ORDER
R.P. Garg, Vice President
1. The President, Income-tax Appellate Tribunal vide order under Section 255(3) of the Income-tax Act, 1961 constituted a Special Bench for the aforesaid appeal and to consider the following question :
Whether on the facts and in the circumstances of the case, loss arising from sale of shares applied for by a dealer and allotted to it in Public Issue is hit by Explanation to Section 73 of the Income-tax Act, 1961.
2. The assessee is engaged in the business of trading in cloth and shares. During the year under consideration sales of cloth have been shown at Rs. 10,93,95,764 and the sales of shares at Rs. 7,35,12,152, both aggregating to Rs. 18,29,07,916. Assessee claimed a loss of Rs. 1.26 crores arising out of the trading in shares.
3. In response to Assessing Officer’s query as to why the loss be not taken as speculative loss in view of Explanation to Section 73 of the Act, the assessee’s contention was that the loss of Rs. 64,13,807 on account of shares acquired in primary market and subsequent sale thereof was not hit by the Explanation to Section 73 of the Act. The Assessing Officer examined the meaning of the terms purchase & sale; Purchase as – (1) the action of buying which cannot be done without making payment; (2) a thing bought – which cannot be done without making payment. Sale as – (1) the exchange of something for money which presupposes the acceptance of payment; (2) the activity of selling – which cannot be done without accepting payment. Both the words according to him carry along with them a physical exchange of the commodity and money; and in the context of purchase money is to be given and commodity is to be taken and conversely, in the context of sale, commodity is to be given and money is to be taken; neither the exchange of commodity nor the exchange of money is absent from either of the two words; and therefore, the existence of a physical exchange of commodity and the physical exchange of money is a must. He further stated both the words, “purchase” and “sales” were complimentary to each other. Not only this, the genesis, the existence and the death of each of these words are equally complimentary meaning, and therefore, when the purchase takes birth it is by automatic implication that the word ‘sales’ also takes birth. He also stated that the two words “purchase” or “sales” have no independent and exclusive birth, existence and death. All of the above three factors, for both the words, are the direct and implied consequence of each other. Such basic and primary conditions being, the exchange of commodity and the exchange of money, he observed that in the present instance all of such conditions have been fully satisfied in the instant case. Since these are the only conditions which need to be satisfied, and, therefore, no other factor other than these can be allowed to influence any decision on the existence and happening of purchase and sale in the instant case.
3.1 Referring to the manner, method and procedure of acquisition of shares from primary market being totally different from the manner, method and procedure of purchase of shares from open market; he observed that such procedure as is involved in the purchase of shares primary market and the secondary market does not form part of any primary and basic condition which needs to be satisfied by deciding whether the activity constitutes purchase and sales or not. Therefore, the irrelevance and non-applicability of such procedural difference, as may or may not exist, is not only apparent but is also established. He thus rejected the contention of the assessee that the purchase of shares from the primary market and loss amounting to Rs. 64,13,808 incurred on the sale of such shares does not fall within the purview of being categorized as speculated loss under the provisions of Explanation to Section 73 of the Act.
4. Before the CIT(A) the assessee relied upon three cases – (i) Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. ; (ii) Morgan Stanley Mutual Fund v. Kartick Das ; (iii) Laxmi Feeds & Exports Ltd. v. Asstt. CIT [1997] 62 ITD 315 ITAT, Mumbai; and a Board Circular No. 204, dated 24-7-1976. The assessee also made a reference to Karnataka High Court in the case of Mysore Rolling Mills (P.) Ltd. v. CIT . The CIT(A) observed that first two cases of the Supreme Court, were not related to the Income-tax Act.
Both the judgments have been given in respect of civil suites, in the Civil Appeal No. 512 of 1961 and Appeal No. 486 of 1963, he also observed that the Companies Act, 1956 and the Consumer Protection Act, 1986, were the respective subject-matters of both the appeals and not the Income-tax Act, 1961, leave along Explanation below Section 73 thereof. The question before the Supreme Court in the first case was about the meaning of the word “allotment” occurring in Section 75(1) of the Companies Act, 1956. This section requires a company to file a return of the allotment of its shares with the registrar within a month of the making allotment. A shareholder of the company moved the Court complaining that the company had not filed the return required by that section. The Supreme Court explained the meaning of term “allotment” particularly because the shares had been forfeited by the company under its articles and then reissued to a different subscriber. The CIT(A) therefore, held that it would be wholly unreasonable to import the observations and findings of such distinct and distinguished surroundings to an altogether independent and unrelated field viz., the Income-tax Act, 1961. In the second case, he observed that the Supreme Court was called upon to give a definition of the words “consumer”, “goods” and to decide whether “shares” constituted consumable goods in respect of which the Consumer Protection Act, 1956 could be brought into play.
4.1 He then referred to Circular No. 204 dated 24-7-1976 issued at the time of inserting the Explanation to Section 73 by which it provided that effective from 1-4-1977 all companies excluding those whose business was investment or banking or granting of loans and advances shall be treated as covered by Section 73 whereby any loss incurred on the purchase and sale of shares of companies would be treated as a speculation loss and therefore, be set off against speculative profit of the same year and if not fully set off, the balance would be carried forward for set off against speculative profit of subsequent years. He observed that while making the impugned amendment and enlarging the scope of operation of Section 73, a passing reference was made to one of the various objects for which the amendment was made. Without doubt such reference cannot be construed to be the sole objective behind inserting the entire explanation, the language of which nowhere suggest that the stated objective in the circular No. 204 was to be treated as the exclusive objective. In the instant case and particularly in the case of Explanation to Section 73, no such ambiguity exists. He accordingly held that the application of the said section is required to be made solely on the strength of the meaning emerging out of the plain reading without being influenced by an incomplete narration of the objectives.
4.2 As regards contention of the assessee that it has not purchased shares and it has only acquired the shares and as such it has not purchased and sold shares in terms of provisions of Explanation to Section 73 of Income-tax Act, the CIT(A) held that the assessee had invested money for purchasing the shares of companies and it has sold the shares also and therefore, so far as purpose and intent of Explanation to Section 73 of the Act is concerned, the assessee very much comes within the purview of these provisions. Acquisition of an asset or a thing may be with or without any investment but the shares in which the assessee invested through proper mode of transactions cannot be taken out of the clear meaning of purchase of the same because the same shares have also been sold in the market. The entirety of facts and the plain reading of Explanation to Section 73 of the Act, according to him, safely confirmed the view that the case of the assessee without any iota of doubt, was covered by the Explanation to Section 73 of the Act.
5. Shri J.P. Shah, the learned Counsel of the assessee raised two main issues for our consideration-(i) a preliminary issue based on the object for inserting the Explanation to Section 73; and (ii) Acquisition of shares by allotment are not purchase of shares and therefore, the Explanation even otherwise is not applicable.
5.1 On preliminary issue he referred to paragraph 19.2 of the Circular No. 204 dated 24-7-1976 and submitted that the object of introducing this provision was to curb the device sometimes resorted to by the business houses, controlling groups of companies to manipulate and reduce the taxable income of the companies under their control. He submitted that on such instances having come to the notice of the Government it was thought fit to introduce a provision to the effect that even if share dealings by these companies were real in the sense that there was actual physical delivery and such dealings cannot be described as speculative transactions in strict sense, still in view of the revenue loss and the unethical nature of the practice, these transactions should not be recognized for income-tax purposes. The Explanation being a provision against tax-avoidance which deems certain actual transactions in shares as speculative transactions, should be construed strictly. For this proposition, the learned Counsel relied on the decision of ITAT Delhi Bench in the case of Aman Portfolio (P.) Ltd. v. Dy. CIT 94 ITD 324 (sic) wherein relying upon objects it was held that the loss could not be treated as speculative. To support the contention, he further relied upon the decision of the ITAT Special Bench in the case of Asstt. CIT v. Concord Commercials (P.) Ltd. [2005] 95 ITD 117 (Mum.). The learned Counsel also submitted that the purpose behind the particular transaction, the effect of the transaction, etc. are all to be considered and unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the courts cannot infer the transaction to be a speculative venture only because the assessee derived subsequently the benefit of tax reduction. For this proposition, he relied on the decision of the Karnataka High Court in the case of Mysore Rolling Mills (P.) Ltd v. CIT as well as the aforesaid Circular No. 204.
5.2 On acquisition versus purchase of shares being the original and main issue the learned Counsel for the assessee submitted that the assessee was carrying business of dealing in shares in three modes, i.e., purchase and sale of shares on delivery basis in the open market; purchase and sale of shares on Badla basis; and making application for allotment of shares in public issue and sell such shares. Net result of business carried on in above three modes was loss of Rs. 62,02,033, Profit of Rs. 50,72,408 and loss of Rs. 64,13,808 respectively. The learned Counsel contended that Explanation to Section 73 was not applicable to sale of shares acquired by making application for allotment of shares in public issue. He relied upon the decision of the Supreme Court in the case of Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. , for the proposition that allotment is not purchase. He also referred to the decision of the ITAT Mumbai Bench in the case of Laxmi Feeds & Exports Ltd. v. Asstt. CIT [1997] 62 ITD 315, wherein it is held that acquiring shares by subscription of public issue and sale thereof would not amount to purchase and sale of shares so as to apply the Explanation to Section 73 of the Act.
5.3 On being invited the attention of the assessee’s counsel to the decision of the Supreme Court in the case of CIT v. T.N. Aravinda Reddy , he gave written submissions stating that (i) T.N. Aravinda Reddy’s decision does not apply because it was dealing with purchase of an existing thing; whereas in assessee’s case the thing came into existence after an act which was allotment but which is alleged to be purchased by the Department; (ii) that T.N. Aravinda Reddy itself talks about context and other indicia and supports the submission of the assessee; (iii) that allotment is not purchase, is very clearly stated by the Supreme Court in Sri Gopal Jalan & Co. ‘s case (supra) and in spite of a direct Supreme Court decision, allotment should not be imported into the meaning of the word “purchase” in a deeming provision, which is required to be strictly interpreted. It is worth remembering that the Supreme Court in T.N. Aravinda Reddy’s case (supra) was interpreting a benevolent provision and was dealing with question of purchase of an existing thing, unlike the case of the assessee; and (iv) that even if, the explanation yields two views on the question whether allotment is purchase, then the well-established and well-known rule that the interpretation which favours the assessee must be preferred.
6. The learned DR, on the other hand, supported the orders of the authorities below. The plain language of the provisions of Explanation is to be adopted particularly when there is no ambiguity or other reasons to have resort to external aids of construction. What is to be seen is that the business of the assessee is in purchase and sale of shares and not how the shares came into existence. He relied upon the decision of ITAT in Paharpur Colling Towers Ltd. v. Dy. CIT [2003] 85 ITD 745, and Prudential Construction Co. Ltd. [2000] 75 ITD 338, wherein even the loss by fall in value of shares was held to be covered by Explanation to Section 73 of the Act. He further referred to the decision of Calcutta High Court in the case of CIT v. Arvind Investments Ltd. to contend that the Circular does not advance the case of the assessee. He also relied upon the decision of Dy. CIT v. Aakrosh Investment & Leasing (P.) Ltd. [2004] 90 ITD 287 and contended that this decision squarely applies to the facts of the assessee’s case before us and provides a direct answer to the arguments of the learned Counsel for the assessee that the assessee does not fall within the purview of Explanation to Section 73 because in the year of account, there was only purchase and sale of shares. It is clearly held in the decision that Explanation to Section 73 does not require that both purchase and sale of shares should take place in the same year. Referring to the Calcutta High Court in the case of CIT v. Sun Distributors & Mining Co. Ltd. [1993] 68 Taxman 223 the Ld. DR contended that what is to be seen is whether the business of the assessee consists of purchase and sale of shares. He also referred to the provisions of Sale of Goods Act and the meaning of the terms ‘purchase’, ‘sales’, ‘acquisition’ and ‘allotment’ and submitted it was a purchase of shares and hit by the Explanation to Section 73 of the Act.
7. We have heard the parties and considered the rival submissions. Section 73 deals with set off and carry forward of losses in speculative business. It provides :
Losses in speculation business.
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 Sub-section (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 Sub-section (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 eight 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 business to the extent to which the business consists of the purchase and sale of such shares.
7.1 The statement of objects and reasons of the Taxation Laws (Amendment) Bill, 1973 by which the Explanation was inserted as narrated in 89 ITR (St.) 107 read as under :
The main objectives of the amendments proposed to be made are to unearth black-money and prevent its proliferation; to fight and curb tax evasion; to check avoidance of tax through various legal devices, including the formation of trusts and diversion of income or wealth to members of family; to reduce tax arrears and to ensure that in future, tax arrears do not accumulate; to rationalize the exemptions and deductions available under the relevant enactments, and to streamline the administrative set-up and make it functionally efficient;
7.2 This statement is not specific to any particular provision but to the Amendment Act as a whole and talks about many objectives one of which is to fight and curb tax evasion. Nothing is specifically mentioned about the alleged avowed object with regard to the impugned Explanation. Clause 16 of the Noted on clauses (page 110 of the Reports) however dealing with this insertion on the other hand reads rather as under :
This clause seeks to add an Explanation to Section 73 of the Act. The proposed Explanation seeks to treat the business of purchase and sale of shares by companies, which are not investment, banking or finance companies, as speculation business. The result of this would be that losses from such dealings will be set off only against gains from similar dealings in shares.
8. The Circular No. 204 dated 24th July, 1976 with regard to the insertion of the Explanation in paragraph 19 on which reliance is placed by both the sides reads as under :–
19.1 Treatment of losses in speculation business–Section 73 Section 73 of the Act provides that any loss computed in respect of speculation business carried on by an assessee will not be set off except against the profits or gains, if any, of another speculation business. Further where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to be carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The Amending Act has added an Explanation to Section 73 to provide that the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business.
19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.
19.3 This provision will come into force with effect from 1-4-1977 and will apply in relation to the assessment year 1977-78, and subsequent years.
8.1 This circular while explaining the provisions states in paragraph 19.1 that the Amending Act has added an Explanation to Section 73 to provide that the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business. It is only in later paragraph 19.2 the Board has speculated the object of this provision as to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. That is not the aim and object of the Amendment Bill nor stated anywhere else in the Parliament. It is the view expressed by the CBDT and thus its own creation. It cannot be equated with the object for introducing the bill debated in the Parliament. It is also not the sole object and the later part of the circular is contra to the earlier paragraph. Be that as it may, even if it be assumed the object of the statute it cannot be the ground for construing the provisions of a statute when the language is clear, certain and unambiguous for the reasons discussed in subsequent paragraphs.
9. The Special Bench in Concord Commercials (P.) Ltd’s case (supra) had dealt with the issue as to what was the principal business of the assessee and the criteria to determine the same. It observed in para 17 of the case as under :–
17. A speculative transaction and the loss arising out of a speculative transaction have been highlighted in the scheme of Income-tax Act, 1961, more particularly in the context of computation of income under the head “Profits and gains of business or profession”, for the purpose of restricting the scope of setting off and carry forward of such loss. The law, for that matter, treats speculative transaction carried on by an assessee as a distinct and separate business if the nature of such transactions are such that, it constitutes a business. This is provided under Explanation 2 to Section 28 of the Act. Likewise the definition of the term ‘speculative transaction’ is provided in Section 43(5) in a substantive manner. Generally speaking, the ambit and scope of speculative transaction and speculation loss need to be confined within the limit provided by law contained in the above-mentioned provisions. But, further to take care of any device that may be attempted by business houses controlling group of companies for the purpose of reducing the tax incidence, the law has annexed an Explanation to Section 73 of the Income-tax Act, 1961. The said Explanation is a deeming provision whereby the transaction of a company dealing in purchase and sales shall be treated as speculation transaction, subject to two exceptions.
9.1 This decision does not deal with the issue and states that generally speaking the scope and ambit is to confine to Section 28 Explanation 2 and Section 43(5). Further it had just narrated the object of Explanation to Section 73 as appears in the circular without deciding the matter as to whether the said object controls the applicability and construction of the Explanation.
10. The Single Bench decision of Tribunal in the case of Anian Portfolio (P.) Ltd. (supra) has however restricted the application of Explanation only to transaction with devices adopted by business houses. After referring to the decision of Supreme Court in KP. Varghese v. ITO and the decision of Madras High Court in the case of Smt. S.T.B. Ameena Khaleeli and the aims and objects of the Amendment Bill as narrated in paragraph 13 above it states :
The particular provision with which we are concerned took effect from 1st April, 1977. However, even before it took effect, the circular was issued on 24th July, 1976 and this I consider to be of significance in the sense that the Assessing Officers were sought to be guided, even before they could invoke the Explanation, by pointing out to them that the Explanation shall not be invoked indiscriminately but should be invoked only if there is any manipulative device adopted-by business houses as mentioned in para 19.2 of the circular. It is also of significance that the Explanation applies only to companies and that too only to a limit category of companies. Other assessable entities are excluded. All this is a clear pointer, in my humble opinion, to the position that only if there is reason to believe that a device is being adopted by the companies to reduce their taxable income shall the Explanation be invoked. The intention of the Legislature is also made clear by excluding other categories of assessable entities from the sweep of the provision. For instance, an individual or a partnership firm is excluded from the operation from the Explanation. The reason is not far to seek. It is the considered opinion of the Legislature that a provision was needed to be introduced, only to check the malpractice: adopted by business houses controlling companies by manipulating the share dealings inter se. Further, such transactions, even; in the case of certain categories of companies were permitted and were treated as normal business transactions so that the loss arises out of such transactions could be adjusted; against the normal business profits. The ban is applicable only to a very limited category of companies. Therefore, it is all the more necessary to apply the provision only where a device is adopted by the company concerned to reduce its taxable income by indulging, in such share: transactions which are apparently real, and may even involve actual delivery, but are carried but with the object of reducing the taxable income. In the scheme of Section 73 fortified by the Explanation, there is no scope for ignoring genuine transactions in shares which have been carried out without any motive of reducing the taxable income of the company.
10.1 We however do not find ourselves in agreement with the assessee and the decision of SMC. The language of the provision is quoted above and is clear. No ambiguity is seen in understanding its plain language and therefore, there is no scope of construing the provision of the Explanation to a certain type of transactions only. “The rule laid down by Rowlatt, J. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64, that in a taxing statute one has to merely look at what is clearly said, was accepted by the Supreme Court in A.V. Fernandas v. State of Kerala [ 1957] 8 STC 561 where it was laid down that ‘if… the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering ‘what was the substance of the matter’. The object of this rule is to prevent a taxing statute being construed ‘according to its intent, though not according to its words.’
11. Construction as per words used in statute:–
11.1 As long back in 1955 the Supreme Court in New Piece Goods Bazar Co. Ltd. v. CIT [1950] 18 ITR 516 stated that “It is elementary that the primary duty of a Court is to give effect to the intention of the Legislature as expressed in the words used by it and no outside consideration can be called in aid to find that intention.
11.2 Again in Turner Morrison & Co. Ltd. v. CIT it was stated that. “The Courts have to construe the statute according to the plain language and tenor thereof and if any untoward consequences result therefrom, it is for authority other than the Court to rectify or prevent the same.
11.3 In CIT v. Ajax Products Ltd. , it was observed that “If the words of a statute are precise and unambiguous, they must be accepted as declaring the express intentions of the Legislature.
11.4 In CIT v. Shahzada Hand & Sons , it is said that “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. To this may be added a rider: in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. The underlying principle is that the meaning and intention of a statute must be construed from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just or expedient.
11.5 In Smt. Tarulata Shyam v. CIT the court explained that the statute must be construed in a manner which carries out the intention of the Legislature and that the intention of the Legislature must be gathered from the words of the statute itself. If the words are unambiguous or plain, they will indicate the intention with which the statute was passed and the object to be obtained by it. It is impermissible for the Court to read into a taxing provision any words which are not there or exclude words which are there. The words found in the provision must be given their natural meaning. There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omisus, the defect can be remedied only by legislation and not by judicial interpretation. The normal rule of construction is that the intention of the Legislature is primarily to be gathered from the words used in the statute.
11.6 In CED v. Alladi Kuppuswamy , it was held that “When the phraseology of a particular section of the statute takes within its sweep the transaction which is taxable, it is not for the Court to strain and stress the language of the section so as to enable the taxpayer to escape the tax”.
11.7 When the literal meaning is clear, the Supreme Court in CBDT v. Aditya V. Birla observed that one need not bother any more for the intention or the purpose.
11.8 Again in CWT v. Smt. Hashmatunnisa Begum the Supreme Court while dealing with the exemption of property comprised in gift under Section 4(1)(a) of the Wealth-tax Act and proviso to Section 5 of the Gift-tax Act, held that on a reading of the plain words of the proviso to Section 4(1)(a) of the Wealth-tax Act, 1957, the clause “for any assessment year commencing after the 31st day of March, 1964” can only be read as relating to gift-tax assessments and not to wealth-tax assessments. The exemption under the proviso, from inclusion in the net wealth, is attracted to assets which were the subject-matter of such gifts as were chargeable to gift-tax or not chargeable to tax under Section 5 of the Gift-tax Act, 1958, for any assessment year commencing after March 31, 1964, but before April 1, 1972. Gifts made earlier would not attract the benefit of the exemption. In that connection, the court observed at page 106 as under :–
One of the pillars of statutory interpretation, viz., the literal rule; demands that, if the meaning of the statutory provision is plain, the court must apply it regardless of the result.
The very concept of interpretation connotes the introduction of elements which are necessarily extrinsic to the words in the statute. Though the words “interpretation” and “construction” are used interchangeably.” The idea is somewhat different. Dr. Patrick Devlin says :
… A better word, I think, would be construction, because construction, although one often used it alternatively with interpretation, suggests that something more is being got out in the elucidation of the subject-matter than can be got by strict interpretation of the words used. In the very full sense of the word ‘construction’, the judges have set themselves in this branch of the law to try to frame the law as they would like to have it. . . .'” [See Samples of Law Making (Oxford University Press), pp. 70-71.]
A statute”, says Max Radin, “is neither a literary text nor a divine revelation. Its effect is, therefore, neither an expression laid on immutable emotional overtones nor a permanent creation of infallible wisdom. It is a statement of situation or rather a group of possible events within a situation and as such it is essentially ambiguous. [See “Statutory Interpretation” : 43 far. LR. 863 (868)].
The observations of Lord Russell of Killowen in Attorney General v. Carlton Bank [1899] 2 QB 158, 164, though an early pronouncement, is refreshing for its broad common sense :
I see no reason why special canons of construction should be applied to any Act of Parliament, and I know of no authority for saying that a taxing Act is to be construed differently from any other Act. The duty of the court is, in my opinion, in all cases the same, whether the Act to be construed relates to taxation or to any other subject, namely, to give effect to the intention of the Legislature, as that intention is to be gathered from the language employed having regard to the context in connection with which it is employed . . . Courts have to give effect to what the Legislature has said.
12. Therefore, one of the pillars of statutory interpretation, viz, the literal rule, demands that if the meaning of the statutory interpretation is plain, the Courts must apply the same regardless of the result. The very concept of interpretation connotes the introduction of elements as are necessarily extrinsic to the words in the statute. Though the words ‘interpretation’ and ‘construction’ are used interchangeably, the idea is somewhat different. The rule of construction that if the statutory provision is susceptible or admits of two reasonably possible views, then the one which would promote its constitutionality should be preferred on the ground that the Legislature is presumed not to have intended to exceed its own jurisdiction, is subject to the further rule that it applies only where two views are reasonably possible on the statutory language.
12.1 The Supreme Court in the case of Mohammand Ali Khan v. CWT [1997] 224 ITR 672 : 92 Taxman 52 while dealing with a case of Section 5(1)(iii) of the Wealth-tax Act, 1957 exempting any one building in the occupation of the ruler declared as his official residence, held that a fair reading of this section would reveal that only the building or the part of the building in the occupation of the Ruler which had been declared by the Central Government to be the official residence under the Merged States (Taxation Concession) Order, 1949 will not be included in the net wealth of the assessee and therefore, the buildings of Khas Bagh Palace which were let to different persons and for which rent was received, were not in the occupation of the assessee within the meaning of Section 5(1)(iii) of the Act and in that context the Supreme Court observed that the intention of the Legislature is primarily to be gathered from the language used. Just as it is not permissible to add words or to fill in a gap or lacuna, similarly it is of universal application that effort should be made to give meaning to each and every word used by the Legislature.
12.2 The Supreme Court in the case of Orissa State Warehousing Corpn. v. CIT , while dealing with a case under Section 10(29) of the Act granting exemption to the income which is derived from letting out of godown or warehouse for storage, processing or facilitating marketing of commodities, held that the Legislature has been careful enough to introduce in the section itself a clarification by using the words “any income derived therefrom”, meaning thereby obviously for marketing of commodities by letting out of godowns or a warehouse for storage, processing or facilitating the same. If the letting out of godowns or warehouses is for any other purpose, the question of exemption would not arise. In that context, the court dealt with the interpretation of fiscal statute and observed as under :–
Let us, however, at this juncture, consider some of the oft cited decisions pertaining to the interpretation of the fiscal statutes being the focal point of consideration in these appeals. Lord Halsbury as early as 1901, in Cooke v. Charles A. Vogeler Company [1901] AC 102 (HL) stated the law in the manner following:
a court of law, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may hold it in interpreting what the Legislature has said. If the language of a statute be plain, admitting of only one meaning, the Legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of this Sub-section be not controlled by some of the other provisions of the statute. It must, since, its language is plain and unambiguous, be enforced, and Your Lordships’ House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous.
The oft-quoted observations of Rowlatt, J. in the case of Cape Brandy Syndicate v. IRC [1921] 1 KB 64 ought also to be noticed at this juncture. The learned judge observed (page 71):
… in a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax.
Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.
The observations of Rowaltt, J. as above stand accepted and approved by the House of Lords in a later decision, in the case of Canadian Eagle Oil Co. Ltd. v. The King [1946] AC 119; [1945] 2 All ER 499. Lord Thankerton also in manner similar in JJRC v. Ross And Coulter (Bladnoch Distillery Co. Ltd.) [1948] 1 All ER 616 at page 625 observed :
If the meaning of the provision is reasonably clear, the courts have no jurisdiction to mitigate such harshness.
The decision of this Court in Keshavji Ravji and Co. v. CIT also lends concurrence to the views expressed above. This court observed (page 9):
As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature….
Artificial and unduly latitudinarian rules of construction, which with their general tendency to ‘give the taxpayer the breaks’, are out of place where the legislation has a fiscal mission.
Be it noted that individual cases of hardship and injustice do not and cannot have any bearing for rejecting the natural construction by attributing normal meanings to the words used since “hard cases do not make bad laws.
In fine thus, a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The court is to ascribe the natural and ordinary meaning to the words used by the Legislature and the court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions.
13. This is the recent trend also. In the case of Vikrant Tyres Ltd. v. First ITO [2001] 247ITR 821 : 115Taxman 202, the Supreme Court while dealing with the levy of interest under Section 220(2) in respect of the demand which was paid on the issue of the notice under Section 156 but refunded to the assessee due to appellate order, but restored by the High Court order held that interest can be levied under this section only when there was a default of the assessee and there can be no revival of the demand if the original notice of demand was satisfied by the assessee within the prescribed time even though the demand was restored by the subsequent order of the High Court. In that connection, the Supreme Court observed that: “Admittedly, on a literal meaning of the provisions of Section 220(2) of the Act, such a demand for interest cannot be made.” In this connection, the Supreme Court observed as under:–
It is settled principle in law that the courts while construing ‘revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning’ thereby that, no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free! This principle in law is settled by this Court in India Carbon Ltd. v. State of Assam wherein this Court held (page 464) “Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf”. A Constitution Bench of this Court speaking through one of us (S.P. Bharucha) in the case of V.V.S. Sugars v. Government of A.P. reiterated the proposition laid down in the India Carbon Ltd’s case [1997] 106 STC 460 in the following words (headnote of [1999] 4 SCC) : “The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise.” If we apply this principle in interpreting Section 220 of the Act, we find that the condition precedent for invoking the said section is only if there is a default in payment of the amount demanded under a notice by the Revenue within the time stipulated therein and if such a demand is not satisfied then Section 220(2) can be invoked.
13.1 The five Judges Constitutional Bench of the Supreme Court in the case of Padmasundara Rao v. State of Tami Nadu while discussing the period of limitation for declaration, the court reaffirmed the literal rule and held that the language of Section 6 of the Land Acquisition Act, 1984, is plain and unambiguous; there is no scope for reading something into it. Once a declaration under Section 6 is quashed, a fresh declaration under that section cannot be issued beyond the prescribed period for notification under Section 4(1). The prescription of time limit in Section 4(1) is peremptory in nature. After the quashing of a declaration under Section 6 the fresh period of one year from the date of quashing of that declaration for issuing a fresh declaration is available to the State Government. That period starts from the date on which the original publication of notification under Section 4(1) was made and can be extended only by the period of stay up to the date of the order of the High Court. It cannot be further extended by the period from the date of the order up to the date of receipt of the order quashing the earlier declaration. In that connection, the Constitutional Bench of five Judges following its earlier order in the case of Rishabh Agro Industries Ltd. v. PNB Capital Services Ltd. held, “the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the Legislature itself. The court only interprets the law and cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary. Legislative casus omissus cannot be supplied by judicial interpretative process.
14. We may refer to some High Court decisions having adopted this approach of interpretation – (I) Gujarat High Court in the case of Kishore B. Setalvad v. CWT , while dealing with a case of wealth-tax under Section 4(1)(b) of the Wealth-tax Act, held that the court is bound to interpret and apply the provisions of the Act as they stand without going behind the wisdom of the Legislature in including within the wealth-tax net only the building and land appurtenant thereto allotted to a member of a co-operative housing society and in not including open plots of land belonging to a co-operative housing society and allotted/let out to its members. (II) Delhi High Court in the case of CIT v. Deep Chand [2002] 257 ITR 756 : 123 Taxman 685 in the context of Section 2(14)(iii)(a) and in the case of CIT v. National Agricultural Co-operative Marketing Federation of India Ltd. , while dealing with Rule 6AA inserted with effect from 1-8-1981 for the purposes of Section 35B of the Act. It was held: “Where the language is plain, it can neither be stretched wider nor squeezed narrowly with an eye on the assumed or implied intention of the Legislature. In a fiscal law much scope for interpretative process is not available if the language of an enactment permits of no ambiguity. It also observed: “It is now a well-settled principle of law that a literal meaning should be attributed to a statute. The golden rule of interpretation should ordinarily be adhered to. Again in the case of CIT v. Cement Distributors Ltd. and in the case of CIT v. Bansal Credits Ltd. [2003] 259 ITR 69 : 126 Taxman 149 (Delhi) it observed “The cardinal rule of interpretation is that the statute must be construed to its plain language and neither should anything be added nor should something be subtracted therefrom unless there are adequate grounds to justify the inference that the Legislature clearly so intended. It is also well-settled that in a taxing statute one has to look merely at what is clearly stated. The meaning and extent of the statute must be collected from the plain and unambiguous expression used therein, rather than from any notions which may be entertained by the court as to what is just or expedient”. (III) Allahabad High Court in the case of CIT v. Champarun Sugar Works Ltd. , while dealing with the contention that payment of personal allowance is not a benefit or amenity or perquisite but a part of salary paid to him as defined in Clause (h) of Rule 2 of Part-A of the Fourth Schedule to the Income-tax Act, held that the term “personal allowance” has not been defined in the Income-tax Act. The personal allowance does not partake of the character of clearness allowance. Therefore, personal allowance does not form part of “salary” under Clause (h) of rule 2 of the Fourth Schedule for the purpose of computing disallowance under Section 40(c)(iii) of the Act and in that context, the Court held that it is the cardinal principle of interpretation of fiscal laws that a given provision should be construed strictly and so long as the provision is free from ambiguity, the words used therein should be given plain meaning without importing into it any foreign words and without subtracting any words therefrom. The question was decided in favour of the revenue and against the assessee. (IV) Bombay High Court in the case of CIT v. Sterling Foods (Goa) , while dealing with a case of deduction under Section 80HH, also observed as :
… In our opinion, the language of Section 80HH being plain, clear and unambiguous, the legislative intent has to be gathered from the statute itself. This principle of interpretation is too well-known to need any elaboration. As observed by the Supreme Court, in Polestar Electronic (Pvt) Ltd. v. Addl CST [1978] 41 STC 409, if there is one principle of interpretation more well-settled than any other, it is that a statutory enactment must ordinarily be construed according to the plain natural meaning of its language and that no words should be added, altered or modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable, or totally irreconcilable with the rest of the statute. This rule of literal construction is firmly established and it has received judicial recognition from the courts in India in numerous cases. Therefore, where the language of the statute is clear and explicit, effect must be given to it, for in such a case the words best declare the intention of the Legislature. It is only from the language of the statute that the intention of the Legislature must be gathered, for the Legislature means no more and no less than what it says. It is not permissible for the court to speculate as to what the Legislature must have intended and then to twist or bend the language of the statute to make it accord with the presumed intention of the Legislature. The clear provision of the statute cannot be given an artificial extended meaning by resorting to the so-called principles of interpretation. The duty of the court always is to find out what the Legislature really meant by the expression which it has used. For that purpose, it may consider the context and any other parts of the Act which throw light upon the intention of the Legislature. It must not be forgotten that the duty of the court is to interpret the law made by the Legislature with a view to ascertaining its true intention and not to interpret it in a manner which may run counter to the legislative intent and purpose.
WHEN STATUTORY LANGUAGE CAN BE IGNORED
14.1 When there is ambiguity : When the words used are ambiguous, then they could stand to be examined and construed in light of surrounding circumstances in CIT v. Sodra Debi . In construing the Act, one must adhere closely to the language of the Act. If there is ambiguity in the terms of a provision, recourse must naturally be had to well-established principles of construction but it is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity by resort to some general principle in CIT v. Indian Bank Ltd. . Similarly in Anandji Haridas & Co. (P.) Ltd. v. Engg. Mazadoor Sangh , it was held that “As general principle of interpretation, where the words of a statute are plain, precise and unambiguous, the intention of the Legislature is to be gathered from the language of the statute itself and no external evidence such as Parliamentary Debates, Reports of the Committees of the Legislature or even the statement made by the Minister on the introduction of a measure or by the framers of the Act is inadmissible to construe those words. It is only where a statute is not exhaustive or where its language is ambiguous, uncertain, clouded or susceptible to more than one meaning or shades of meaning that external evidence as to the evils, if any, which the statute was intended to remedy, or of the circumstances which led to the passing of the statute may be looked into for the purpose of ascertaining the object which the Legislature had in view in using the words in question”. In Madan Lal Lohia v. CED , it was stated that: “The possibility that an anomaly may arise on a particular construction is only a factor to be taken into account by the Court where two interpretations are possible, but where the meaning of a statutory provision is plain, it cannot alter such meaning. If the language of the statute is clear and unambiguous, and if two interpretations are not reasonably possible, it would be wrong to discard the plain meaning of the words used in order to meet a possible injustice”.
14.2 When to apply the mischief rule :It can also be when to apply the mischief Rule. In CIT v. Shahzada Nand & Sons , it was observed that “When the words of a section are clear, but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in Heydon’s case [1584] 3 Rep. 7b yields better results. To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object to the whole Act; to consider, according to Lord Coke; 1. what was the law before the Act was passed; 2. what was the mischief or defect for which the law had not provided; 3. what remedy Parliament has appointed; 4. the reason of the remedy. In Sevantilal Maneklal Sheth v. CIT , the Supreme Court again observed that it is a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute. In K.P. Varghese v. ITO also it was observed that “The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading or mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and it would be idle to expect every statutory provision to be drafted with divine presence and perfect clarity.
14.3 When plain meaning results in absurdity :In Gurudevdatta VKSSS Maryadit v. State of Maharashtra , it has been held:
It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are cear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences. It is said that the words themselves best declare the intention of the law-giver. The courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the Legislature and it is not a sound principle of construction to brush aside words in a statute as being inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute.
14.4 When it is irrational or ultra vires constitution : Supreme Court in K.P. Varghese ‘s case (supra) states: “Moreover, if Sub-section (2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view-point can be rationally considered as capital gains or any other type of income. It is a well-settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in list I of the Seventh Schedule to the Constitution, which deals with “Taxes on income other than agricultural income” and under which the I.T. Act, 1961, has been enacted, Parliament cannot “choose to tax as income an item which in no rational sense can be regarded as a citizen’s income or even receipt. Sub-section (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section (2) would also be violative of the fundamental right of the assessee under Article 19(1)(f)–which fundamental right was in existence at the time when Sub-section (2) came to be enacted–since on the construction canvassed on behalf of the revenue, the effect of Sub-section (2) would be to penalise the assessee for transferring his capital asset for a consideration lesser by 15% or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital asset at the price of his choice. The court must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void”. AIDS TO CONSTRUCTION
15. Aids to construction like legislative history, marginal notes, statements of objects and reasons in introducing a particular enactment, Views of select committee, Finance Minister’s speech and departmental instructions and circulars etc. are all subsidiary things which do not control the meaning and ambit of the statute.
15.1 In CIT v. Madurai Mills Co. Ltd. , the court held that it is well-settled that considerations stemming from these things must not be allowed to override the plain words of a statute. It was a case with regard to legislative history. Similarly for marginal notes in Shree Sajjan Mills Ltd. v. CIT it was held that the marginal note or heading is certainly a relevant factor to be taken into consideration in construing the ambit of the section. The marginal note of a section could give an indication as to what exactly was the mischief that was intended to be remedied and also throw light on the intention of the Legislature. CIT v. Vadilal Lallubhai .
15.2 It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but as observed in K.P. Verghese v. ITO , it can certainly be relied upon as indicating the drift of the section or, to use the words of collins M.R. in Bushel v. Hammond [1904] 2 KB 563 (CA), to show what the section is dealing with. It cannot control the interpretation of the words of a section, particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie, furnishes some clue as to the meaning and purpose of the section. It is further observed that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason, for the introduction of the bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. In Anandji Haridas & Co. (P)Ltd. v. Engg. Mazdoor Sangh also it was so held that where the language of a provision is manifestly clear and unequivocal, it has to be construed as it stands, according to its plain grammatical – sense without addition or deletion of any words. It would not be permissible to use the speech of the Finance Minister to construe the clear language of the statute.
15.3 Statement of Objects and Reasons can be referred to for the purpose of ascertaining the circumstances which led to the legislation in order to find out what was the mischief which the legislation aimed at. “It is well-settled that when the language of the statute is clear and admits of no ambiguity, recourse to the Statement of Objects and Reasons for the purpose of construing a statutory provision is not permissible”. S. C. Prashar v. Vasantsen Dwarkadas and In Govind Saran Ganga Saran v. CST .
15.4 In CIT v. K. Srinivasan & K. Gopalan [1953] 23 ITR 87 the Supreme Court observed that Views of the Select Committee are not a permissible consideration in interpreting a statutory provision. Similarly in CIT v. Vadilal Lallubhai it is said that “In order to find out the legislative intent, one has to find out what was the mischief that the Legislature wanted to remedy, and if a provision is considered ambiguous, it is not inappropriate to refer to the Select Committee’s recommendation”.
15.5 In B.K. Industries v. Union of India (sic) the Court said “Promise of Finance Minister in his speech/Budget speech is not ‘law’ and Parliament may or may not accept his proposal.”
15.6 Departmental instructions, as held in CIT v. K. Srinivasan & K. Gopalan [1953] 23 ITR 87 (SC), cannot be considered in case of construction of a statute.
16. In the case of CED v. Smt. S.T.B. Ameen Khaleeli , referred to by the Single Member, the Madras High Court considered the provisions of Section 46(1) of the Estate Duty Act, 1953 and in that connection observed the idea behind both the clauses of this section is based on the apprehension of the Legislature that the requirement under Section 44 of the Act that a debt must be for full consideration and must be incurred bona fide could be easily defeated by the deceased by making an unconditional gift would be creditor and then borrowing the amount of the value of the gift from the donee with a diminution in the deceased’s purchasing powers. In other words, the policy behind the provision is to counteract any attempt at avoidance or evasion of estate duty in this manner. In that connection, the Madras High Court observed “Though ordinarily understood the expression ‘at any time’, used in the words “any person who was at any time entitled to” or “amongst whose resources there was at any time included any property derived from the deceased” in Section 46(1)(b), may mean however long before and however long after, if an unrestricted meaning is given to the words “at any time”, it may even refer to property derived from the deceased by way of inheritance or testamentary succession. Hence, it must only refer to derivation of property prior to the advance of the debt or loan. This is because at the time when the property becomes part of the creditor’s resources there must be some nexus between the resources and the consideration for the debt. The expression “resources” itself indicates a particular fund or source and it is from that fund that the debt should have been advanced. This also shows that there must be a precedence of the property first and the advance of the loan to the deceased subsequently and resource does not merely refer to the source of finance without any antecedence. The proviso to Section 46(1)(&) should be read as a measure of relief from abatement of debt. The proviso to Section 46(1)(b) does not merely enunciate a rule of evidence but should be read as part and parcel of the entire object of Parliament contained in Section 46(1)b) with regard to the extent of the abatement of the debt and the extent of cutting down of the abatement, both put together”.
17. In the case of K.P. Verghese v. ITO the Supreme Court dealt with the issue arising under Section 52(2) of the Act and held this Sub-section can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee, or, in other words, the full value of consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee, and the burden of proving such understatement or concealment is on the revenue. The Sub-section has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him. The task of interpretation of a statutory enactment, the court observed, is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought. By extracting the famous words of Judge Learned Hand, the Supreme Court observed that they can do no better :
… it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.
17.1 The court thereafter, observed as under :–
The primary objection against the literal construction of Section 52, Sub-section (2), is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but it can certainly help to fix its meaning. It is a well-recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the revenue would lead to a wholly unreasonable result which could never have been intended by the Legislature. Take, for example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement–and it is quite well known that sometimes the completion of the sale may take place even a couple of years after the date of the agreement–the market price shoots up with the result that the market price prevailing on the date of the sale exceeds the agreed price, at which the property is sold, by more than 15% of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would find in a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no understatement of consideration in respect of the transfer and the transaction is perfectly honest and bona fide and, in fact, in fulfilment of a contractual obligation, the assessee, who has sold the property, should be liable to pay tax on capital gains which have not accrued or arisen to him? It would indeed be most harsh and inequitable to tax the assessee on income which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him. It is difficult to conceive of any rational reason why the Legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carries out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income which has neither arisen to the assessee nor has been received by him. If we may take another illustration, let us consider a case where A sells his property to B with a stipulation that after some time which may be a couple of years or more, he shall re-sell the property to A for the same price. Could it be contended in such a case that when B transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of re-sale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15%. Many other similar situations can be contemplated where it would be absurd and unreasonable to apply Section 52, Sub-section (2), according to its strict literal construction. We must, therefore, eschew literalness in the interpretation of Section 52, Sub-section (2), and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even “do some violence” to it, so as to achieve the obvious intention of the Legislature and produce a rational construction : Vide Luke v. IRC [1963] AC 557; [1964] 54 ITR 692. The court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this well-recognised rule of interpretation, a fair and reasonable construction of Section 52, Sub-section (2), would be to read into it a condition that it would apply only where the consideration for the transfer is understated or, in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in the case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. There are several important considerations which incline us to accept this construction of Section 52, Sub-section (2).
17.2 In that context, the first consideration the Supreme thought to refer was the object and purpose of enactment of Section 52(2). It then referred to the provisions of Sub-section (1) of Section 52 which restricted its operations to persons who are directly or indirectly connected with the assessee and the object of understatement was to avoid or reduce the income-tax liability. It observed that there may be cases where the consideration for the transfer is shown at a lesser figure than that actually received by the assessee but the transferee is not a person directly or indirectly connected with the assessee or the object of understatement of the consideration is unconnected with tax on capital gains and such cases being not covered by Sub-section (1), the Parliament enacted Sub-section (2) with a view to extending the coverage of the provision in Sub-section (1) to other cases of under-statement of consideration and this was found clear by having regard to the object and purpose of introduction of Subsection (2) as appearing from travaux preparatoire relating to the enactment of that provision. It states that it would, therefore, be legitimate in interpreting Sub-section (2) to consider what was the mischief and defect for which Section 52 as it then stood did not provide and which was sought to be remedied by the enactment of Sub-section (2) or, in other words, what was the object and purpose of enacting that Sub-section and in that connection, the speech made by the Finance Minister while moving the amendment introducing Sub-section (2) was extremely relevant, as it throws considerable light on the object and purpose of the enactment of Sub-section (2). It, however, hastened by stating, “now, it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. The Finance Minister’s speech for introducing Sub-section (2) was quoted as under:–
Today, practically every transaction of the sale of property is for a much lower figure than what is actually received. The deed of registration mentions a particular amount, the actual money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted…. It does not aim at prefectly bona fide transactions…but essentially related to the day-to-day occurrences that are happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help us to defeat the free play of unaccounted money and cheating of the Government.
17.3 The Court, thus accepted the underlining assumption of Sub-section (2) that there is an under-statement of consideration in respect of the transfer and Sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received. This was also found supported by the marginal note to Section 52 that reads “Consideration for transfer in cases of under-statement”. It also noticed that if Parliament intended that Sub-section (2) to cover all cases where the condition of 15% difference is satisfied or not, it is reasonable to assume that Parliament would have enacted that provision as a separate section and not pitchforked it into Section 52 with a total stranger under an inappropriate marginal note. It observed that there is inherent evidence in Sub-section (2) which suggests that the thrust of that Sub-section is directed against cases of under-statement of consideration. The crucial and important words in Sub-section (2) are : “the full value of the consideration declared by the assessee”. The word “declared” is very eloquent and revealing. It clearly indicates that the focus of Sub-section (2) is on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplates a case where the consideration received by the assessee in respect of the transfer is not truly declared or disclosed by him but is shown at a different figure. The other circumstance which strongly reinforces the view taken by it was the issuance of the Circular by the Board explaining the scope and object of Section 52(2) was introduced with a view to countering evasion of tax on capital gains through the device of an understatement of the full value of the consideration received or receivable on the transfer of a capital asset. The circular drew attention of the income-tax authorities to the Finance Minister’s assurance that Sub-section (2) was not aimed at perfectly honest and bona fide transactions where the consideration for the transfer was understated by the assessee and was shown at a lesser figure than that actually received by him. It then observed at page 617 as under :–
Moreover, if Sub-section (2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view-point can be rationally considered as capital gains or any other type of income. It is a well-settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with “Taxes on income other than agricultural income” and under which the Income-tax Act, 1961, has been enacted, Parliament cannot “choose to tax as income an item which in no rational sense can be regarded as a citizen’s income or even receipt.” Subsection (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section (2) would also be violative of the fundamental right of the assessee under Article 19(1)(f)–which fundamental right was in existence at the time when Sub-section (2) came to be enacted–since on the construction canvassed on behalf of the revenue, the effect of Sub-section (2) would be to penalise the assessee for transferring his capital asset for a consideration lesser by 15% or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital asset at the price of his choice. The court must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void.
18. These two decisions have taken the objects of the introduction of the statute as a base understanding the meaning of the terms used therein and the wider meaning thereof “at any time” in the Madras case and language of Sub-section (2) of Section 52 of the Act in case before Supreme Court were giving absurd and unconstitutional results and therefore, resort was had to the objects and reasons for introducing the provision. That in the 1st case was that the term “at any time” might include even the property inherited or by testamentary succession. It was therefore, the meaning to the term was given restricting it to ‘derivation of property prior to advance of the debt or loan’ and ‘because at the time when property became part of creditors’ resources there must be some nexus between the resources and the consideration for the debt.’ Similarly in the 2nd case the wide language in Section 52(2) was giving rise to tax an item which was not income or even receipt and therefore, outside the legislative powers of the Parliament and also violative of fundamental rights enshrined under Article 19(1)(f) of the Constitution. There is nothing of that sort in this case. There is no ambiguity also in the language used. Putting the share dealing transactions in one category is a reasonable classification and loss arising therefrom are put in one category of ‘speculative loss’ entitled to same treatment as other losses except that set off thereof is restricted to income of that category.
18.1 As held in KP. Varghese’s case (supra) itself the external aids like marginal notes, aims and objects, the statements of the Minister at the time of introducing the particular provision cannot be referred to ascertain the meaning of that terms used therein in a statute, they are only to understand the what were the circumstances in which the provision was introduced. They are to be adopted when there is ambiguity or to remedy the mischief or when the literal meaning give absurd results or results contrary to the vires of the Constitution. In this case the Supreme Court applied the external aid of construction, because the plain meaning of the provision of Section 52(2) were found to be contrary to Sub-section (1), contrary to the mischief sought to be remedied and also contrary to the legislative powers of the Parliament. In the present case neither is there any contradiction to any provision, nor this provision prohibits any mischief to be remedied, nor against the constitutional provisions.
19. In Karnataka High Court in Mysore Rolling Mills (P.) Ltd. (supra) the facts that the assessee-private limited company purchased shares of another company and subsequently sold them at a loss and claimed the same as a short-term capital loss. It was disallowed by the Assessing Officer as a speculation loss within the meaning of Explanation to Section 73 of the Act. The CIT(A) however, found that the assessee-company was not dealing in shares at any time and that the transaction was in question was a solitary transaction. The Tribunal, however, restored the order of the Assessing Officer. The High Court on a reference held that the Tribunal had assumed that assessee-company had purchased the shares as a dealer but not as an investor. It also approved the finding of the CIT(A) that the assessee-company was interested in the other company and obviously purchased the shares to help them to modernize its plant, but having realized that it was not possible, the assessee sold the same. The High Court held that it was not a speculative transaction. In that context, the High Court observed : “The facts of each case will have to be examined to arrive at a conclusion whether the transaction in question is a separate venture or business. The nature of the assessee’s business in general, the purpose behind the particular transaction, the effect of the transaction, etc. are all to be considered. Unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the courts cannot infer the transaction to be a speculative venture only because the assessee derived subsequently the benefit of tax reduction”. It only stated that the Explanation to Section 73 does not apply to purchaser and sale of shares as investment and that a transaction cannot be treated speculative merely because some tax reduction to the assessee. This case therefore, does not help us in solving the issue at issue in this case.
20. We however find a direct decision of the Calcutta High Court in the case of CIT v. Arvind Investments Ltd. , wherein dealing with a similar contention of the assessee the Court answered as under :
The circular on which reliance has been placed also does not advance the case of the assessee in any way. The object as stated in the circular is to curb the device to manipulate and reduce the taxable income of a company under the management of a controlling group of persons. But the circular has clearly stated in paragraph 19.1 that “the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on the business of granting loans and advances will be treated on the same footing as ‘speculation business’.”
Therefore, the circular does not leave any room for doubt that the Explanation will apply to the business of purchase and sale of shares of certain companies. Nowhere in the circular has any indication been given that where the only business of a company consists of purchase and sale of shares, the Explanation will not apply.
21. We therefore hold that the provisions of Explanation to all the transactions of purchase and sale of shares of the companies whose business consist of such purchase and sale of shares and the same cannot be restricted to only those transactions which are found to device sometime resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.
22. Coming to the original case of the assessee that the Explanation to Section 73 does not apply to transaction of acquiring shares by allotment. The reliance is placed on Sri Gopal Jalan & Co. ‘s case (supra) decision of the Supreme Court in Laxmi Feed & Exports Ltd. (supra) of the Tribunal wherein matter has proceeded on the proposition that allotment of shares are not purchases because the shares were not in existence prior to allotment. We however find that what is held by the Supreme Court is : “Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.” This statement itself is an answer to the question raised by the assessee. The shares become existing property the moment they are allotted. On allotment the shares become existing property. Once allotment is made the shares cannot thereafter be said to be property not in existence. It would be a case of purchase or sale of existing goods or property on allotment. Be that as it may, even if the shares allotted were not in existence and consequently not the shares purchased, it does not make any difference in the matter because there can be a purchase and sale of future property or goods as provided under the Sales of Goods Act. Sections 4, 5 and 6 of this Act dealing with contract of sales reads :
4. Sale and agreement to sell–(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Whereunder a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
5. Contract of sale how made.–(1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed.
(2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.
6. Existing or future goods.–(1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or future goods.
(2) There may be a contract for the sale of goods the acquisition of which by the seller depends upon a contingency which may or may not happen.
(3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods.
23. T.N. Aravind Reddy’s case (supra) dealt with the concept of ‘purchase’. In this case the facts were that one of the coparcener sold his house and earned capital gains. He was also a co-owner of a common house with his 3 brothers. These 3 brothers executed released deeds for a consideration of Rs. 30,000 each in his favour and the question was whether the eldest brother will get the benefit of Section 54; whether he has fulfilled the condition of having “purchased” a house property for residence? The Supreme Court noted and agreed with an English decision which held that; “purchase primarily means acquisition for money paid, not adjusted.” The Supreme Court agreed with the following observation of Upjohn, J. in Bobshaw Bros. Ltd. v. Mayer [1956] 3 All ER 833 at 835 where the learned Judge quoted Mr. T. Cyprian Williams’ book, the Contract of Sale of Land, at page 3:
‘Sale’, in the strict and primary sense of the word, means an agreement for the conveyance of property for a price in money; but the word “sale” may be used in law in a wider sense and so applied to the conveyance of land for a price consisting wholly or partly of money’s worth other than the conveyance of some other land.
Apparently he considered that a sale for something other than money can in a wider sense be properly described as a sale.
23.1 The contention of the assessee that the observations of the Supreme Court after agreeing with the meaning of the term “sale” given in Bobshaw Bros. Ltd.’s case (supra) and stating “The signification of a word of plural semantic shades may, in a given text, depend on the pressure of the context or other indicia” are of great importance. We, however, find that firstly, these were the observations for the extended meaning of the word “sale”; secondly, the quoted sentence from the Supreme Court judgment is only half. The other half which is left unquoted by the Id. counsel is: “Absent such compelling mutation of sense, the speech of the lay is also the language of the law.”; and thirdly, the court itself had adopted the general meaning of the word ‘purchase’ by stating in the following paragraph:
We find no reason to divorce the ordinary meaning of the word “purchase” as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration from the legal meaning of that word in Section 54(1). If you sell your house and make a profit, pay Caesar what is due to him. But if you buy or build another subject to the conditions of Section 54(1) you are exempt. The purpose is plain; the symmetry is simple, the language is plain. Why multilate the meaning by lexical legalism. We see no stress in section on “cash and carry”. The point pressed must, therefore, be negatived.
23.2 It is true that this decision is regarding the purchase of existing property viz., the purchase of 3 joint owners’ share in a common house by paying to each Rs. 30,000 as against allotment of share where there is no existing property as stated by the Supreme Court in Gopal Jalan & Co.’s case (supra) that: “Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.” But that does not make any difference there can be a purchase and sale of future property or goods as provided under Sections 5 and 6 of the Sales of Goods Act extracted above. In any case the share becomes existing property the moment it is allotted. Once allotment is made it becomes a property in existence cannot thereafter be said it was a case of purchase or sale of non-existing goods or property.
24. In Laxmi Feeds & Exports Ltd.’s case (supra) the Tribunal held shares allotted are not shares purchased and therefore, the Explanation would not apply, has not taken into consideration that shares are goods and future goods can also be agreed to be sold as provided in the Sales of Goods Act and also the fact that on allotment shares become ascertained and specific goods and amounts to purchase of shares/goods on allotment.
25. Let us have a look on various terms that are frequently used in such like cases. These are ‘acquired’, ‘allotment’, ‘sale’ and ‘purchase’.
25.1 “Acquire, in the law of Contracts and Descents is to become the owner’s of property: to make property, one’s own”. [Himatlal Motilal v. Vasudev [1912] 14 Bom. LR 634].
The word ‘acquire’ means acquisition in any way, private purchase or acquisition under the Land Acquisition Act, (Trimbak Municipality v. Ramchandra AIR 1981 Bom. 18).
Black’s Law Dictionary defines ‘acquire’ as : To gain by any means, usually by one’s own exertions; to get as one’s own; to obtain by search, endeavour, investment, practice, or purchase; receive or gain in whatever manner; come to have. In law of contracts and of descents, to become owner of property; to make property one’s own; to gain ownership of, the act of getting or obtaining something which may be already in existence, or may be brought into existence through means employed to acquire it.
‘Acquired’: The use of the word ‘acquire’ necessarily postulates a change of relationship vis-a-vis thing or property which is said to be acquired and which was not existing before. Salu Bai v. Chandru AIR 1966 Bom. 194, 210.
A property is said to be acquired when prior to the acquisition the person acquiring it (like a donee of a gift or the deviser under a will) had no interest in the property. Savadhar Chandra Day v. Tara Sundari Dari AIR 1962 SC 438.
25.2 Allot in Law Lexicon is: To divide or distribute, as by lot; to apportion or distribute or parcel out (as); to allot shares in a public company; to grant; to assign; set apart; appropriate; (as), to allot a sum of money for some specific purpose.’
To allot is to indicate that a portion of property held by a number of joint owners is in future to belong exclusively to a specific person called the “allottee”.’
Allotment: The act of allotting or distribution by lot. That which is allotted; a share, or portion granted or distributed; the thing or portion which is assigned by lot.
In company law ‘allotment’, the Supreme Court held in Sri Gopal Jalan & Co. ‘s case (supra), means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person.
25.3 The expression “sale of goods” in entry 48, as observed in State of Madras v. Cannon Dunkerley & Co. , is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement’.
In Andhra Sujarb Ltd. v. State of A.P. it was observed that “In order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods and it must be supported by money consideration and as a result of the transaction property must actually pass in the goods”. On a parity of reasoning, to constitute a purchase of goods there must be an agreement for purchase of goods and the passing of property pursuant to such an agreement.
25.4 Purchase means the acquisition of property by a party’s own act, as distinguished from acquisition by act of law. As defined in Section 101, Transfer of Property Act purchase means To acquire property whether movable or immovable by paying money or its equivalent.’
Law Lexicon defines the ‘purchase’ as a word with two significations – a popular but restricted one, and a legal but enlarged one. As a noun in its popular and more limited sense; acquisition by way of bargain and sale or other valuable consideration, the transmission of property from one person to another by their voluntary act and agreement, founded upon a valuable consideration; the buying of real estate and of goods and chattels; that which is obtained for a price in money or its equivalent; acquisition for a valuable consideration; bargain. In its technical and larger sense, in case of land the act of obtaining or acquiring title to lands and tenements by money, deed gift or any means, except by descent; the acquisition of land by any lawful act of the party, in contradistinction to acquisition by operation at law, including title by deed, by matter of record, and by devise. As a verb to buy, to obtain property by paying an equivalent in money, to obtain or secure as one’s own by paying or promising to pay price. The verb in its technical broader sense, refers to all titles including those by devise acquired otherwise than by descent. The term ‘purchase’ as used in speaking of an estate acquired by purchase means an acquisition either from an ancestor or any other person, by deed will, or gift, and not as heir at law. There are two modes only of acquiring a title to land, namely, descent and purchase, purchase including every mode of acquisition known to the law, except that by which an heir, on the death of an ancestor, becomes substituted in his place as owner by the act of law. In other words where no consideration passes for the transfer of goods it would not be a case of purchase and that would be a simple case of acquisition, but when acquisition of property is with monetary consideration it would be a case of purchase.
26. On a close reading of the meanings of these terms it becomes evident that acquisition is getting by self exertion or by change of ownership of something, the allotment is apportioning a previously unapportioned capital of a company. When the acquisition by allotment is for a consideration it is a sale. Therefore when a price is paid for allotment of shares it is a purchase of shares in general law as well as for the purposes of Explanation to Section 73 of the Act.
27. We may examine this issue from a different angle. What the Explanation provide is the any business of a company consists of purchase and sales of shares of another company, therefore, we have to see is whether business is of purchase and sale of shares and not what is the nature and mode of such purchase. The assessee does not dispute that on allotment shares are acquired. He only disputes that they are not purchases. When acquisition is with a price it is a purchase as held in T.N. Aravind Reddy ‘s case (supra). We have already quoted provisions of the Sales of Goods Act above defining what sales means. Sale in the case of a seller is purchase in the hands of the purchaser and therefore, where under a contract of sale the property is transferred from the seller to the buyer, the contract is called a sale, conversely a purchase. The sale of shares is complete when the shares are allotted as on allotment it becomes an ascertained goods/ property.
28. A careful perusal of Explanation to Section 73 indicates that this Explanation lays down that the expression “speculation business”, under the specified circumstances, will cover assessee’s business ‘to the extent to which the business consists of the purchase and sale of such shares’. Unlike the definition under Section 43(5) which defines ‘speculative transactions’, the provisions of Explanation to Section 73 lay down the circumstances in which, and the extent to which, a business is to be deemed as, ‘speculation business’. The thrust of the provisions under Explanation to Section 73 is on the nature of ‘business’, rather than nature of ‘transaction’. Even the circular itself provides that the Explanation would apply to the business of purchase and sale of shares of certain companies. This is how the Courts and the Tribunals have proceeded to decide in the following cases.
28.1 In the case of Sun Distributors Mining Co. (supra) the Calcutta High Court observed as under :
6. The section will not apply where any part of the business of the company ‘consists’ in the purchase and sale of shares of other companies. Therefore, it has to be seen whether the assessee-company has such a business. It may be that in a particular year shares were only sold or in a particular year the shares were only purchased. The section does not require that both sale and purchase should take place in the same year. What is to be seen is whether the business of the company consists in purchase and sale of shares. In the instant case, the assessee-company had a business of buying and selling the shares. The shares are treated as stock-in-trade. The closing stock of the shares have been valued just as any other stock-in-trade is valued by a company. There were small lots of sale of shares in this year. But that will not make any difference to the main question, which is, whether the company was engaged in the business of sale and purchase of shares. If it is found that any part of the business of the company consists in the purchase and sale of shares, then for the purpose of Section 75 such a company shall be deemed to be carrying on a speculation business to the extent the business consisted of purchase and sale of shares. It is not the requirement of the section that both purchase and sale of shares should take place in the same year. But what the section requires is that there will be business of sale and purchase of shares and the assessee-company will carry on that business in the relevant year of account. The very fact that shares were valued as stock-in-trade and the loss was disclosed, as a result of the valuation of the shares, goes to show that the business of share purchase and sale of shares was carried on by the company. To the extent such business was carried on, the business of the assessee-company must be treated as speculation business.
28.2 Quoting this paragraph of the judgment of the Calcutta High Court, the Mumbai Bench of the Tribunal in the case of Akrosh Investment & Leasing (P.) Ltd. (supra) order observed as under :
This decision squarely applies to the facts of the assessee’s case before us and provides a direct answer to the arguments of the learned Counsel for the assessee that the assessee does not fall within the purview of Explanation to Section 73 because in the year of account, there was only purchase of shares and no sale of shares. Their Lordships have held in the decision that section does not require that both purchase and sale of shares should take place in the same year. What is to be seen is whether the business of the assessee consists in purchase and sale of shares.
28.3 In the case of Paharpur Colling Towers Ltd. (supra), the Calcutta Bench of the Tribunal observed as under :
17. We are also of the considered view that even if the loss is only on account of fall in value of stock, it is still in the nature of loss incurred from that business. A carefully perusal of Explanation to Section 73 indicates that this Explanation lays down that the expression ‘speculation business’ under the specified circumstances, will cover assessee’s business ‘to the extent to which the business consists of the purchase and sale of such shares’. The definition thus sought to be placed is of the ‘speculation business’ and not ‘speculation profits’. As to what will constitute profits from such speculation business, this is to be essentially governed by the normal accounting principles and business practices. Unlike the definition under Section 43(5) which defines ‘speculative transactions’ per se, the deeming provisions of Explanation to Section 73 lay down the circumstances in which, and the extent to which, a business is to be deemed as, speculation business 1. The thrust of the provisions under Explanation to Section 73 is on the nature of ‘business’, rather than nature of ‘transaction’. It is thus immaterial as to whether profit is, or is not, on account of sale and purchase of shares but, in our considered view, to the extent it is arising out of ‘business of purchase and sale of shares’, it will be hit by the provisions of Explanation to Section 73. As held by Hon’ble Supreme Court in Chainrup Sampatram’s case loss on account of fall in value of stock is to be treated as loss of that business on the ground of prudence, fully sanctioned by the custom. Their Lordships of Hon’ble Supreme Court inter alia observed that, “. .. valuation of unsold stock at the end of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as source of such profits (or losses)”. In this view of the matter, the loss on valuation of closing stock of shares, in the present case, cannot be treated any different than a normal trading loss; such loss is, as is the settled legal position, an integral part of the loss on trading, i.e., purchase and sale, of shares.
18. Accordingly, in our considered view, the proposition advanced by the learned Counsel is neither supported by admitted factual position or the settled legal principles. For these reasons, we reject the alternate contention also.
28.4 In the case of Prudential Construction Co. Ltd. (supra), the Hyderabad Bench of the Tribunal observed as under :
12. One of the arguments advanced by the learned Counsel is that the loss relating to purchase and sale of shares can, at the most, be treated as speculation loss and not in the loss resulting in on account of valuation of closing stock. We do not agree with such proposition. As mentioned earlier, the appellant is carrying on business of trading in shares. Where the appellant is carrying on business of purchase and sale of shares, the value of opening stock and the closing stock form integral part of the computation of profit or loss from share trading. The correct profit or loss cannot be determined without taking into account the value of opening stock and the value of closing stock. In fact, in the Profit & Loss Account, the entire loss of Rs. 1,60,33,083 arising on account of share transactions including valuation of closing stock has been adjusted against the profit and gains from business. The appellant has not adjusted only loss of Rs. 6,26,225 to the Profit & Loss Account and it had adjusted the entire loss of Rs. 1,60,33,083 to the business profit. Therefore, while making the adjustment under Section 143(1)(a), the Assessing Officer was duty bound to examine this aspect as to whether loss arising from share transactions was correctly adjusted against business profit or not. Since the appellant had adjusted the entire loss of Rs. 1,60,33,083 and not of Rs. 6,26,225 the Assessing Officer was justified in treating the entire loss as speculation loss. It may also be mentioned that there cannot be any controversy as made out by the appellant that the loss on share transactions has to be determined by excluding the value of closing stock of the shares, it is only made out by the appellant to wriggle out the rigours of Explanation to Section 73 of Income-tax Act.
29. We therefore hold that looked at from any angel the case of the assessee is covered by the plain, clear and unambiguous statutory language of the provisions of Explanation to Section 73 of the Act which requires no external aid, like object etc. to construe them differently and therefore, the loss suffered on account of acquisition by allotment and sale thereof being in the nature of loss arising on purchase and sale of shares of a company and also being in the nature of business of the assessee being purchase and sale of shares of other companies is to be taken as a speculative loss.
30. In the result, appeal of the assessee is dismissed.