2014 (1) TMI 1091 - HC - Income Tax

Whether loss on transaction of shares is speculative loss - Held that - Decision in Commissioner of Income Tax Vs. Subhash Chand Shorewala 2004 (1) TMI 327 - ITAT DELHI-F followed - On some occasions, the loss on the share transaction was consequent to a breach of contract by the client and the same could not be said to be speculative loss - Secondly, in certain situations, a broker also acts as a jobber and the jobbing transactions are inherent in the business of share broking and the same is also not to be viewed as a speculative loss. The two facets of the issue relate to (a) loss as a result of the breach of contract by the clients; and (b) loss suffered on account of jobbing transaction - As regards the loss on account of breach of contract - Following Bhagwan Dass Rameshwar Dayal 1984 (5) TMI 35 - DELHI High Court - One can visualise a number of situations in which there may be no delivery for various reasons, i.e., because of failure of the party on account of insolvency or frustration, e.g., banning of business or mere breach, i.e., to say non-supply - All these cannot be classified as speculative within the meaning of section 43(5) - A contract which is settled by means of a cross contract is termed as speculative transaction - If the contract is settled for some other reasons by payment of damages or even without payment of damages it may or may not be speculation transaction depending upon the circumstances of the case - If a contract is broken, i.e., for any reasons one party is unable to give delivery order the other party is unable to take delivery, it is a case of breach of contract - The loss suffered by the appellant on account of breach of contract falls outside the purview of speculative transaction. The share trading business on behalf of oneself is known as jobbing - Section 43(5) defines the word speculative transaction, but there are three exceptions to it - The assessed, being in the business of broking, would be facing situations wherein some of the clients do not own up the transactions on anticipating losses - In such situations, the consequential loss incurred by the assessee to honour the commitments is to be viewed as an integral part of carrying on of assessee s business and is, therefore, not liable to be judged as a speculation loss - The share trading business on behalf of oneself is known as jobbing - A transaction carried on by the assessee for sale and purchase of the shares was fully covered by the term jobbing and assessee is entitled for the extension of the benefit of proviso (c) to Section 43(5) of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of loss of Rs. 8,53,030/- as speculative loss.
2. Nature of the assessee's entire business as non-speculative.
3. Assessee's engagement in jobbing without being registered as a jobber.
4. Evidence of delivery of the scripts and its impact on the speculative nature of the loss.

Issue-wise Detailed Analysis:

1. Treatment of Loss as Speculative Loss:
The primary issue was whether the loss of Rs. 8,53,030/- incurred by the assessee should be treated as speculative loss. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) classified the loss as speculative since the transactions were settled without actual delivery of shares, as per Section 43(5) of the Income Tax Act. The Tribunal, however, disagreed, noting that the system provided for settlement on a net basis as per Stock Exchange guidelines and that the assessee paid turnover fees to SEBI, indicating non-speculative transactions. The Tribunal held that the Revenue failed to fully establish that the transactions were settled without actual delivery.

2. Nature of the Assessee's Entire Business:
The Tribunal concluded that the assessee's entire business was of a non-speculative nature. This conclusion was based on the fact that the assessee had been paying turnover fees on such transactions since 1991-92, and the transactions were settled on a net basis as per Stock Exchange guidelines. The Tribunal also referenced a Division Bench judgment (249 ITR 233) which supported the view that transactions by a share broker are not speculative if they fall under the proviso (c) to Section 43(5).

3. Assessee's Engagement in Jobbing:
The Tribunal found that the assessee was engaged in jobbing, despite not being registered as a jobber. The Tribunal noted that the assessee had been paying turnover fees for jobbing to SEBI, and the transactions were settled on a net basis. The Tribunal relied on the definition of "jobbing" provided in legal dictionaries and concluded that the transactions were indeed in the nature of jobbing, thereby qualifying for the exception under proviso (c) to Section 43(5).

4. Evidence of Delivery of the Scripts:
The Tribunal observed that the allegation of transactions being settled without actual delivery was not fully established by the Revenue. The assessee had consistently claimed that the transactions were settled on a net basis as per Stock Exchange guidelines and were covered under proviso (c) to Section 43(5). The Tribunal found that the details of the transactions were disclosed, and no discrepancies or doubts were raised by the AO regarding the bonafide of the transactions.

Conclusion:
The Tribunal upheld the assessee's appeal, concluding that the losses incurred were not speculative by virtue of proviso (c) to Section 43(5). The Tribunal's decision was based on the assessee's consistent payment of turnover fees, the nature of transactions as jobbing, and the failure of the Revenue to fully establish that the transactions were speculative. The Tribunal's order was affirmed, and the appeal was dismissed, with all questions answered in favor of the assessee and against the Revenue.