the assessee as business loss since it was a loss sustained in speculation business. In similar case, the Rajasthan High Court in the case of Commissioner of Income Tax Vs. Shree Textiles, had taken the view where the assessee had shown a loss of Rs. 16,426 in the cotton account and the entry was passed through the "Nakal Bahi'' on the last date of the accounting year. This difference was paid on account of purchase and sale of 100 cotton bales which were through B. The Income-tax Officer held that it was a speculation transaction and as such could not be adjusted against the business income. The Tribunal, however, held that it was business loss.

On the aforesaid aspects, it was held that from the definition of "speculative transaction" as given in section 43(5) of the Income Tax Act, 1961, only the three exceptions given in clauses (a), (b) and (c) are deemed not to be speculative transactions and if a transaction falls within the main clause, it cannot be excluded from the category of "speculative transaction". The object of Explanation 2 to section 28 is to demarcate and classify separately out of the various transactions, speculative business, Explanation 2 states what would constitute a speculative business. Speculative business has to be treated and deemed to be separate from any other business. Speculative transactions carried on by the assessee should be of such a nature so as to constitute a business. The definition of business, therefore, becomes more relevant when it has to be seen as to whether the nature of the transaction carried on constitutes a business. In a case where a trader carries on a business part of which (even one transaction) is in the category of "speculative transaction" as defined under section 43(5) and part of which falls in the category of business, then the object of Explanation 2 is to treat them separately. A single transaction may constitute a speculative business so as to be treated differently from other business under section 28. Accordingly, that amount of Rs. 16,426/- was considered to be the loss in speculation.

In our opinion, the question of law raised is similar to that decided by the Rajasthan High Court in the above decision. Since we concur with the findings recorded by the authorities as well as the Tribunal below, we are in complete agreement with the judgment and order rendered by the Tribunal and, hence, find no reason to allow these appeals. Accordingly, the appeals are dismissed. The question of law is answered in favour of revenue and against the assessee.