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TMI Blog1990 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Tribunal was right in law in holding that the loss of Rs. 91,000 ( rupees ninety one thousand ) arising from speculative transaction in purchase and also sale of shares should be allowed to be set off against the other income ? (4) Whether, the finding of the Tribunal that the instant case is a case of damages paid for breach of contract is vitiated in law being based on partly relevant material or being based on no evidence or being based on evidence contradictory and/or being inconsistent with the evidence on record or whether such finding is otherwise unreasonable and perverse?" The assessee is a Hindu undivided family. The assessment year involved is 1974-75 for which the accounting year ended on March 31, 1974. The claim of the assessee is that he carried on a business in purchase and sale of shares and securities under the name of Bikram Traders. The assessee made a declaration on March 30, 1972, that he had converted his investments in shares into stock-in-trade. During the previous year, the assessee had purchased 10,000 shares of Orient Paper Mills Ltd. at the rate of Rs. 38.30 per share from M/s. Kothari Co., share brokers. The delivery of shares was taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing against loss made out on behalf of the assessee. The Income-tax Officer was of the view that the real intention behind the transaction was to derive income from dividend from the shares which were exempt from tax under section 80K of the Income-tax Act. The Income-tax Officer held that the loss of Rs. 91,000 arose out of speculative transaction and did not qualify for adjustment against the other income of the assessee. It was contended on behalf of the assessee before the Appellate Assistant Commissioner that it was a case of hedging and that the loss should be allowed as business loss. In the alternative, it was argued that, even if the transaction was treated as speculative being an isolated transaction, it would not be treated as " speculation business " within the meaning of Explanation 2 to section 28. The Appellate Assistant Commissioner held that there was not single factor from which it could be inferred that there was a reasonable ground for apprehending loss. The appellant had failed to discharge the burden of proof cast upon him to show that the transaction in question was by way of hedging. There was a steady rise in the trend in the price of the shares. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; shall not be deemed to be a speculative transaction." "72. Carry forward and set off of business losses. - (1) Where for any assessment year, the net result of the computation under the head ' Profits and gains of business or profession ' is a loss to the assessee, not being a loss sustained in A speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year. " Explanation 2 to section 28, undoubtedly, makes a distinction between speculative transactions and speculation business. When speculative transactions are of such a natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Lord President Clyde, in the case Balgownie Land Trust Ltd. v. IRC [1929] 14 TC 684, 691, was quoted with approval by the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594, 615. Therefore, the facts of the case will have to be looked into to decide whether a transaction is of business nature or not. Whether a transaction is of speculative nature or not does not make any difference to this principle. If a single plunge in trade may constitute business, the transactions will be an adventure in the nature of trade. If such a transaction was settled without the transfer of the contracted commodity, then the transactions will be an adventure in the nature of speculation business. Moreover, as was observed by Lawrence LJ. in the case of Leeming v. Jones [1930] 15 TC 333, 354 (HL), where, in a case of isolated transaction of acquisition and sale of property, there is really no middle course open, it is either an adventure in the nature of trade or else it is simply a case of sale and resale of a capital asset. This view was also approved by the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594. The problem that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter, on August 22, 1973, he entered into an agreement to sell the shares. This was not followed up by delivery of the shares. On September 20, 1973, the assessee entered into a contract for purchase of another 10,000 shares of Rs. 48.40 each. No delivery was given pursuant to this contract. There is nothing on record to show that there was any dispute between the purchaser and the seller because of which delivery could not be taken by the assessee when he purchased the shares or delivery could not be given by the assessee when he sold the shares. The assessee had full knowledge of the trend of the market and also had inside knowledge of the working of the company. The contracts for purchase and sale of shares without delivery were clearly of speculative nature. This is a clear case of share speculation. Having regard to the various transactions as narrated hereinabove, it will not be right to hold that there was only one solitary transaction. In any event, even if there is a solitary transaction, I fail to see how such a transaction cannot be regarded as a speculation business. The difference of a " speculation business " with any other business is that, in speculation busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur view, the Tribunal was in error in holding that, in the instant case, there was one isolated transaction. The Tribunal was also in error in holding that, even if the transaction in question was speculative, it could not amount to speculative business within the meaning of Explanation 2 to section 28 of the Income-tax Act, 1961. The next question is the question of damages. It has been contended on the strength of the decision of the Bombay High Court in the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 that the assessee was unable to effect delivery of the shares and had committed a breach of the agreement to sell the shares. The settlement took place after the breach had occurred. Damages had to be paid by the assessee for the breach. This was not a case of settlement of the contract by making payment as contemplated by section 43(5) of the Act. It has been argued that what had taken place was not a settlement of the contract but settlement of the assessee's liability for damages for the breach of that contract. The Bombay High Court referred to two judgments of this court in the case of CIT v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal) and Daulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Kushalraj v. CIT [1974] 96 ITR 401, the Mysore High Court referred to the aforesaid two decisions of this court and remanded the case to the Tribunal for fresh enquiry and decision. In the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 (Bom), the assessee-company had entered into an agreement for purchasing 250 M.Ts. of hot-processed naphthalene for export FOB Calcutta; delivery to be completed by September 30, 1961. Under the agreement, a letter of credit was to be opened by the assessee-company forthwith. A performance bond was to be executed by the assessee-company concurrently with the signing of the agreement for a sum equivalent to 3% of the contract value of the goods. The assessee-company failed to open a letter of credit and paid a sum of Rs. 20,000 in lieu of the performance bond. The price of the goods having gone down in the foreign markets, the assessee-company negotiated with H. S. company for an amicable settlement and addressed a letter dated October 30, 1961, stating that it had already paid a sum of Rs. 20,000 in lieu of the performance bond and forwarded therewith a cheque for Rs. 30,000 and requested the H. S. company to accept the total su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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