ITAT, DELHI BENCH ‘D’, DELHI
Multiplex Trading & Industrial Co. Ltd.
v.
ITO
ITA No. : 863 (Del) of 2006
June 5, 2009
This is the relevant extract of the case
8. We have heard both the parties and gone through the material available on records. The assessee is engaged in rendering Business & Management Consultancy and Marketing Services to its various clients against payment of professional fees. The assessee invested Rs 2,00,00,000/- in 14,38,848.929 units of Sun F &C fund. The dividend of Rs.43,16,546.70 received on 22.02.2001 was also reinvested in 4,09,151.252 units of the said fund as per the scheme of reinvestment plan. The investment of Rs 2,00,00,000/- in units of Sun F & C Fund and investment of dividend of Rs 43,16,546.70 in units of the said fund had taken place on the same day. The assessee sold 18, 48,000.181(14,38,848.929 +4,09,151.252 ) units on 23.02.2001 for Rs 1,94,77,922.88. In fact no loss was suffered by the assessee in this transaction. However, from point view of taxation, the dividend of Rs 43,16,546.70 was became capital in the hands of the assessee. The total investment made by the assessee in units of the said Fund was at Rs 2,43,16,546.70 against which) the assessee received net sale consideration after meeting expenses al Rsl.lM.77.922.KK. This resulted in loss of Rs.48,38,623.88. The assessee as discussed alone earned profits from share trading activities at Rs.48,65,115/-. Thus during the year under consideration the assessee had earned loss in trading in units of mutual funds and profits from trading in shares. The assessee had treated these two activities as two separate activities reflecting short term capital loss under trading in units of mutual fund and profits from trading in shares, As per clause 6 of Memorandum of Association, the assessee is permitted "to carry on business of shore brokers, sub-brokers, underwriters, and sub-under-underwrirers. " There is no other clause in Memorandum of Association permitting the assessee to deal in shares and units of mutual funds as business activity. However the fact remains that the assessee was engaged in trading of shares during the year under consideration.
9.1 Now question arises as to whether the purchase and sale of units can be treated as business carried on by the assessee? The expression "business" is not defined under income Tax Act, 1961. As per the decision of Hon'ble Supreme Court in Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368, the word 'business' is one of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense. In bellow mentioned cases the Hon'ble Courts have discussed the circumstances under which a person could said to have carried out business activities:
i. In Sole Trustee, Loka Shikshana Trust v. CIT 11975] 101 ITR 234 (SC) Hon'ble Apex court has held that there must be a course of dealings with continuity. The expression 'business', though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be course of dealings either actually contained or contemplated to be contained with a profit motive, and not for sport or pleasure. Whether a person carried on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive.
ii. In P. Krishna Menon v. C1T [ 19.S9] 35 [ IK 4S (SC) has held that motive to produce income is not necessary. It is well-established that il is not the motive of the person doing an act which decides whether the act done by him is carrying on of a business, profession or vocation. If any business, profession or vocation, in fact produces an income that is taxable as income from business, irrespective of the fact that business was not carried on with any motive of producing any income.
iii. Hon'ble Patna High Court in Eclat Construction (P.) Ltd. v. C1T [1988] 172 ITR U (Pat.) has held that the expression 'business' in ordinary parlance means any trading activity accompanied by regularity of transactions intended for the purpose of making profit. In general, a single transaction is not taken as business.
9.2 From above mentioned decisions it is clear that for considering a transaction as business there must be trading activities accompanied by regularity of transactions intended for the purpose of making profit. In the case before us the assessee purchased units' of Sun F & C Value Fund with a motive of reinvestment the amount of dividend receivable into units of the said fund. Thus intension of assessee at time purchase of original units of Sun F & C Value Fund was to hold them as investments. The units were not purchased as stock in trade. It is immaterial that subsequently assessee thought to sell them at profit earned by way of tax free dividend income. The assessee had borrowed Rs 2,00,00.000/- from the bank for this purposes. The assessee itself had treated the investment of dividend income as capital investment for the purposes of determination of the short term capital loss. Hon'ble Calcutta High Court in the case of Bikhamchand Bagri v. CIT [1962] 44 ITR 746 (Cal) held that normally shares in joint stock companies acquired and held by a trader in shares are the stock-in-trade of his business. His business is to buy with a view to sell at a profit. Nonetheless the trader may, if he likes, acquire and hold the shares for investment and not for purposes of trade. But his intention to retain them and enjoy their dividends and not to circulate and part with them in course of business must be distinctly shown. The Court further observed that if the family treated the profits and losses arising from the sales of those shares as capital accretion or capital diminution and not as business profits or business losses arising from sales of stock-in-trade their conduct was relevant material to show that the shares were not stock-in-trade. Seen in the light of observations of Hon'ble Calcutta High Court the units were acquired by the assessee as investments and assesses had taken dividend income as further investment in units of the l-'und for the purposes of compilation of short term capital loss. The receipt of dividend and its reinvestment in units of the said Fund shows that the assessee held the units as investments and not as stock in trade and hence the loss suffered on sale such investments will he assessable as capital loss. Hence the assessing officer was justified in accepting the loss from units as short term capital loss. The purchase and sale of units do not fall in speculative transactions within the meaning of section 43(5) of the Act as ; the assessee had taken and given the actual delivery of units. The assessee itself in the profit and loss account treated the loss as short term capital loss. Therefore, the assessing officer was justified in treating the loss on purchase and sale of units as short term capital loss. We, therefore, set aside the order of CIT(A) holding that purchase and sale of units of mutual fund constituted business activity and restore tire order of assessing officer.
9.3 Now we will decide the nature of transactions involved in purchase and sale of shares. The assessing officer has given a finding that the assessee had taken the deliveries of shares traded. The assessee had not given the copy of DEMAT account so as to prove the actual deliveries of the shares. In the absence of any such material to show the actual deliveries of the shares traded, the logical conclusion is that assessee was trading in shares without effecting actual deliveries of the shares. Section 43(5) of Income Tax Act,1961 defines the term "speculative transaction " and at the relevant time it stood as under:-
"(5) "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:
Provided that for the purposes of this clause—
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks ami shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any 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: or
(d) an eligible transaction in respect of trading in derivatives referred to in clause (act of section 2 of the Securities Contracts (Regulation) Act, 1956 f-f? of J 956) carried out in a recognised stock exchange:"
shall not be deemed to be a speculative transact ion;
The language employed in section 43(5) is plain and dear. A speculative transaction as contemplated by section 43(5) should fulfill four essential conditions namely (i) the contract should be for purchase or sale; (ii) the purchase or sale should be of any commodity, including stocks and shares; (iii) periodical or ultimate settlement of the contract; and (iv) settlement to be otherwise than by the actual delivery or transfer. The section covers only those transactions or contracts which are periodically or ultimately settled otherwise than by the actual delivery or transfer. The assessee's case does not fall under any of the exceptions contained in the proviso to section 43(5) of the Act. It has been held by Hon'ble Delhi High Court in the case of M.R. Ohawan v. CIT [1979] 119 ITR 412 (Delhi) that 'speculation' in common parlance connotes an intention to speculate, gamble, take a chance or risk. The Act however provides a very simple and objective test for determining whether a transaction is a speculative transaction or not. Under this definition, all that has to be found out is whether the contract was periodically or ultimately settled by actual delivery, transfer or otherwise. If the goods or commodities in respect of which the contracts were entered into were actually taken delivery of pursuant to the contract, it would not be a speculative transaction, even though the commodity or scrip may be a highly speculative one by its very nature and even though at the time when the contracts were entered into the parties might have had no idea of taking delivery at all. On the other hand, if the contract is settled otherwise than by actual delivery, then it will be a speculative transaction notwithstanding that the nature of the commodity was not one lending itself to possibilities of speculation or that the intention of the parties at the time of entering into the contract might have been to take actual delivery but this intention could not be effectuated for one reason or the other. On examination of the facts of the case before lis in the light of decision of Hon'ble Jurisdictional High Court of Delhi we find (hat the settlement of contracts in respect of shares traded during the period May 2000 to March 2001 has been made otherwise than by the actual delivery or transfer. Hence, the transactions of purchase and sale of shares are in nature speculative in nature within the meaning of section 43(5) of the Act.
9.4 There is another aspect of the matter. The assessee's main business consists of providing consultancy services to its clients. The receipts from consultancy business for the year under consideration as per profit and loss account are at Rs 2,12*01,307/-. As per the objects of Memorandum of Association the assessee is not permitted to trade in shares. The Memorandum of Association only authorizes it to engage in business of stock broker for which membership of a stock exchange is necessary. Admittedly the assessee is not in business of a stock broker. Though the memorandum of association does not authorize the assessee to carry on business of share trading but fact remains that the assessee was engaged in share trading activities. As many as 200 transactions of purchase and sale of shares of different companies were concluded in the year under consideration. Be it, as it may. We have to see the applicability of the Explanation to section 73 of the Act to the share trading activities carried on by the assessee As per Explanation to Section 73, where any part of business of the company an assessee whose gross total income is not consisted 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 of the purchase and sale of shares of other companies, such company shall, for the purposes of section 73, 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 provisions of Explanation to section 73 do not distinguish between the transaction of trading in shares on actual delivery or without delivery basis. Admittedly the assessee does not fall under any of the exceptions provided in the Explanation and hence, the purchase and sale of shares traded during the year under consideration is also in nature of speculation business within the meaning of proviso to section 73 of II Act, 1961.
9.5 Another contention of Sh. Veil Jain, the AK of the assessee is that both the transactions i.e. trading in shares and units of mutual funds have to be treated on same footings. We are unable accept this proposition o\' the Id AR of the assessee on the ground that units of mutual fund cannot be equated to shares of a company for the purposes of Explanation to section 73 of the Act. A Mutual Fund is not a company within the provisions of Companies Act. Therefore the units of mutual fund cannot be treated as shares. Hon'ble Supreme Court in the case of Apollo Tyres Ltd. r. Commissioner of Income-tax [2002] 122 Taxman 562 had an occasion to examine the question "whether the business of buying and selling of units of Unit Trust of India by the assessee-company amounts to a speculation business or not, for the purpose of allowing set off as to the loss suffered by the company in such a business ?" Hon'ble Supreme Court answering the question in negative held as under:
"8. The last point for our consideration is: whether buying and selling of units by the assessee company can be treated as a speculative business? For this purpose, the revenue argues that the units purchased by the assessee-company from the UTI are shares, therefore, as per Explanation to section 73 of the Act, the said business of purchasing and selling of shares will have to be treated as a business of speculation. The revenue in support of this argument relies on section 32(3) of the UTI Act which reads as follows:
"(3) Subject to the foregoing sub-sections, for the purposes of the Income-tax Act, 1961,—
(a) any distribution of income received by a unit holder from the Trust shall be deemed to be his income by way of dividends; and
(b) the Trust shall be deemed to be a company."
9. Relying on the above provision of the UTI Act, the revenue contends that if the UTI is a company and income from its units is dividend, then ipso facto the units will have to be shares, therefore, the business of purchase and sale of units conducted by the assessee-company will have to be deemed to be a business in shares which business, according to the revenue, attracts Explanation to section 73. On this basis, it is contended that the business of purchase and sale of units by the assessee-company amounts to a business of speculation. Both the Tribunal and the High Court have considered this argument as also the effect of section 32(3) of the I 77 Act and have come to the conclusion that the provision of the said Act is limited for the purpose of assessment of dividend income under the Act and Jar deduction of tax at source. They have held that the legal fiction created by section 32(3) of the UTI Act cannot be carried any further. We have examined the provisions of the UTI Act and we are of the opinion that even though the said section creates a fiction to make the UTI as a deemed company and distribution of income received by the unit holder as a deemed dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of the UTI a deemed share. In our opinion, a deeming provision of this nature, as found in section 32(3) should be applied for the purpose for which the said deeming provision is specifically enacted, which in the present case is confined only to deeming the UTI as a company and deeming the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the unit as also a deemed share, then it would have stated so. In the absence of any such specific deeming in regard to the units as shares, it would be erroneous to extend the provisions of section 32(3) of the UTI Act to the units of UTI for the purpose of holding that the unit is a share. For these reasons, we are in agreement with the finding of the High Court on this point also. "
From the decision of Hon'ble Supreme Court it is clear that units of mutual fund cannot be equated with shares of a company. Hence income from short term capital loss on purchase and sale of units of Sun F & C Value Fund cannot be treated as loss from speculation business. Further under section 73(1) of the Act, any loss computed in respect of a speculative business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Therefore the income from speculation business earned by the assessee cannot be set off against the short term capital loss from purchase and sale of units of the said Fund. Accordingly we do not find any infirmity in the order of C1T(A) upholding the assessment order for not allowing the set off of income from speculation business against short term capital loss from units of Sun F & C Value Fund.
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