Commissioner Of Income-Tax vs Hotz Hotel Ltd.
2003 Latest Caselaw 23 Del

JUDGMENT

D. K. Jain, J.

1. This appeal by the Revenue under Section 260A of the Income-tax Act, 1961 (for short "the Act"), is directed against the order, dated October 31, 2001, passed by the Income-tax Appellate Tribunal, Delhi Bench-B, New Delhi, in I. T. A. No. 5326/Delhi of 1994, pertaining to the assessment year 1988-89. The following questions, stated to be substantial questions of law, have been proposed in the appeal memo :

"A. Whether the Income-tax Appellate Tribunal was right in holding that loss of Rs. 10,05,740 on account of sale of shares is a hedging loss and is not a speculative loss as held by the Assessing Officer ?

B. Whether the Income-tax Appellate Tribunal was right in not appreciating that the transaction related to speculative loss as covered under Section 43 of the Act ?

C. Whether the order of the Income-tax Appellate Tribunal in holding that Rs. 10,05,740 is a business loss, is perverse and has ignored the fact that actual delivery of the shares was not taken by the assessed ?

D. Whether the Income-tax Appellate Tribunal has correctly interpreted applied Section 43(5), Explanation 2 to Sections 28 and 73 of the Income-tax Act, 1961, and correctly held that the loss of Rs. 10,05,740 is not on account of speculative transaction of business ?"

2. The respondent, hereinafter referred to as the assessed, a private limited company, is engaged in the business of running a hotel. It also derives income from some other sources as well, including interest and dividend from shares. For the assessment year 1988-89, the assessed filed its return declaring an income of Rs. 27,86,630, but was assessed on a total income of Rs. 39,60,615. The main reason for the difference between the returned income and the assessed income was the addition of Rs. 10,05,740, representing the disallowance of the amount claimed by the assessed as hedging loss. In this appeal we are concerned with this addition.

3. The said loss was claimed under the following circumstances : On May 26, 1987 and May 27, 1987, the assessed had sold 77,000 shares of Food Specialities Limited through a broker, namely, Bharat Bhushan and Co. for a total sum of Rs. 95,66,250, at rates varying from Rs. 120 to 128 per share. These shares were thereafter repurchased by the assessed through the same broker on 1st, 3rd

and 5th June, 1987, for a consideration of Rs. 1,05,71,990 at rates varying from Rs. 134 to 138 per share, thus incurring the aforenoted loss. The Assessing Officer treated the said loss as speculative loss and, therefore, disallowed it on the grounds that : (i) the broker's certificate regarding purchase and sale of shares did not contain the distinctive numbers ; (ii) the assessed had itself sold some shares on May 31, 1987, at Rs. 170 per share and, therefore, it could not be believed that the market rate on May 26, 1987 and May 27, 1987, varied between Rs. 122 and 128 per share ; (iii) there was no contract between the buyer and the seller and, therefore, the transaction could not be considered as an exception to Section 43(5), proviso (b) of the Act ; and (iv) the assessed did not discharge the onus which lay upon it to prove that the sales in question were for safeguarding further loss.

4. Aggrieved, the assessed preferred appeal to the Commissioner (Appeals) who agreed with the assessed. While holding that the said loss was a hedging loss and was to be allowed as such, the Commissioner (Appeals) corrected two factual errors in the assessment with regard to the date on which the appellant had last sold the shares of the said company and the total shareholding of the assessed in Food Specialities. He noted that the assessed had sold the shares of Food Specialities at Rs. 170 per share on January 31, 1987, and not on May 31, 1987, as noted in the assessment order ; the fall in value of shares on May 26, 1987, and May 27, 1987, was in comparison to the rate prevailing on January 31, 1987, and not on May 31, 1987, and that the transaction in question was only in 77,000 shares, which was far less than the total shareholding of the assessed. Observing that the shares sold and repurchased bear a reasonable proportion to the stocks held in hand, the Commissioner (Appeals) held that the assessed was not trying to speculate in the shares by putting all the shares on sale for repurchase and its clear intention was to reduce investment loss by selling the shares in question for repurchase in the depressed market so that the entire loss or part of the loss could be recouped. The Commissioner (Appeals) also found that the transaction in question was based on a contract inasmuch as in the stock market contract notes are treated as binding contracts between the seller and the buyer ; the usual format of contract is neither insisted upon nor is in fact the practice in the share market ; though it was, true that the contract did not contain distinctive numbers of shares involved in the transaction the contract, where the transaction is settled otherwise than by physical delivery of shares, does not and cannot contain distinctive numbers of the shares ; the assessed had adequately discharged the onus to prove that the transaction was not a speculative transaction and since the shares involved in the transaction were physically in the possession of the appellant and since they represented a smaller portion of the total shareholding, it was clear that the intention of the assessed was not to speculate but to safeguard against further loss.

5. Being dissatisfied with the said order, the Revenue carried the matter in further appeal to the Tribunal but without success. While affirming the view taken by the Commissioner (Appeals), the Tribunal concluded that on the facts of the present case, a contract did exist between the parties and out of a substantial stock of shares of the said company only 77,000 shares were sold for guarding against future loss and, further, sales and purchases were made in a depressed market with the same intention as also to boost the market so that the share value would not go down further. Rejecting the contention of the Revenue that the assessed's claim could not be accepted as distinctive numbers had not been mentioned and there was no physical delivery, the Tribunal observed that if these two things would have been there, then there was no need to refer to Section 43(5) and its exceptions, since the said section deals with speculative transactions and the three exceptions pertain to those transactions which at first look will fall under the same category but are deemed not to be so. Hence, the present appeal.

6. We have heard Mr. R. D. Jolly, learned senior standing counsel for the Revenue, and Mr. C. S. Aggarwal, learned counsel for the assessed.

7. It is submitted by learned counsel for the Revenue that though initially it was the stand of the assessed itself that there was a written contract for the sale and purchase of the shares in question no such written contract was produced and, therefore, the broker's note could not be treated as a contract, particularly when no correspondence between the assessed and the broker was placed on record. It is also urged that the assessed has not produced any resolution passed by the board of directors of the assessed-company to indicate that a conscious decision had been taken to go in for such a transaction to guard against future loss. It is asserted that the transaction having been entered into just a few days before the end of the previous year, it was, per se, speculative in nature. Mr. C. S. Aggarwal, learned counsel for the assessed, on the other hand, while supporting the orders of the appellate authorities would submit that the genuineness of the transaction not being in dispute, the conclusions arrived at by the two appellate authorities with regard to the existence of the contract and the intention behind the transaction are pure findings of fact, therefore, the impugned order does not involve any substantial question of law.

8. We find substance in the contention of learned counsel for the assessed.

9. Clause (5) of Section 43 of the Act defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, which may include stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. However, certain exceptions to the definition of "speculative transaction" are provided in a proviso to Section 43(5). Clauses (a), (b) and (c) of the proviso enumerate the contracts which are not deemed to be speculative transactions. For the present case, Clause (b) of the proviso is relevant and it provides that a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations shall not be deemed to be a speculative transaction. Proviso (b) contemplates a transaction which is entered into to safeguard the fall in price of the holding of stocks or shares. It is a hedging contract to protect oneself against loss on account of adverse price fluctuations. The prerequisite for being classed as a hedging contract and to fall within the ambit of the said proviso are : (i) a contract in respect of stocks or shares, and (ii) entered into to guard against loss in the holdings of stocks and shares through future price fluctuations.

10. The question about the existence of the contract and the intention to enter into such a contract, on which the answer to the question whether a transaction is a hedging transaction or not rests, is primarily one of fact, necessarily to be determined on appreciation of facts surrounding the transaction- Alternatively put, the conclusion that a transaction is a hedging transaction is arrived at on the basis of primary and relevant facts and not by mere application of a principle of law. The finding of the Tribunal on the question is not liable to be interfered with unless it is found that the Tribunal has taken into consideration any irrelevant material or has failed to take into consideration any relevant material or that the conclusion arrived at by it is perverse in the sense that no reasonable person, on the basis of the facts before the Tribunal, could have come to the same conclusion to which it has come.

11. In the present case the two appellate authorities have recorded concurrent findings of fact about the existence of the contract between the parties and the intention of the parties to enter into the transaction, namely, to guard against loss in the holding of stocks and shares through future price fluctuations. In the light of the facts found by the Commissioner (Appeals) and the Tribunal, which have not been challenged by the Revenue by means of a specific question, we find it difficult to hold that the aforenoted conclusions reached by the Tribunal are based on no evidence or are perverse or patently unreasonable. We are, therefore, of the opinion that the view of the Tribunal that the transaction in question fell within the ambit of the proviso (b) to Clause (5) of Section 43 cannot be faulted.

12. For the foregoing reasons, we are of the opinion that the order of the Tribunal does not give rise to any question of law, much less a substantial question of law. We, therefore, decline to entertain the appeal and the same is accordingly dismissed with no order as to costs.