2007 (8) TMI 41 - 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

Summary

Issues Involved:
1. Application of Section 43(5) of the Income-tax Act, 1961.
2. Determination of whether the transaction was speculative in nature.

Detailed Analysis:

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

The appellant, an assessee under the Income-tax Act, 1961, challenged the legality and validity of the order dated January 24, 2003, passed by the Income-tax Appellate Tribunal, Gauhati Bench, Guwahati. The primary contention was whether the Tribunal was justified in applying the provisions of Section 43(5) when the broker, acting as the agent of the appellant, was in custody of the shares on behalf of the appellant.

The Tribunal had determined that the loss of Rs. 3,99,860 claimed by the assessee was speculative in nature, as the shares were purchased and resold to M/s. R. K. Associates without taking physical delivery, and only the difference amount was paid. This decision was based on the interpretation of Section 43(5) which defines a "speculative transaction" as one where the contract for the purchase or sale of any commodity, including stocks and shares, is settled otherwise than by actual delivery or transfer.

The appellant argued that the Tribunal erred in its judgment, asserting that the transactions were genuine and not speculative. The appellant relied on various judicial precedents to support their claim, including CIT v. Kamani Tubes Ltd., CIT v. Mangal Chand, and CIT v. Shantilal P. Ltd. These cases suggested that transactions settled by compensation for breach of contract or those involving actual delivery of shares should not be considered speculative.

However, the court found that these precedents did not apply to the facts of the present case. The Tribunal's decision was upheld, as the transactions in question involved settlement by payment of differences rather than actual delivery, fitting the definition of speculative transactions under Section 43(5).

2. Determination of whether the transaction was speculative in nature:

The second issue was whether the Tribunal was justified in holding the transaction to be speculative when the shares were sold to avoid further loss due to a downward trend in the value of steel company shares.

The appellant's counsel argued that the transactions were not speculative, as there was no intention to settle by payment of differences initially, and the sale was forced by subsequent circumstances. The appellant cited decisions like CIT v. Mangal Chand, where the court held that delivery of blank transfer forms along with share certificates completed the transaction, thus not making it speculative.

On the contrary, the Revenue's counsel argued that the transactions fell within the ambit of speculative transactions as defined by Section 43(5). The counsel cited several cases, including Hoosen Kasam Dada (India) Ltd. v. CIT and CIT v. Maya Ram Jia Lal, which supported the view that transactions settled without actual delivery are speculative.

The court agreed with the Revenue's position, noting that the transactions were settled by payment of differences and not by actual delivery. The court emphasized that the intention of the parties at the time of entering the contract is irrelevant if the contract is ultimately settled without delivery. The court also referenced the Supreme Court's decision in CIT v. Jagannath Mahadeo Prasad, which held that speculative losses cannot be set off against profits from other business activities.

Conclusion:

The court concluded that the Tribunal was justified in treating the loss of Rs. 3,99,860 as speculation loss. The appellant's arguments were overruled, and the court answered the questions of law in favor of the Revenue. The loss was deemed speculative, and no tax deduction was allowed on the said amount.