loss on purchase and sale of units of mutual fund cannot be treated as
loss from speculation business.
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.