2007 (8) TMI 18 - HC - Income Tax

Speculation loss - Assessee claim the share business loss amount was deductible from total income - Held that transaction in shares as claimed by the assessee can t be treated as genuine and accordingly not allowed

Issues Involved:
1. Application of Section 43(5) of the Income-tax Act, 1961.
2. Determination of whether the share transactions were speculative.

Detailed Analysis:

1. Application of Section 43(5) of the Income-tax Act, 1961

The appellant, a Hindu undivided family, challenged the order of the Income-tax Appellate Tribunal, which classified a loss of Rs. 3,99,860 from share transactions as speculative. The Tribunal held that the transactions, which involved purchasing and reselling shares from M/s. R. K. Associates without taking physical delivery, fell under the definition of "speculative transaction" as per Section 43(5) of the Act. The Tribunal's decision was based on the observation that the transactions were settled by paying the difference between purchase and sale values, rather than through actual delivery of shares.

The appellant argued that the Tribunal erred in applying Section 43(5) since the broker, acting as an agent, was in custody of the shares on behalf of the appellant. The appellant contended that the transactions were genuine and not speculative, as there was no initial intention to settle by paying differences but were forced by subsequent circumstances.

2. Determination of Whether the Share Transactions Were Speculative

The Tribunal's decision was contested on the grounds that it had no cogent material to prove the transactions were not genuine. The appellant relied on several judicial precedents to support their claim, including:
- CIT v. Kamani Tubes Ltd. [1994] 207 ITR 298 (Bom): Held that a transaction cannot be described as speculative if there is a breach of contract and damages are awarded as compensation.
- CIT v. Mangal Chand [2002] 255 ITR 329 (Raj): Held that delivery of blank transfer forms along with share certificates results in completing the transaction, making it non-speculative.
- CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 (SC): Held that transactions involving breach of contract and compensation are not speculative.

The Revenue, however, countered with decisions supporting the Tribunal's view:
- Hoosen Kasam Dada (India) Ltd. v. CIT [1964] 52 ITR 171 (Cal): Held that transactions settled otherwise than by delivery are speculative.
- CIT v. Maya Ram Jia Lal [1986] 162 ITR 520 (P & H): Held that compensation for non-fulfilment of contracts is speculative.
- V. N. Sarsetty v. CIT [1987] 163 ITR 727 (Karn): Held that non-delivery of goods and settlement by payment is speculative.
- Abdul Gani Haji Habib v. CIT [1969] 72 ITR 6 (Cal): Held that transactions settled by payment of differences are speculative.
- CIT v. Jagannath Mahadeo Prasad and CIT v. Gauri Dutt Bhagwan Dass and Co. [1969] 71 ITR 296 (SC): Held that speculative losses cannot be set off against profits from other business activities.

The court concluded that the Tribunal was justified in treating the loss as speculative. The argument that the transactions were forced to be settled by paying differences due to subsequent circumstances was not accepted. The court emphasized that the nature of the transactions, which were settled without actual delivery, fell squarely within the definition of speculative transactions under Section 43(5).

Conclusion:

The court affirmed the Tribunal's decision, holding that the loss of Rs. 3,99,860 was speculative and thus not deductible. The substantial questions of law were answered in the affirmative, in favor of the Revenue.

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