Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the short term capital loss on sale of shares made by the appellant company is to be treated as a speculative loss by virtue of Explanation to Section 73 of the Act when actual delivery and possession has been made in respect of sale of shares?

2.

Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the short term captial loss on sale of shares made by the Appellant Company is deemed to be speculative loss even though the transactions of sale of shares are not covered under Section 43 (5) of the Act?"

the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

(ii)

any compensation or other payment due to or received by,-

(a)

any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;

(b)

any person by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(c)

any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;

(d)

any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;]

(iii)

income derived by a trade, professional or similar association from specific services performed for its members;

(iiia)

profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);]

(iiib)

cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;]

(iiic)

any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;]

(iv)

the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;"

that the contracts are to be periodically or ultimately settled; and

(ii)

the settlement would be otherwise than by actual delivery or transfer of commodity or scrips.

where actual delivery of goods, or transfer of the commodity or scrips, takes place, the transaction is not a speculative transaction, however highly speculative it may be in fact; and

(ii)

even if the original intention was not to gamble in differences, if in fact the contract is settled by payment of the difference, it is a speculative transaction for the purposes of the Act.

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 and 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 (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange shall not be deemed to be a speculative transaction.

Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; and

(B)

which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

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'.

(ii)

a company, the principal business of which is the business of banking or the granting of loans and advances.'

it shall be set-off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

(ii)

if the loss cannot be wholly to set-off, the amount of loss not so set-off shall be carried forward to the following assessment year and so on.

Mysore Rolling Mills (P.) Ltd. v. CIT [1992] 195 ITR 404/63 Taxman 416 (Kar.):—

'"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 reference to the nature of the speculative transaction carried on by him."

CIT v. Lakshmi Mills Co. Ltd. [2007] 290 ITR 663/158 Taxman 420 (Mad.):—

In the decision of the Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562, wherein it is held as under (head-note):

"Even though section 32(3) of the Unit Trust of India Act, 1963, creates a fiction to make the UTI a deemed company and distribution of income received by the unit holder a deemed dividend for the purposes of the Income-tax Act, by virtue of those provisions it cannot be said that the section also makes the unit of the UTI a deemed share. The deeming provision in section 32(3) should be confined only to deeming the UTI a company and the income from units a dividend. In the absence of any specific deeming provision in regard to the units as shares it would be erroneous to extend the provisions of section 32(3) for the purpose of holding the unit a share.

Held accordingly, that buying and selling of units by the assessee company could not be treated as a speculative business. The Explanation to Section 73 of the Income-tax Act did not apply. Loss in buying and selling of units of the UTI was business loss not speculation loss".

(iii)

CIT v. Kamani Tubes Ltd. [1994] 207 ITR 298/75 Taxman 55 (Bom.):—

'So far as the legal proposition advanced by Mr. Jetly is concerned, we do not find any difficulty in accepting the same in view of section 43(5) of the Act which defines "speculative transaction" to mean 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. The meaning and scope of this expression is no more res integra in view of the decision of the Supreme Court in CIT v. Shantilal (P.) Ltd. [1983] 144 ITR 57. In that case, the Supreme Court explained the distinction between "a settlement of the contract otherwise than by actual delivery of the goods" and "breach of contract". It was observed (at page 60):

". . . . . . . A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, in terms of section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of section 73 of the Contract Act the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. There is no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of 'speculative transaction'. The award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the lay may would understand that the contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. The law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with the sense of law, and it is that sense which must prevail in sub-section (5) of section 43. Accordingly, we hold that a transaction cannot be described as a 'speculative transaction' within the meaning of sub-section (5) of section 43, Income-tax Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation. . . . . ."'

CIT v. Pangal Vittal Nayak & Co. (P.) Ltd. [1969] 74 ITR 754 (SC)

'. . . . . . the receipt of commission was a receipt from the business of the assessee as a broker and was not a receipt of income from the business of speculation and therefore the commission should not be assessed under the head "speculation business". In our opinion, the argument put forward on behalf of the appellant is well-founded and must be accepted as correct. The reason is that there is no element of speculation whatever, in the commission income received by the assessee. The commission was earned and received by the assessee independently of any fluctuation in the market and no risk was involved in the earning of the commission and so it must be treated as profit from the other business of the assessee and not as profit from speculation business'

(v)

CIT v. Hotz Hotel (P.) Ltd. [2003] 260 ITR 132/128 Taxman 160 (Delhi):—

'. . . . . . Clause (5) of Section 43 of the Income-Tax Act, 1961, 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 scripts. 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. Clause (b) provides that a contract in respect of stocks and shares entered into by a dealer or investor 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 on self against loss on account of adverse price fluctuations. The prerequisites 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 guard against loss in the holdings of stocks and shares through future price fluctuations. 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.'

(vi)

CIT v. H. Holock Larsen [1986] 160 ITR 67/26 Taxman 305 (SC):—

"Held, (i) that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact.

In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step - the purchase of the shares - was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these."

". . . . . . . Investors face an unknown and uncertain future and try to diversify the investments. As a general law, it was emphasised at page 603 of the book, growth of capital was a desirable objective of portfolio management. This did not mean that every investor must invest in growth stocks; this would be inconsistent with many investor's needs. A fund can be built up from reinvested income as well as through the purchase of growth shares. A large fund does provide more income for the investor than a small fund. Many invetors have increased the capital value of their funds through reinvested dividends and interest income. Some wanted income, some capital gains and some a combination of both. Inspite of these variations, several objectives should be considered as a basis to a well-executed investment programme. The guiding principles establish the indifference curve of risk versus return for the investor."

R.P.G. Industries Ltd. (supra):—

In the case of S. Sundaram Pillai v. V.R. Pattabiraman, AIR 1985 SC 582, the Supreme Court laid down the general rule of 'interpreatation of an explanation' in the following way:-

"It is now well settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision. Sarathi in 'Interpretation of Statutes' while dwelling on the various aspects of an Explanation observes as follows:

"(a)

The object of an explanation is to understand the Act in the light of the explanation.

(b)

It does not ordinarily enlarge the scope of the original A section which it explains, but only makes the meaning clear beyond dispute."

Swarup in 'Legislation and Interpretation' very aptly sums up the scope and effect of an Explanation thus:

"Sometimes an explanation is appended to stress upon a particular thing which ordinarily would not appear clearly from the provisions of the section. The proper function of an explanation is to make plain or elucidate what is enacted in the substantive provision and not to add or substract from it. Thus an explanation does not either restrict or extend the enacting part; it does not enlarge or narrow down the scope of the original section that it is supposed to explain . . . . . The Explanation must be interpreted according to its own tenor; that it is meant to explain and not vice versa." (P.P. 297-298.) Bindra in 'Interpretation of Statutes' (5th Edn.) at page 67 states thus:

"An explanation does not enlarge the scope of the original section that it is supposed to explain. It is axiomatic that an explanation only explains and does not expand or add to the scope of the original section.. The purpose of an explanation is, however, not to limit the scope o the main provision.. The construction of the explanation must depend upon its terms, and no theory of its purpose can be entertained unless it is to be inferred from the language used. An 'explanation' must be interpreted according to its own tenor."

. . . . . . . . .

Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is-

(a)

to explain the meaning and intendment of the Act itself,

(b)

where there is any obscurity or vagueness in the main enactment, to clarify the same so a to make it consistent with the dominant object which it seems to subserve,

(c)

to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful,

(d)

an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and

(e)

it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same.

(ii)

CIT v. DLF Commercial Developers Ltd. [2013] 218 Taxman 45/35 taxmann.com 280 (Delhi):—

"8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall in Chapter IV, in Section D, which deal with computation of business income. The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out.

9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd. (supra), the Madras High Court noticed, rather dramatically, that -. . . .'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down. . . .? The High Court then, after examining the nature and characteristics of derivatives transactions, observed that:

5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows:

A derivative is a financial instrument:

(a)

whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying');

(b)

that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and

(c)

that is settled at a future date.

ITA 94/2013 Page 10 Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies."

(iii)

Eastern Aviation & Industries v. CIT [1994] 208 ITR 1023/74 Taxman 641 (Cal.):—

"6. The expression "investment company" has been defined in Section 109(ii) of the said Act as under:

'investment company' means 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'."

. . . . . . . . . .

8. It is by now well-settled that the words "income" or "profits and gains" should be understood as including losses also so that in one sense "profits and gains" represent "positive income" whereas "losses" represent "negative income". In other words, "loss" is "negative profit". Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Reference, in this context, may be made to the decision of the Supreme Court in CIT v. Harprasad and Co. (P.) Ltd. [1975] 99 ITR 118. The Supreme Court in the case of CIT v. J.H. Gotla [1985] 156 ITR 323, in construing the word "income" in Section 16(3) of the Indian Income-tax Act, 1922, held that the word "income" would include loss."

(iv)

Paharpur Cooling Towers v. CIT [2011] 338 ITR 295/195 Taxman 83/9 taxmann.com 213 (Cal.):—

'The Explanation to any section cannot be read to extend or stretch the applicability of that section. The Explanation creates a fiction and that fiction cannot be read or explained for any purpose other than that for which it is created. The fiction created in the Explanation does not take away the real object and purport of section 73 of the Income-tax Act, 1961. Section 73 generally provides that any loss arising out of speculation business can be set off only against another speculation business of the assessee. The word "assessee" in sub-section (1) covers all types of assessees as mentioned in section 2(7) of the Act which includes individuals and companies. Sub-section (2) of section provides that where the loss arising out of speculation business which cannot be set off in a particular assessment year fully the balance may be carried forward for the next assessment year and so on not exceeding eight assessment years immediately after succeeding year as provided in sub-section (4). Under the Explanation, all companies are not included within the word "assessee" as mentioned in Section 73. Companies other than those whose gross total income consists mainly of income which is chargable 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 granting of loan and advances consists in purchase and sale of shares of other companies, shall be for the purpose of this section, be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of shares. Thus, the Explanation has really employed a restricted meaning of the word "assessee" as mentioned in Section 73. The Departmental Circular cannot be treated as a guide for interpretation of the section when the same with Explanation is very clear and free from any ambiguity. By virtue of Explanation 2 to section 28 of the Act business of speculative transaction must be distinct and separate from any other business. Thus, any speculative transaction cannot be treated as speculative unless such a transaction takes place as a part of business activity of the assessee concerned. It is not necessary that the assessee must carry on speculative business exclusively - it can be one of the businesses but this must be distinct and separate from any other business. The definition of speculative transaction in section 43(5) demands that there must be actual delivery or transfer of the commodity or scrip. Only if it is by way of a paper transaction it can be said to be a speculative transaction. The Explanation to section 73 will be applicable in respect of companies and companies alone and not any other assessee, namely, individuals or other assessees. However, part of the business of a company other than a few category of companies as mentioned therein, shall be treated as speculation business, if such part consists of the purchase and sale of shares, not other category of speculative dealings. If on a clear and plain reading the statute can be applied without any difficulty or without any aid whatsoever, then the objects and reasons need not be looked into.'