IN HIGH COURT AT CALCUTTA SPECIAL JURISDICTION (INCOME TAX) ORIGINAL SIDE Present: Hon ble Justice Soumitra Pal & Hon ble Justice Arindam Sinha ITA No. 274 of 2001 Messrs Maud Tea & Seed Co. Ltd vs- Commissioner of Income-Tax, West Bengal-II, Kolkata For appellant : Mr. J.P. Khaitan, Senior Adv. Ms. Sanjukta Gupta, Adv. For respondent : Mr. M.P. Agarwal, Adv. Heard on : 28.08.14, 29.08.14, 03.09.14, 04.09.14,25.09.14 and 26.09.14 Judgment on : 24th December, 2014. Court: This appeal was admitted on two substantial questions of law. first of such questions was formulated as by order dated 1st October, 2002 to be:- 1.Whether on proper construction of provisions of Section 43(5) and in particular proviso (b) thereto, transactions entered into by appellant in respect of ACC shares and loss of Rs. 14.82 lacs incurred therein fell outside purview of said proviso (b) because market price of ACC shares continued to rise and there was no adverse price fluctuation? Mr. Khaitan, learned senior advocate appeared on behalf of appellant assessee and referred us straight away to section 43(5) read with proviso (b) thereto of Income Tax Act, 1961. It will be useful to set out below said provision:- 43.(5) speculative transaction means transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips: Provided that for purpose of this clause (b) contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; ... ... ... shall not be deemed to be speculative transaction. He submitted transactions his client had entered into were those stated by stock and share broker and dealer Babulal Dhanuka in answering summons under section 131 of said Act by letter dated 28th February, 1994. It would appear from said letter assessee entered into three transactions of sale and purchase of 2850 shares of ACC Ltd. between 27th July, 1990 and 29th August, 1990. Mr. Khaitan submitted his client entered into those transactions for purpose of hedging. Of shares held by his client, on 27th July, 1990 it had sold 2850 shares at rate of Rs.913/- per share which were purchased subsequently on 8th August, 1990 at rate of Rs. 1,060/- per share. On next day assessee again sold those shares at rate of Rs. 1,044.50 per share to purchase them subsequently on 22nd August 1990 at rate of Rs. 1,350/- per share. Lastly, on 23rd August 1990 assessee sold those shares at rate of Rs. 1,367.50 per share and thereafter on 29th August 1990 purchased them at rate of Rs. 1,435/- per share. Mr. Khaitan submitted scrutiny of aforesaid transactions would reveal price fluctuation in period when his client made sale and purchase of shares without actual delivery or transfer of them. This his client had done to guard against loss of its holding those shares. He pointed out that in fluctuation of prices of said shares between 27th July, 1990 and 29th August, 1990 market price of shares continued to rise except between 8th and 9th August 1990 when price of said shares fell from Rs. 1,060/- per share to Rs. 1,044.50 per share. According to learned counsel relevant provision read with proviso excepted hedging transactions without providing for requirement of result of such transactions. He submitted in hedging transactions if price of share fell between time of sale and purchase then share holder would end up with profit in hand to compensate loss in value of shares. On other hand if price of shares increased between time of sale and purchase, share holder would incur loss being difference between increased value of shares at time of purchase against sale price of same. He, therefore submitted, his client having hedged by those transactions, suffered loss by reason of price of shares continuing to rise. Since transactions came within exception provided for, those could not be said to be speculative transactions. He emphasised proviso stipulated price fluctuation as against adverse price fluctuation mentioned in question formulated. He relied on following decisions:- (i) SK. AR. K. AR. Somasundaram Chettiar And Co. vs- Commissioner of Income-Tax: 194 ITR 1 (SC). (ii) Commissioner of Income-Tax vs- Hotz Hotel Ltd: 260 ITR 132 (Delhi High Court). (iii) Commissioner of Income-Tax vs- Ashokbhai B. Shah: 218 ITR 331 (Gujarat High Court). (iv) Commissioner of Income-Tax vs- Mohanlal Ranchhoddas: 203 ITR 304 (Gujarat High Court). Mr. Khaitan relied on Somasundaram Chettiar to submit earlier 1922 Act under Section 24 provided for speculative transactions which in later Act got separated, inter alia, under Sections 43 and 73 thereof. He submitted if his client was to accept said transactions to be speculative transactions then loss incurred thereby could only be set off against profit from speculation business. However section 43(5) read with proviso (b) thereto excepted hedging transactions out of speculative transactions defined in Section 43(5). His client having entered into hedging transactions, it was entitled to set up hedging loss as business loss. He went on to submit decision in Mohanlal Ranchhoddas could be relied on. Gujarat High Court in that decision referred to earlier Full Bench decision of that court in Pankaj Oil Mills-vs- CIT: 115 ITR 824 wherein Full Bench had referred extensively to technique of hedge trading as explained by well known economist W.R. Natu in his book Regulation of Forward Markets . portion of quote from that book in Mohanlal Ranchhoddas is reproduced below:- Thus, by resorting to counterbalancing transactions in market for ready commodity on one hand and in hedge market on other hand, hedger seeks to safeguard his position. movement of prices in two markets may not always follow identical course and hedger might at times gain and at times lose but such gain or loss would be marginal and far less than what it would be if person had not hedged at all. While, however, hedging operation protects hedger against loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. forgoing of such possible windfall profit is price which he pays for insurance against loss. He then referred to Ashokbhai B.Shah to submit Gujarat High Court in that decision had applied Mohanlal Ranchhoddas. Referring to case of Hotz Hotel Ltd. he submitted Delhi High Court in considering questions and D in that appeal proposed for formulation, dismissed same on basis of concurrent finding by CIT (A) and Tribunal that loss incurred by assessee therein was hedging loss. So, Mr. Khaitan submitted, aforesaid substantial question of law should be answered in negative and in favour of appellant assessee. Mr M.P Agrawal, learned advocate appeared on behalf of respondent Revenue and submitted according to Concise Oxford Dictionary, Sixth Edition in page 498 meaning of hedge was to make or trim hedges; secure oneself against loss on (bet, speculation) by compensating transactions on other side. Chambers Twentieth Century Dictionary ninth reprint of Indian Edition 1983 in page 603 gave meaning of hedge as to obstruct; to surround; to guard; to protect oneself from loss on, by compensatory transactions. e.g. bets on other side. He submitted answer was in formulated question itself. loss of Rs14.82 lacs incurred by appellant, according to him, fell outside purview of said proviso (b) because market price of ACC Ltd. shares continued to rise and there was no adverse price fluctuation. Proviso (b) since excepted transactions out of speculative transactions defined by section 43(5) of Act, said proviso needed to be strictly construed in its application. said proviso mandated contracts in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuation. That, according to him, would mean those transactions which were made to guard against loss in holding of stocks and shares meaning thereby to compensate against loss in value of stocks and shares through price fluctuation. In this case there was no dispute on facts and they showed that on contrary there was addition in value of shares held by assessee through price fluctuation. Therefore, there was rising trend in price of shares and no adverse price fluctuation, keeping transactions within meaning of section 43(5) of said Act. We find passage of said economist W.R. Natu extracted from his book Regulation of Forward Markets as reproduced in Mohanlal Ranchhoddas, very illuminating. portion of that passage which we have set out above clearly contemplates hedging operation, in protecting hedger against loss arising from adverse fluctuation in price, would also prevent him from making windfall profit owing to favourable fluctuation in price as well. author attributes that as price which hedger pays for insurance against loss. explanation of hedge trading given by said author, we find, truly explained meaning of hedging as given in dictionaries relied on by Revenue in context of said Act. proviso (b) of section 43 (5) of said Act does not require inquiry into result of transactions but that it should have been entered into for guarding against loss in holding of stocks and shares. undisputed facts in this case, in our view, contain ingredients of hedging. result of those transactions, however, was gain in holding of shares by assessee by incurring loss of said sum of Rs. 14.82 lacs, value of increase in holding of appellant in shares in that period. Therefore, when ultimately appellant sold those shares at even greater value, it was denied windfall profit it would have made if it had not hedged at all. For reasons aforesaid we answer questions in negative and in favour of appellant assessee. next question for adjudication as formulated is as under:- Whether in facts and circumstances of this case, proper way in law to look upon Unit Trust Master share transaction of assessee is that in respect of UTI Master Share Units, appellant incurred loss of Rs. 68,900/- and was in receipt of dividend income of Rs.1,26,000/- as claimed by it or as held by Tribunal, it made profit of Rs. 56,000/- and dividend amount and consequently deduction under Section 80M and credit for tax deducted at source has to be excluded from appellant s assessment? facts are assessee purchased Unit Trust of India Master shares in February, 1990 @ Rs.17.10 per unit. In May 1990, assessee entered into contract to sell said shares at then prevailing price of Rs.17.90 per unit. Registration in respect of said shares was made in favour of assessee in August/September, 1990, thereafter dividends declared @ Rs.1.80 per unit and received by assessee. Subsequent thereto said shares were sold by assessee but @ Rs.16.10 per share being agreed price less dividend value per unit. assessee therefore claimed deduction in respect of dividend under then section 80M of Income Tax Act, 1961 and showed loss of Rs.68,900/- in respect of share transactions. Mr. Khaitan relied on decisions in case of CIT Vs. Walfort Share and Stock Brokers P.Ltd.: 326 ITR 1 (SC) and Commissioner of Wealth Tax, West Bengal-VI Vs. Babulal Jatia: 137 ITR 540 (Cal). Mr. Khaitan by relying on Walfort s case submitted losses over and above dividend received would still be allowed from which it follows that Parliament has not treated dividend stripping transactions as sham or bogus. It has not treated entire loss as fictitious or only fiscal loss. After 1st April, 2002, losses over and above dividend received will not be ignored under section 94(7) of Income Tax Act, 1961. Relying on Babulal Jatia he submitted until change by registration is effected, transferor continued to be holder of shares. Mr. Agarwal submitted question had two parts to it. first part was to be answered in favour of Revenue and second in favour of assessee. He submitted facts in regard to first part of question formulated had been concurrently found by CIT(A) and Tribunal, to be in favour of Revenue. They had held there was contract, performance of which would have yielded profit to assessee but for dividend stripping of shares it had indulged in. We find issue stands settled by judgments cited and relied upon by Mr. Khaitan. facts are that though contract was entered into, it was not specifically performed. There was alteration made thereto in as much as assessee obtained dividends and then sold shares at reduced price to its buyer. Alteration of contract is permissible in law. Hon ble Supreme Court had made position clear regarding dividend stripping by owners of shares in period prior to 1st April, 2002, while this court had clearly held until change by registration is effected in books of company, transferor continues to be holder of shares. For reasons above answer to first part of second question is in positive and second part of it in negative, thus both parts of question answered in favour of appellant assessee and against Revenue. appeal is accordingly allowed. Urgent certified copy of this judgment, if applied for be made available to parties on their usual undertakings. (Soumitra Pal, J.) (Arindam Sinha, J.) Maud Tea & Seed Co. Ltd v. Comm. of Income-tax, W.B. - II