BHC in Prasad Agents Private Limited

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MGN
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.19 of 2009
M/s.Prasad Agents Private Ltd. )
having its address at 46, Jolly )
Maker Chamber II, 4th Floor, )
225, Nariman Point, Mumbai-20 )..Appellant
Vs.
Income Tax Officer 3(2)(4) )
Aayakar Bhavan, Maharishi Karve )
Marg, Mumbai-400 020. )..Respondent
Mr. Sanjiv M.Shah for the Appellant.
Mr. R.B. Upadhyay, fo the Respondent.
CORAM: F.I. REBELLO &
R.S.MOHITE, JJ.
DATED: 20TH MARCH, 2009
ORAL JUDGMENT (PER F.I. REBELLO, J.)
. The Appellant a non-banking financial
company has approached this Court against the order
dated 13th August, 2008 passed by the I.T.A.T. for
the assessment year 2001-2002. The A.O. by his
order had directed that loss of Rs.6,00,877/- in
share trading, was a speculation loss by virtue of
Explanation to Section 73 of the Income Tax Act,
1961. In respect of the said disallowance and on
some other aspects, the assessee preferred an Appeal
before C.I.T. (A). C.I.T. (A) by its order was
pleased to observe that the business of the
appellant consists of trading and investment in
shares, debentures, bonds, mutual funds and other
securities pursuant to its Memorandum of
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Association. The Tribunal considering the arguments
was pleased to place reliance on the order of the
Delhi Bench in Aman Portofolio Pvt. Ltd., 92 ITD
324 (Delhi) as also the clarification issued by
C.B.T.D.’s Circular No.204 dated 24th July, 1976 and
held that the A.O. was not justified to treat the
loss in shares as speculative loss and accordingly
the disallowance on that count was deleted. Revenue
aggrieved by the said order preferred an Appeal
before the I.T.A.T. The Tribunal noted that the
Tribunal had taken the decision in the case of High
Power Motors Pvt. Ltd. in ITA No.2094/Mum/2004
vide order dated 8th May, 2008. It also placed
reliance on the judgment of the Supreme Court in
Chainrup Sampathram 24 ITR 481 where the Supreme
Court had taken a view that loss or profit on
account of valuation of closing stock has to be
treated as speculative loss and allowable as revenue
loss or revenue receipt as the nature of these
profits are similar to the nature of business in
trading of shares and for that reason allowed the
appeal filed by the Revenue and set aside the order
of C.I.T. (A).
2. The assessee is in appeal on four questions.
In our opinion the following two questions would
arise for consideration:-
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(i)Whether on the facts and in the
circumstances of the case and in law, the
Tribunal was justified in treating
Rs.6,00,877/- as speculation loss by dint of
the Explanation to Section 73 of the Act?
(ii) Whether on the facts and in the
circumstances of the case and in law, the
Tribunal was correct in treating the loss
Rs.6,00,877/- originating from and traceable
simply and barely to the valuation of stock
of shares as covered by the ken of the
Explanation to Section 73 of the Act?"
3. At the hearing of this Appeal on behalf of
the Appellant-Assessee, learned Counsel submits that
in so far as Question (i) is concerned, the
Explanation has to be read with Circular No.204 and
if so read it would be clear that the object of the
provisions is to curb the device sometimes resorted
to, by business houses controlling groups
of
companies to manipulate and reduce the taxable
income of companies under their control. It is
submitted that it is not the contention of the
Revenue that the Assessee controls the group
companies and the transactions were done to
manipulate and reduce the taxable income of the
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companies under their control.
. On the other hand on behalf of Revenue,
learned Counsel submits that the language of the
Explanation to Section 73 is clear. It is further
submitted that no doubt the Circular has been
issued. However, it is for the Court to decide the
true effect of the Explanation to Section 73 and the
effect of the Circular.
4. The explanation to Section 73 as introduced
by the Taxation Law (Amendment) Act, 1973 read as
under:-
Explanation.-- Where any part of the
business of a company (other than an
investment company, as defined in clause
(ii) of Section 109, or a company the
principal business of which is the business
of banking or the granting of loan 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."
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4. The Statement of Objects and reasons provide
as under:-
"2. The main objectives of the amendments
proposed to be made are to unearth
black-money and prevent its proliferation;
to fight and curb tax evasion; to check
avoidance of tax through various legal
devices, including the formation of trusts
and diversion of income or wealth to members
of family; to reduce tax arrears and to
ensure that in future, tax arrears do not
accumulate; to rationalise the exemptions
and deductions available under the relevant
enactments, and to streamline the
administrative set-up and make it
functionally efficient."
. The relevant provision of Section 73 as it
now stands reads as under:-
Losses in Speculation business.
"73(1) Any loss, computed in respect of a
speculation business carried on by the
assessee, shall not be set off except
against profits and gains, if any, if
another speculation business.
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(2) ........
(3) ........
(4) No loss shall be carried forward under
this section for more than (four) assessment
years immediately succeeding the assessment
year for which the loss was first computed.
Explanation.-- 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 of 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."
5. A perusal of the explanation would,
therefore, make it clear that where any part of the
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business of the company consists in the purchase and
sale of shares of other companies, for the purpose
of Section 73 such company shall be deemed to be
carrying on speculation business. On consideration
of the said provision considering the language of
the Explanation there is atleast no scope for
ambiguity. The language of the Explanation is
clear, in as much as a company carrying on business
of purchase and sale of shares shall be deemed to be
carrying on speculation business.
. Our attention was invited to Circular
No.204. The Circular contains the explanatory notes
to Taxation Laws (Amendment) Act, 1975. Para.19.1
deals with the treatment of losses in speculation
business. In so far as this paragraph is concerned
there is no dispute in respect of its language
wherein it uses the following expression:-
"The amending Act has added an Explanation
to Section 73 to provide that the business
of purchase and sale or shares by companies
which are not investment or banking
companies or companies carrying on business
of granting loans or advances will be
treated on the same footing as a speculation
business."
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Learned Counsel, however, relies on paragraph 19.2.
Paragraph 19.2 reads as under:-
"The object of this provision is to curb the
device sometimes resorted to by business
houses controlling groups of companies to
manipulate and reduce the taxable income of
companies under their control."
It appears from this paragraph in the explanatory
note in respect of the amending Act that the
argument advanced on behalf of the assessee by their
Counsel may merit some consideration. In our
opinion, however, a gainful reading of paragraphs
19.1 and 19.2 read with language of the Explanation
would not bear out the submission as made on behalf
of the Assessee. Para.19.1 as we have noted earlier
does not refer to group companies, but refers to
companies dealing with shares. It is in that
context para.19.2 may be considered to mean that it
also includes cases of such group companies. That
does not mean that the explanation to Section 73
must be restricted only to group companies and not
to other companies who carry on business of sale and
purchase of shares either having no controlling
interest in other companies or purchasing shares to
control other companies. Once the language is clear
the Court must give effect to the language for its
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true interpretation. If the language is in conflict
with the Circular then to that extent to ignore the
circular. The Circular cannot be read in the manner
sought to be argued on behalf of the assessee as
that would defeat the very object as set out in the
statement of object and reasons to the Taxation Laws
(Amendment) Act, 1973. In the light of the above,
the Tribunal was right in taking the view it has
taken. The first question is accordingly answered
against the assessee.
6. The learned Counsel then sets out that even
if the question (i) is answered in favour of the
assessee nevertheless the explanation specifically
refers to purchase and sale of shares of any other
companies and does not refer to losses suffered on
account of book valuation. Our attention is invited
to Section 43(5) which reads as under;-
"speculative transaction" means 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."
Our attention is also invited then to Section 28
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Explanation 2 which reads as under:-
"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."
Explanation 2, to Section 28, therefore, treats the
business in respect of speculative transactions to
be distinct and separate from any other business.
Section 43(5) holds those transactions to be
speculation respect of which a settlement is
otherwise periodically or settled other than by
delivery or transfer of the commodity or scrips.
Reading these provisions learned Counsel submits
that the ’speculative value’ would not fall within
the explanation.
7. Our attention is first invited to the
judgment of the Supreme Court in Commissioner of
Income Tax, West Bengal vs. Hind Construction Ltd.,
83 ITR 211 to contend that if a person revalues his
goods and shows higher value for them in his books
he cannot be considered having sold his goods and
made profits therein. The issue before the Supreme
Court was in respect of sale of machinery. The
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Court there held that there was no sale. That
judgment, therefore, would really of no much
assistance.
7. We next consider the judgment of the Supreme
Court in Chainrup Sampatram vs. Commissioner of
Income-tax, West Bengal, 24 ITR 481, where the
Supreme Court observed that the valuation of unsold
stock at the close of an accounting period is a
necessary part of the process of determining the
trading results of that period and can in no sense
be regarded as the source of such profits. The
Supreme Court in Sanjeev Woolen Mills vs.
Commissioner of Income Tax, 279 ITR 434 (S.C.)
considered the judgment in Chainrup Sampatram
(supra) for the purpose of considering the rational
behind valuation of the stock at market whichever is
earlier.
8. On the other hand on behalf of the Revenue
the learned Counsel has drawn our attention to the
finding recorded by the Tribunal as also to the
observations in Sanjeev Woolen Mills (supra) to
contend that there is nothing inconsistent in the
said judgment of the view taken by the Tribunal.
9. In our opinion there can be no difference
between the losses suffered in the course of trading
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by delivery and losses in terms of the book value.
As long as the assessee is carrying on business of
trading by way of purchase and sale of shares even
if in respect of any financial year, there are no
transaction and yet the company has stock in trade
of shares, the book value will have to be considered
for the purpose of considering the profit and loss
in case of speculative business. There can be no
doubt that the explanation to Section 73 cannot be
read to mean only when there is a purchase and sale
of shares in the course of the financial year. The
explanation will cover both shares which are stock
in trade and shares which are traded in the course
of the financial year for the purpose of considering
the loss and profit for that year. The Tribunal, in
our opinion, has correctly answered the issue by
holding that the loss of profit on account of
valuation amounts to revenue losses or revenue
receipt. The second question, therefore, also will
have to be answered against the assessee and in
favour of the Revenue.
10. For the aforesaid reasons we find no merit
in this Appeal which is accordingly dismissed.
(R.S.MOHITE, J.) (F.I.REBELLO, J.)