* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 06.05.2013
Pronounced on: 11.07.2013
+ ITA 94/2013
THE COMMISSIONER OF INCOME TAX DELHI-IV
..... Appellant
Through: Sh. Sanjeev Sabharwal, Sr.
Standing Counsel with Sh. Puneet Gupta, Jr.
Standing Counsel.
Versus
DLF COMMERCIAL DEVELOPERS LIMITED
..... Respondent
Through: Sh. Ajay Vohra and Ms. Kavita
Jha, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S.RAVINDRA BHAT
%
1. This appeal of the revenue impugns an order of the Income
Tax Appellate Tribunal (ITAT) dated 30.11.2011 in the assessee's
appeal [ITA No. 1446 (Del) of 2011] whereby its contention about
inapplicability of Explanation to Section 73 of the Income Tax Act,
1961 in respect of its transactions, and the resulting relief in carry
forward of its losses for the previous year, in respect of its
ITA 94/2013 Page 1
derivative business was upheld. This Court framed the following
question of law for consideration, and heard the parties, i.e:
Did the Income Tax Appellate Tribunal (ITAT) fall
into error in not holding that the loss of Rs.
4,92,71,000/- on account of derivative transaction was
a speculative loss, and was entitled to the benefit of
Section 73, in view of the Explanation to Section 73 of
the Income Tax Act;
2. The brief facts are that the assessee claimed loss of
Rs.492.71 lakhs on account of purchase and sale of shares. The
assessee argued that the loss in trading of derivatives was not a
speculative loss in terms of Section 43(5) of the Income Tax Act
and could not be disallowed as speculative loss under any
provisions of the Income Tax Act. The Assessing Officer rejected
that submission and held that Section 73 applied since it was
independent of Section 43(5). Explanation to Section 73 can be
applied even if there is delivery based sale purchase of shares and
also in situations of trading of derivatives. It was held that the
assessee was not engaged in any of the specifically excluded
categories of business as to render Explanation to Section 73
inapplicable. The AO held that loss of Rs.492.71 lakhs had to be
treated as speculative loss and could not be allowed to be adjusted
against business income. The CIT (Appeals) rejected the assessee's
contentions. Therefore, a further appeal was preferred to the ITAT,
which accepted the contention that Explanation to Section 73
applied, and granted the relief claimed. The revenue is in appeal
against that part of the impugned order of the Tribunal.
ITA 94/2013 Page 2
3. Learned counsel for the Revenue argued that the reliance
placed upon an amended Section 43 (4) of the Income Tax Act by
the impugned order is erroneous. It is highlighted in this regard
that the scheme and structure of Section 73 is clear. Counsel
argued that explanation to the provision categorically provides that
where any part of the business of the company includes purchase
and sale of shares of other company, it shall be deemed to be
carrying on speculation business to the extent to which the business
consists of that activity. The intention of Section 43, counsel
submitted, was to define certain terms in respect of classification of
income and for purposes of Sections 28-41. Section 43(5) stated
that transactions where contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or
ultimately settled otherwise than by the actual delivery or transfer
of the commodity or scrips, it would not be deemed to be
speculative transaction. By the amendment made w.e.f.
01.04.2006, four categories of contracts including the one provided
under Section 43(5)(d) i.e. transaction in respect of trading and
derivative as defined under Securities Contract (Regulation) Act,
1956 are not to be deemed to be speculative transaction. However,
counsel drew strength from the fact that the said provision, i.e.,
Section 43(5)(d) has restricted application in that it defines
speculative transaction and excludes transactions and derivatives
only for a limited purpose. On the other hand, Section 73 has
wider application and relates to all manner of losses. It deals with
a question of under what circumstances can carry forwarding of
ITA 94/2013 Page 3
such losses be permitted. Learned counsel for the Revenue relied
upon the decisions reported as CIT v. Intermetal Trade Ltd., 2006
(285) ITR 536 (M.P.); CIT v. Arvind Investments Ltd., 1991 (192)
ITR 365 (Cal) and Eastern Aviation and Industries Ltd. v. CIT,
1994 (208) ITR 1023. In this regard, it is submitted that the
specific inclusion of the activity of sale and purchase of share of
other companies from the otherwise general application of
principles underlying Section 73 meant that those transactions
could not claim the benefit of the provision. Derivatives of the
kind and nature traded by the assessee in the present case were
relatable to stocks and shares and what is more were the subject
matter of transactions under the National Stock Exchange. In these
circumstances, the Tribunal ought not to have permitted the
assessee the benefit of Section 73.
4. Learned counsel for the Revenue submitted that there is no
infirmity with the judgment and order of the Tribunal impugned in
the present case. He highlighted the fact that the trade and
transactions in derivatives as defined under Section 2 of the
Securities Contract (Regulation) Act, 1956, were specifically
excluded from the definition of speculative transactions. Even
though that definition was in Section 43(5), yet neither the Tribunal
nor the Court could ignore it since there was no other definition of
derivatives in the Income Tax Act. Counsel sought to highlight
that derivative need not be only in respect of stocks and shares but
could also pertained to commodities. Such being the case, the
Tribunal acted within its jurisdiction and correctly concluded that
ITA 94/2013 Page 4
the assessee could enjoy the benefit of Section 73 and did not fall
within the mischief of its explanation.
5. Counsel submitted that the decision of the Madras High
Court in Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd.,
AIR 2011 Mad 144 in support of the submission that derivatives
depend on underlying assets which are not confined to stocks and
shares but can be commodities, metals, energy resources, bonds
and foreign currencies etc. Assessee's counsel also relied upon the
decision of the Division of the Bombay High Court reported as CIT
v. Bharat R. Ruia (HUF), 2011 (337) ITR 452 (Bom) where
especially the discussion relating to the amended position had
taken place. The Bombay High Court had considered the pre-
amended position and held that derivatives in the light of the then
existing position under Section 45 (5) were speculative transactions
but the position had changed after 01.04.2006 in view of the
clarification by way of the amendment.
6. Before a discussion on the merits of the appeal, it would be
essential to extract the relevant provisions of the Income Tax Act.
Section 73 (with explanation), to the extent it is relevant, reads as
follows:
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.
ITA 94/2013 Page 5
(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 [four] assessment years immediately succeeding
the assessment year for which the loss was first computed.
[Explanation.--Where any part of the business of a
company [other than a company whose gross total income
consists mainly of income which is chargeable under the
heads "Interest on securities", "Income from house
property", "Capital gains" and "Income from other
sources"], or a company the principal business of which is
the business of banking or the granting of loans and
advances) consists in the purchase and sale of shares of
other companies, such company shall, for the purposes of
this section, be deemed to be carrying on a speculation
business to the extent to which the business consists of the
purchase and sale of such shares.]
ITA 94/2013 Page 6
Section 43, to the extent it is relevant, reads as follows:
43. In Sections 28 to 41 and in this section, unless the
context otherwise requires-
********** *********
(5) Speculative transaction means a transaction in which
a contract for the purchase of sale of any commodity,
including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of
the commodity or scrips:
Provided that for the purposes of this clause
(a) A contract in respect of raw materials or merchandise
entered into by a person in the course of his
manufacturing or merchanting business to guard
against loss through future price fluctuations in
respect of his contracts for actual delivery of goods
manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into
by a dealer or investor therein to guard against loss in
his holdings of stocks and shares through price
fluctuations; or
(c) a contract entered into by a member of a forward
market or a stock exchange in the course of any
transaction in the nature of jobbing or arbitrage to
guard against loss which may arise in the ordinary
course of his business as such member (or)
(d) An eligible transaction in respect of trading in
derivatives referred to in clause {(ac)} of section 2 of
the Securities Contracts (Regulation) Act, 1956 (42 of
1956) carried out in a recognized stock exchange;]
Shall not be deemed to be a speculative transaction,
[Explanation Four the purpose of this clause, the
expressions
ITA 94/2013 Page 7
(i) eligible transaction means any transaction -
(A) Carried out electronically on screen-based systems
through a stock broker or sub-broker or such other
intermediary registered under section 12 of the
Securities and exchange Board of India Act, 1992
(15 of 1992) in accordance with the provisions of
the Securities Contracts (Regulation) Act, 1956 (42
of 1956) or the Securities and Exchange Board of
India Act, 1992 or the Depositories Act, 1996 (22
of 1996) and the rules, regulations or bye-laws
made or directions issued under those Acts or by
banks or mutual funds on a recognized stock
exchange; ;and
(B) which is supported by a time stamped contract note
issued by such stock broker or sub-broker or such
other intermediary to every client indicating in the
contract note the unique client identity number
allotted under any Act referred to in sub-clause (A)
and permanent account number allotted under this
Act;
(ii) recognized stock exchange means a
recognized stock exchange as referred to in
clause (f) of section 2 of the Securities
Contracts (Regulation) act, 1956 (42 of 1956)
and which fulfils such conditions as may be
prescribed and notified by the Central
Government for this purpose;]
7. It is apparent, facially, that the term "speculative
transaction" has been defined only in Section 43 (5). At the same
time, it is qualified, i.e. that the scope of the definition is restricted
in its application to working out the mandate of Sections 28 to 41
of the Act. In terms of the Explanation to Section 73 (4) in the case
of a company, business of purchase and sale of shares is deemed to
ITA 94/2013 Page 8
be speculation business. However, certain companies are excluded
from this Explanation which are:
(i) a company whose gross total income consists mainly of income
which is chargeable under the heads 'Interest on securities', 'Income
from house property', 'Capital gains' and 'Income from other
sources'.
(ii) a company, the principal business of which is the business of
banking or the granting of loans and advances.
8. Section 43 defines, for the purpose of Sections 28 to 41,
certain terms. These latter provisions fall in Chapter IV, in Section
D, which deal with computation of business income. The said
provisions provide for matters relating to computation of such
income, rent taxes, insurance of buildings, repairs of plant and
machinery, depreciation, reserves for shipping business,
rehabilitation fund, expenditure on certain eligible objects or
schemes, deductions, amounts not deductible, profits chargeable to
tax, etc. The assessee is no doubt correct in contending that the
only definition of derivatives is to be found in Section 43 (5); yet
the Court cannot ignore or overlook that the definition to the
extent it excludes such transactions from the mischief of the
expression "speculative transactions" is confined in its application.
Parliamentary intendment that such transactions are also excluded
from the mischief of Explanation to Section 73 (4), however, is not
borne out.
ITA 94/2013 Page 9
9. In this context, it would be instructive to notice that in
Rajshree Sugars and Chemicals Ltd (supra), the Madras High
Court noticed, rather dramatically, that ..'Derivatives are time
bombs and financial weapons of mass destruction' said Warren
Buffett, one of the world's greatest investors, who overtook
Microsoft Maestro in 2008 to become the richest man in the world
and who is known as the 'Sage of Omaha or Oracle of Omaha'.
Derivatives, according to him, can push companies on to a spiral
that can lead to a corporate melt down.... The High Court then,
after examining the nature and characteristics of derivatives
transactions, observed that:
5. What are these 'derivatives' which have
gained such a great deal of notoriety? In simple
terms, derivatives are financial instruments whose
values depend on the value of other underlying
financial instruments. The International Accounting
Standard (IAS) 39, defines "derivatives" as follows:
A derivative is a financial instrument:
(a) whose value changes in response to the change
in a specified interest rate, security price,
commodity price, foreign exchange rate, index of
prices or rates, a credit rating or credit index, or
similar variable (sometimes called the 'underlying');
(b) that requires no initial net investment or little
initial net investment relative to other types of
contracts that have a similar response to changes in
market conditions; and
(c) that is settled at a future date.
ITA 94/2013 Page 10
Actually, derivatives are assets, whose values are
derived from values of underlying assets. These
underlying assets can be commodities, metals,
energy resources, and financial assets such as
shares, bonds, and foreign currencies.
10. It is no doubt, tempting to hold that since the expression
"derivatives" is defined only in Section 43 (5) and since it excludes
such transactions from the odium of speculative transactions, and
further that since that has not been excluded from Section 73, yet,
the Court would be doing violence to Parliamentary intendment.
This is because a definition enacted for only a restricted purpose or
objective should not be applied to achieve other ends or purposes.
Doing so would be contrary to the statute. Thus contextual
application of a definition or term is stressed; wherever the context
and setting of a provision indicates an intention that an expression
defined in some other place in the enactment, cannot be applied,
that intent prevails, regardless of whether standard exclusionary
terms (such as "unless the context otherwise requires") are used. In
The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S.
Fraser And Ross & Anr AIR 1960 SC 971 it was held that:
It is well settled that all statutory definitions or
abbreviations must be read subject to the
qualification variously expressed in the definition
clauses which created them and it may be that even
where the definition is exhaustive inasmuch as the
word defined is said to mean a certain thing, it is
possible for the word to have a somewhat different
meaning in different sections of the Act depending
upon the subject or the context. That is why all
ITA 94/2013 Page 11
definitions in statutes generally begin with the
qualifying words similar to the words used in the
present case, namely, unless there is anything
repugnant in the subject or context. Therefore in
finding out the meaning of the word " insurer " in
various sections of the Act, the meaning to be
ordinarily given to it is that given in the definition
clause. But this is not inflexible and there may be
sections in the Act where the meaning may have to be
departed from on account of the subject or context in
which the word has been used and that will be giving
effect to the opening sentence in the definition section,
namely, unless there is anything repugnant in the
subject or context. In view of this qualification, the
court has not only to look at the words but also to
look at the context, the collocation and the object of
such words relating to such matter and interpret the
meaning intended to be conveyed by the use of the
words under the circumstances.
Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991
SC 1289, it was held that:
4. The subject matter and the context in which a
particular word is used are of great importance and it
is axiomatic that the object underlying the Act must
always be kept in view in construing the context in
which a particular word is used...........
11. The stated objective of Section 73- apparent from the tenor
of its language is to deny speculative businesses the benefit of
carry forward of losses. Explanation to Section 73 (4) has been
enacted to clarify beyond any shadow of doubt that share business
of certain types or classes of companies are deemed to be
speculative. That in another part of the statute, which deals with
ITA 94/2013 Page 12
computation of business income, derivatives are excluded from the
definition of speculative transactions, only underlines that such
exclusion is limited for the purpose of those provisions or sections.
To borrow the Madras High Court's expression, derivatives are
assets, whose values are derived from values of underlying
assets; in the present case, by all accounts the derivatives are
based on stocks and shares, which fall squarely within the
explanation to Section 73 (4). Therefore, it is idle to contend that
derivatives do not fall within that provision, when the underlying
asset itself does not qualify for the benefit, as they (derivatives
once removed from it and entirely dependent on stocks and shares,
for determination of their value).
12. In the light of the above discussion, it is held that the
Tribunal erred in law in holding that the assessee was entitled to
carry forward its losses; the question framed is answered in favour
of the revenue and against the assessee. The appeal is, therefore,
allowed; there shall be no order as to costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JULY 11, 2013
ITA 94/2013 Page 13
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