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TMI Blog2006 (5) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... o be carrying on sale and purchase of shares of other companies on his own account also. Thus, it was held that both the activities of business, i.e., business of brokerage and business of dealings in shares were separate activities and thus assessee was held not entitled to set off the loss. Here in the present case, the assessee is found to have no business activity of sale and purchase of shares at its own. Thus, this decision has no application to the facts of present case - assessee is entitled to get set off of a sum of Rs. 20,38,775, being loss accrued to assessee being incidental to its business activity as a broker against its brokerage income - appeal allowed. Whether disallowance of foreign travel expenses of the director of Rs. 6,20,841 to be allowed in full? - HELD THAT:- There are force in the argument of learned counsel that the visit of director was not purely personal. It may have some elements of business nature. Therefore, entire expenses could not be disallowed and expenses relating to the director only should be estimated which have been incurred for the purpose of business. The expenses relating to the wife of director cannot be allowed being not wholly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 1997 was shown at Rs. 20,250, therefore, there is a loss of Rs. 62,000. This total loss in business of sale and purchase of shares comes to Rs. 21,00,775. Before discussing the issue it would be worthwhile to reproduce the Explanation to s. 73 which reads as under: 'Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.' From the plain reading of this Explanation, it is clear that other than banking companies or companies whose principle business is of granting loans, for the purpose of s. 73, part of the business consisting of purchase and sale of shares of other companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rors in executing the orders by the staff members and to save the goodwill company has squared up these accounts by treating the same as own trading transactions therefore, it is normal business loss closely connected with the broking business and therefore provisions of s. 73 are not applicable and loss should be allowed as business loss under s. 28 of IT Act. On going through the details furnished by the assessee it is found that these are speculative transactions in various scrips which were settled without delivery of shares. The claim of assessee that mistakes were bound to take place is not tenable in view of the fact that in the immediately preceding financial year, gross brokerage receipt was of Rs. 12.74 lakhs as against gross brokerage receipt in current year of Rs. 85.89 lakhs meaning thereby that approximate 1/7th of the current turnover was handled by the company in the preceding year. But there is not a single mistake during the financial year on account of which assessee had to take the transactions in its own account. In the current financial year there is systematic pattern where short sales were carried forward and settled without delivery and same time there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not applicable to the assessee's case. Alternatively, it was argued that income from brokerage should be set off against loss arising out of purchase and sale of shares which is treated as speculation business because they are related to the same source. Reliance in this regard was placed on the decision of Calcutta High Court in the case of CIT vs. Nirmal Kumar Co. (1986) 53 CTR (Cal) 148 : (1986) 161 ITR 413 (Cal). Considering these submissions which are contained in para 3.2 of impugned order, learned CIT(A) has upheld the order of AO in this regard vide observations. as per para 3.3 which is reproduced below for the sake of convenience: 3.3 I have given a careful thought to the submissions made before me by the counsel and have also gone through the contents of the letter dt. 12th Jan., 2000 and 12th Feb., 2000 which gives detailed submission as to why the transaction in purchase and sale of shares should not be considered as speculation loss. 3.4 Coming to the loss of Rs. 62,000 as computed by the AO, it would suffice to say that the account of Rs. 82,250 has been shown by the company by way of investment, the cost of market value of which is Rs. 20,250. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions and the loss in trading of shares is not a adjunct of brokerage income. Therefore, the case relied upon by the learned counsel in the case of Nirmal Kumar Co. is not applicable to the instant case which is different on facts. 3.7. In brokerage income, there can be no element of speculation. The brokerage is earned and received independently due to fluctuation in the market and no risk is involved in the earning of brokerage and so it must be treated as business profit and not as a profit from the speculation business. The two are separate and distinguished factors and any speculation loss, therefore, cannot be adjusted from out of business profit of brokerage as held in the case of CIT vs. Pangal Vittal Nayak Co. (P) Ltd. (1969) 74 ITR 754 (SC). Following the same and on the facts found as above, the loss of Rs. 20,38,775 is held to be speculation loss. The assessee is aggrieved hence in appeal. 5. As many as 4 paper books have been filed before us which were referred to by the learned counsel of the assessee during the course of hearing. 6. Paper book I is the compilation of statement of total income along with its enclosures and copies of notices iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r those transactions with NSE, the assessee had purchased those shares. However, by the end of the year none of those shares were kept by the assessee and those shares were disposed during the year itself. Such contentions were raised to contend that the intention of assessee had never been to engage in sale and purchase of shares at its own. It was only due to compulsion, the assessee had to fulfil its obligation with regard to certain transactions of purchases of shares as the same were disowned by the clients of assessee-company due to communication gap, etc. The balance sheet and P L a/c of various years were referred to show that all these transactions were not entered into by the assessee at its own but these transactions were with regard to its clients and these transactions were disowned by its clients. Therefore, in order to be in the business assessee had fulfilled those transactions as in absence of fulfilling those transactions the assessee may have been treated to be in default and thus could be debarred from carrying on its activities as a broker of shares. 11. Reading following portion of para 3.6 of the order of CIT(A), learned counsel pleaded that these observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1063.86 crores and accordingly, the daily average turnover comes to Rs. 4.25 crores. The daily working hours is very limited and always considered as peak hours. We are having two terminals and handled by two persons but at a time these two persons have to give reply on phone to various customers (not less than 10 clients). Even they are responsible to give reply to clients who are personally present at the office. This is simultaneously with operation of TERMIAL on the market is volatile they have to consent on terminal. Even this being in electrical operation and light planation (sic) is inevitable certain time Sauda could not be made to NSE within time and hence we are responsible for such standing Sauda in the market and we have to bear (rate difference in the market. It is our practice that terminals are strictly operated by a person who is having direct access to the terminal of NSE and none other. Thus, this particular person is concentrating his mind in following two aspects: (1) Giving reply, and (2) Taking instructions from the clients and also operating the terminal and carrying out the Sauda. At that particular moment, there could be a feeding mistake and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kar, director of Parkar Securities Ltd., do hereby solemnly state, affirm and confirm as under: 1. That during the course of assessment proceedings before the AO in letter dt. 12th Feb., 2000, the appellant-company had produced trading account along with copies of bills. 2. That the learned CIT(A) has made an observation contrary to the facts available on record in his appellate order in para 3.6 that 'but the fact remains that it is only a general statement without any factual information giving the necessary transactions which were purported to have been caused due to bad delivery or due to mistake of the employees, etc. In fact, before me also no such transactions have been shown and no evidence has been filed in support of the contention as raised in letter dt. 12th Feb., 2000'. The said observation of the learned CIT(A) is not correct in view of the fact that the appellant-company had already submitted the trading account along with copies of bills to the learned AO vide letter dt. 12th Feb., 2000. This affidavit is filed in support of para 2.5 of the grounds of appeal annexed with Form No. 36 appeal memo filed before the Hon'ble Tribunal. Whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 173712.50 5-3-1997 Trf. from Ankush Caplease 9014210.30 19-3-1997 Trf. from Kantaben Bhagirath 44555.00 19-3-1997 Trf. from Bharat Bhudarji 73609.00 11547169.60 11547169.60 He took us through these statements, copies of which are produced in paper book No. IV to show that all these transactions were entered by assessee in the bills raised by it to its respective clients who had disowned these transactions and assessee being a member of NSE had to honour these transactions as in case of failure the assessee could be debarred to carryon its broking activities with NSE. He contended that all these bills are part of account books and record maintained by assessee in conformity with rules of NSE and, therefore, the same is contemporary evidence which could not be ignored or discarded in absence of any contradictory or adverse material. He contended that where there is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 907 1997/005 3183 Mansi Consultancy 7129 1997/006 3045 Pushpa Tej Finance 5689 1997/009 3012 Ankush Caplease 26366 1997/011 3017 Kantaben Bagirath 4079 1997/011 3012 Ankush Caplease 17511 1997/011 3249 Bharat Bhudarji 6865 Total 192042 13. He further contended that the clients who had disowned certain transactions were good clients and assessee has earned a brokerage of Rs. 34,34,765 from these clients during the year under consideration and details in this regard as furnished at p. 119 of paper book-II are as under: Details of brokerage received during the year from following clients: Code No. Name of client Amount Rs. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade, commerce or manufacture. 16. He further referred to Expln. 2 to s. 28 according to which-Where speculative, transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business ) shall be deemed to be distinct and separate from any other business. 17. He also referred to s. 29 which describes that the income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. 18. Then he referred to s. 43(5) which defines speculation transaction as under: 'speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity. including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: 19. He also referred to following sections: Sec. 70-Set off of loss from one source against income from another source under the same head of income. Sec. 71-Set off of loss from one head against income from another. Sec. 72-Carry forward and set off of business losses. 20. Then he referred to Explanation to s. 73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 Nil Nil Nil 6,73,555 1996-97 Nil Nil Nil 18,20,540 1997-98 Nil Nil (Relatable to disowned saudhas taken into trading account of the assessee) 85,37,855 1998-99 Nil Nil Nil 37,11,872 1999-2000 Nil Nil Nil 3,99,889 2000-01 Nil Nil Nil 34,30,242 2001-02 Nil Nil Nil 34,40,928 2002-03 Nil Nil Nil 45,259 Thereafter the assessee surrendered its card to the National Stock Exchange and stopped the business immediately. Referring to above chart he contended that it was only during the year under consideration such eventuality occurred and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Mysore Rolling Mills (P) Ltd. vs. CIT (1992) 103 CTR (Kar) 33 : (1992) 195 ITR 404 (Kar)-to contend that the Explanation is attracted only when part of the business of the assessee-company consisted of the purchase and sale of shares of other companies: it is only in such a situation that such dealing in shares is deemed to be carrying on a speculation business. Any kind of venture will fall within the definition of business . The venture or the adventure will have to be in the nature of trade,commerce or manufacture. Basically, the concept of business involves a frequent activity of a particular nature. The facts of each case will have to be examined to arrive at a conclusion as to whether the transaction in question is speculative venture or business. The nature of the assessee's business in general, the purpose behind the particular transaction, the effect of the transaction, etc., are all to be considered. Unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the Courts cannot infer that the transaction was a speculative venture only because the assessee derived subsequently the benefit of tax reduction. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Nirmal Kumar Co.- The assessee was dealing in PDOs. The brokerage that it earned from dealing in PDOs was shown as profit. The PDO loss that was incurred was found by the Tribunal to be inseparable. In fact, the ITO himself had treated all these transactions as inseparable in the earlier assessment years. The ITO could have dealt with these transactions as speculative or the ITO could have treated them as business transactions. In either event, the loss had to be set off against the profit. The ITO in the earlier assessment years had treated all these transactions as business transactions. No reason has been given to depart from the view taken by the ITO in the earlier years. It was noted that it was not the case of the ITO that the brokerage income was earned out of the transactions which were actually settled by delivery of jute goods and loss arose out of transactions in which goods were not ultimately delivered. Had that been the case, different consequences might have followed. Thus the Tribunal was held to have come to a correct decision. (v) CIT vs. Abdul Razak Co. (1981) 22 CTR (Guj) 181 : (1982) 136 ITR 825 (Guj)-to contend that where a commission age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocation by virtue of s. 10(2A), it follows by necessary implication that such income or profit can only be income or profit arising from speculative business. 24. Concluding his arguments learned counsel pleaded that in view of abovementioned facts and position of law, the loss arising to assessee from sale and purchase of shares should not be treated to be speculative loss as envisaged in Explanation to s. 73. The loss should be treated as ordinary business loss entitled to be set off against other income of assessee. 25. On the other hand, learned Departmental Representative relied on the order of AO. He also relied on the case law relied upon by the learned CIT(A) and also the decision of Calcutta High Court in the case of CIT vs. Arvind Investment Ltd. (1991) 94 CTR (Cal) 263 : (1991) 192 ITR 365 (Cal). The decision in the case of CIT vs. Arvind Investment Ltd. lays down the following proposition: The Explanation to s. 73 applies to certain categories of companies. The opening words of the Explanation to s. 73 are 'where any part of the business of company' do not create any difficulty. The assessee has not been able to cite any case where the word 'any&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his clients. The point to be noted is that the assessee carried on these speculative transactions on behalf of its clients and not on its own behalf. There is thus no element of speculation in the commission income received by the assessee and the commission is earned and received by the assessee independently of the profit or loss sustained by his clients in the transaction. Accordingly, the assessee is not entitled to get the commission receipts assessed under the head 'speculation business' for the relevant years. Thus the learned Departmental Representative concluded his argument to contend that loss accrued to assessee from sale and purchase of shares has rightly been treated by AO as speculative for which set off of loss was not permissible against other income as per discussion made in the assessment order and in the order of CIT(A). 26. Giving reply to the arguments of learned Departmental Representative, learned counsel pleaded that both the cases relied upon by the learned Departmental Representative have no application to the case. The loss arising to assessee is not hit by Explanation to s. 73 of the Act. In the alternative he pleaded that source of los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. The abovementioned Explanation has been inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1977. The Explanation provides that where any part of the business of a company (other than certain specified companies as mentioned in the Explanation) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It is clear from the above provision that sale and purchase of shares of other companies, within the ambit of the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of capital and not an yield of income.' The decision in CIT vs. Bhikamchand Jankilal (1980) 19 CTR (MP) 311 : (1981) 131 ITR 554 (MP) : TC 19R.552 is based on the facts of the said case. In fact, at p. 559, the Bench observed that: 'Our conclusion, therefore, is that if the transaction under which the assessee paid Rs. 13,500 to M/s Rallis India Ltd. amounted to a speculative transaction, it also amounted to speculation business attracting the operation of s. 73(1) and the loss of Rs. 13,500 could not be set off against the profits of the other business of the assessees.' CIT vs. Sri Venkateswara Rice Oil Mills (1987) 62 CTR (AP) 26 : (1985) 154 ITR 756 (AP) : TC 19R.512 is a decision of the Andhra Pradesh High Court. The question that arose was under s. 43(5) of the IT Act. The Bench found that the transaction in question could not be held to be a speculative transaction and, therefore, the Revenue's contention was negatived. In the said case, the assessee was carrying on business in the manufacture and sale of groundnut oil and, in that connection, it had entered into a number of contracts for the purchase as well as sale of the aforesaid commod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the contract leaving only differences to be paid [vide Tod vs. Lakhmidas Purshotamdas (1892) ILR 16 Bom 441, Perosha Gursetji Parakh vs. Manekji Dossabhai Watcha (1898) ILR 22 Bom 899 and Sassoon vs. Tokersey Jadhawjee (1904) ILR 28 Bom 616].' Again the Bench concluded: 'What is required for speculation business is that the course of speculative transactions carried on by an assessee is of such a nature as to constitute a business. It is, therefore, necessary in each case to examine and find out whether the speculative transactions carried on by an assessee are of such a nature as to constitute a business. It may be that, in a given case, a single speculative transaction, on application of proper tests, may be found to constitute 'speculation business'. It may equally be true that a plurality of speculative transactions, on application of proper tests, constitute 'speculation business'. It would depend upon the facts of each case. It is not possible to accept the submission of learned standing counsel for the Revenue that no recognised tests are applicable for the purpose of determining whether an assessee is carrying on speculation business by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; bills, along with assessee's purchase bills giving details of non-acceptance of Sauda by parties and xerox copies of settlement sheets. All these bills were comprising part of accounting books maintained by the assessee giving all required details regarding the transactions on which the assessee had to bear these losses. Thus, by placing all these materials on record of AO, it can be said that assessee had discharged its primary onus to substantiate its explanation regarding incurring of losses out of these transactions. The AO has not brought any material on record to suggest that the assertions and documents produced by assessee were not substantiating the explanation furnished in this regard. There is also no material on record to disprove the facts stated by the assessee. In this view of the situation, the AO could not act unreasonably to reject that explanation. As per decision of Hon'ble Supreme Court in the case of Shreelekha Banerjee Ors. vs. CIT, before AO rejects such evidence it must (show) commensurate weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The AO cannot be merely rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is lack of ingredient called business in the sale and purchase done by the assessee of shares for which loss has occurred to assessee. It has been held in the case of CIT vs. Shri Venkateswara Rice Oil Mills that the transaction made which are beyond the control of the assessee would not make the transaction a speculative transaction in the absence of any evidence to show that the transaction was speculative. 31. It is further observed that the Tribunal in the case of Asstt. CIT vs. Subhash Chand Shorewalla (2004) 91 TTJ (Del) 57 has held that where an assessee carrying on business of broking, in normal course of his business would be facing situations wherein some of the clients do not own up the transactions on investing losses and in such situations, the consequential loss incurred by the assessee to honour the commitment 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. Relevant observations of the Tribunal from the said case are reproduced below for the sake of convenience: 11. We have heard the rival submissions and have also perused the orders of the lower authorities and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO are accepted that such loss suffered by the appellant was on account of self-trading, still the loss cannot be termed as speculation loss. In normal terminology, the share trading business on behalf of oneself is known as jobbing. Sec. 43(5) defines. the word speculative transaction, but there are three exceptions to it. The proviso (c) to s. 43(5) reads as under: 'A contract entered into by a member of forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to hedge against loss which may arise in the ordinary course of his business as a member.' This proviso makes it very clear that any profit or loss on account of jobbing will not be in the nature of speculation profit or speculation loss. Thus, even if it is accepted that the loss suffered by the appellant was on account of self-trading in view of proviso (c) to s. 43(5) such loss cannot be treated as speculation loss. The AO is directed to treat the loss as normal business loss. Accordingly, I hold that the loss of Rs. 3,01,785 is normal business loss and not the speculation loss.' 14. A perusal of the aforesaid leads to an inference that the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be inapplicable by the Tribunal for the reason that for application of Explanation to s. 73 it is necessary that some part of the business of assessee should be sale and purchase of shares. On this order of Tribunal, it was held by the Hon'ble High Court that where assessee is carrying on sale business in share trading the same also falls within the ambit of Explanation to s. 73. Here, on the basis of facts, it is found that no part of business activity of the assessee included sale and purchase of shares of other companies. 34. In the decision in the case of CIT vs. Pangal Vittal Nayak Co. (P) Ltd., the assessee was found to be carrying on sale and purchase of shares of other companies on his own account also. Thus, it was held that both the activities of business, i.e., business of brokerage and business of dealings in shares were separate activities and thus assessee was held not entitled to set off the loss. Here in the present case, the assessee is found to have no business activity of sale and purchase of shares at its own. Thus, this decision has also no application to the facts of present case. 35. In view of above discussion, we hold that assessee is entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TISM Los Angeles 3.00 p.m. to 5.00 p.m. Pacific Stock Exchange Stratus Singapore -- Singapore Stock Exchange HCL HP Hong Kong -- Hong Kong Stock Exchange Tandem It was pleaded that assessee (director) had visited various stock exchanges. Thus, it was pleaded that the purpose of visit of director was not purely personal as apprehended by AO. Thus it was pleaded that disallowance of entire expenses is not justified. 39. Learned Departmental Representative on the other hand, however, relied on the orders of AO and the CIT(A). 40. We have carefully considered the rival submissions in the light of material placed before us. We find force in the argument of learned counsel that the visit of director was not purely personal. It may have some elements of business nature. Therefore, we are of the opinion that entire expenses could not be disallowed and expenses relating to the director only should be estimated which have been incurred for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X
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