THE COMMISSIONER OF INCOME TAX - 7 MUMBAI vs. LOKMAT NEWSPAPERS PVT. LTD.

1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. INCOME TAX APPEAL (L) NO.3005 OF 2009 The Commissioner of Income Tax­3. ...Appellant. Vs. Lokmat Newspapers Pvt.Ltd. ...Respondent. ..... Mr.Vimal Gupta for the Appellant. Mr.Percy Pardiwala, Sr.Advocate with Mr.Atul K.Jasani  i/b.Ashok Bhoghani & Co. for the Respondent. ..... CORAM : DR.D.Y.CHANDRACHUD & J.P.DEVADHAR, JJ. 16th February, 2010. ORAL JUDGMENT (Per Dr. D.Y. Chandrachud, J.) : The  office   objections   are   waived.     The  Registry   shall register the appeal.   With the consent of Counsel appearing on behalf of the Revenue and the Assessee, the appeal is taken up for final disposal. 2. The appeal by the Revenue under Section 260A of the Income Tax Act, 1961 raises the following substantial questions of law : CNR No : HCBM020303952009 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

2 “1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing brought forward speculation loss to be set off against  delivery   based profits   earned by  the  Assessee Company from sale and purchase of shares? 2. Whether, on the facts and in the circumstances of the case and in law, the Explanation to Section 73 can be invoked in a case where there is a profit from transactions?” 3. The facts lie in a narrow compass.  During the course of Assessment   Year   2003­04,   the   assessee   showed   a   profit   of   Rs. 28,37,382/­ on the sale of shares and securities held as stock­in­ trade.       The profit was offered by the assessee as a profit of speculation business and was set off against a speculation loss of Rs.27,61,505/­ brought forward from Assessment Year 1996­97 to 1998­99.   After claiming a set off of the speculation loss, which was   brought   forward,   the   assessee   showed   a   balance   of   Rs. 75,877/­ as speculation income.   The Assessing Officer did not treat the income which arose from the sale of shares as income from a speculation business on the ground that the assessee had settled   its   transaction   of   sale   and   purchase   of   shares   through physical delivery.   Consequently,   the Assessing Officer did not Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

3 allow the claim of the assessee for seeking a set off of the income from the sale of shares against the loss on account of speculation business,   brought   forward   from   Assessment   Year   1996­97   to 1998­99.  The CIT (Appeals) confirmed the order of the Assessing Officer.     The   Tribunal,   following   its   judgments   in   the   case   of Samba Trading and Investment Pvt. Ltd. vs.ACIT,1   and in the case of Sucham Finance and Investments (I) Ltd.,2 (2007) 107 TTJ 315, came to the conclusion that the profit which has been earned from the sale of shares, fell within the purview of   the explanation  to Section 73 and to be set off against losses which have been brought forward. 4. Counsel   appearing   on   behalf   of   the   Revenue,   while assailing   the   judgment   of   the   Tribunal,   urged   the   following submissions:   (i)  The profit   of  business   has  to  be  computed  in accordance with the  provisions of Section 28; (ii) Section 43(5) provides a definition of what constitutes a speculative transaction and explanation (2) to Section 28 provides a deeming fiction of when a business can be treated as a speculation business; (iii) 1 58 ITD 360 2 (2007) 107 TTJ 315 (Mum) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

4 Section 73 deals with losses of speculation business; a speculation loss   can   arise   only   from   a   speculative   transaction;   (iv)   The explanation to Section 73 creates a deeming fiction of when an assessee can be deemed to be carrying on a speculation business; (v) The loss from a delivery based transaction will constitute a loss on account  of speculation  business  as a result  of the deeming provisions   of  the  explanation   to  Section  73;  (vi)  The  deeming fiction created by the explanation to Section 73 will, however, not apply when there  is a profit from a delivery based transaction; and (vii) In the present case though the losses which were sustained by the assessee and were brought forward from the earlier Assessment Year pertain to a speculation business,  they could not be set off against the profits which were earned by the assessee from the sale of shares during the Assessment Year in question, since the profits were earned from a delivery based transaction in the sale of shares. 5. In order to consider the tenability of the submissions which have been urged on behalf of the Revenue, a reference to the   provisions   of   Section   73   would   be   in   order.     Section   73 provides as follows : Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

5 “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, of another speculation business. -(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub­section (1), so much of the loss as is not so set off or the whole loss where the assessee   had   no   income   from   any   other   speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and - -(i) 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 so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. -(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub­section (2) of Section 72 shall apply in relation to speculation   business as they apply in relation to any other business. -(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 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 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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

6 business to the extent to which the business consists of the purchase and sale of such shares.” 6. Sub­section (1) of Section 73 provides that the loss in respect of a speculation business can be set off only against the profits and gains of another speculation business.  Sub­section (2) of Section 73 enables an assessee to carry forward the loss arising out of a speculation business which has not been set off either wholly or partly under the provisions of sub­section (1). A loss from a speculation business which has not been set off either entirely or in part, can be carried forward to the following Assessment Year and can be set off against the profits and gains, if any, of a speculation business carried on by the assessee and assessable for that Assessment Year.    If the loss cannot be wholly set off, the amount of loss  which  is not so set off,  can be carried forward to the following Assessment Year.   However, a loss cannot be carried forward   for   more   than   four   Assessment   Years   immediately succeeding   the   Assessment   Year   in   which   the   loss   was   first computed. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

7 7. The explanation to Section 73 creates a deeming fiction. The explanation  postulates   a situation   where  the  assessee  is  a Company and where any part of the business of the Company consists of the purchase and sale of shares of other Companies.  In such a case, the assessee is for the purposes of Section 73 deemed to be carrying on a speculation business, to the extent to which the business   consists   of   the   purchase   and   sale   of   shares.     The explanation carves out an exception in the case of a Company whose gross  total income  consists mainly of income  under the heads of 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.   The exception carved out by the explanation, however,   is   not   attracted   to   the   facts   of   this   case   and   its interpretation,   therefore,   does   not   call   for   consideration   here. What   is   material   for   the   purposes   of   this   case   is,   that   the explanation postulates a situation where any part of the business of a Company consists of the purchase and sale of shares of other Companies.  Therefore, the explanation is attracted in a situation where something more than an isolated transaction involving sale Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

8 and   purchase   of   shares   is   involved.     A   business   postulates   a systematic course of activity or dealing. Unless the business of a Company consists of the sale and purchase of shares, the deeming fiction would not apply. However, once the requirements of the explanation are satisfied, namely, in a situation where: (i) The assessee is a Company; (ii) Any part of the business of the Company consists in the purchase and sale of shares of other Companies, the consequence which is envisaged in the explanation, as a fiction of law, is brought into existence. The legal fiction is that the assessee is deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. 8. Section 28 of the Act deals with the profits and gains of a business or profession.  Explanation (2) to Section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (which is to be referred to as a “speculation business”) shall be deemed to be distinct   and   separate   from   any   other   business.       Section   43 provides definitions of certain terms relevant to the head of income from profits and gains of business or profession.  Sub­section (5) of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

9 Section 43 defines the expression “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 proviso to sub­section (5) then describes   certain   categories   of   transactions   which   shall   not   be deemed to be  speculative transactions. The proviso will not have a bearing on these proceedings. 9. The contention of the Revenue in the present case, in essence   is   that   the   definition   of   the   expression   “speculative transaction” in Section 43(5) must be read into the provisions of Section 73, because a business cannot be a speculation business unless   there   is   a   speculative   transaction   and   a   speculative transaction is defined by the former as one, not involving an actual delivery of shares.   Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative   transaction   and   the   assessee   who   is   engaged   in   a business   involving   the   actual   delivery   of   shares,   cannot   be regarded as being engaged in speculation business. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

10 10. The submission which has been urged on behalf of the Revenue, cannot be accepted, having regard to the plain meaning of the explanation to Section 73.   The submission of the Revenue is that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from a speculation business for the purposes of the explanation.  But, that the profit which arises from a transaction involving the actual delivery   of shares   would   not   constitute   a   profit   for   the   purposes   of   sub­ sections (1) and (2) of Section 73 in respect of which a set off can be granted.  To accept the submission of the Revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the explanation to Section 73, which is not contemplated by Parliament.  Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by the explanation to Section 73 defines when an assessee is to be deemed to be carrying on a speculation business for the purposes of the Section.  The deeming fiction is, therefore, one which arises specifically in the context of the provisions of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

11 Section 73 and is confined to that purpose alone.  The explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares.  Whether or not it is a profit or loss that has resulted from   carrying on such business, is a consideration which is   alien to the meaning of what constitutes a speculation business by the explanation to Section 73.   Once an assessee is deemed to be carrying on a speculation business for the purpose of Section   73,   any   loss   computed   in   respect   of   that   speculation business, can be set off only against the profits and gains of an other speculation business.   Similarly, for the purposes of sub­ section (2), the loss  in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains “of  any  speculation business”.     The  expression  “any  speculation   business”  means   a speculation business of the assessee in respect of which  profits and gains for the Assessment Year in question have arisen and there is no justification to restrict the content of that speculation business Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40

12 where profits have arisen by excluding a business involving actual delivery of shares.  No such restriction is found in the explanation. To impose one is a legislative function.   In other words,  once the assessee is carrying on a speculation business and the profits and gains have   arisen  from  that  business   during the  course  of   the Assessment   Year,   the   assessee   is   entitled   to   set   off   the   losses carried   forward     from   a   speculation   business   arising   out   of   a previous Assessment Year. 11. In these circumstances, the view which has been formed by the Tribunal is consistent with the provisions of Section 73.  The questions of law shall stand answered accordingly.   The appeal shall  stand dismissed.  There shall be no order as to costs. ( Dr.D.Y.Chandrachud, J.) ( J.P.Devadhar, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:29:40 Powered by TCPDF (www.tcpdf.org)