9. We have considered the rival submissions and perused the record of the case. The facts are not disputed. Admittedly, the assessee company was dealing in Cement and also engaged in the business of dealing in shares. There is no dispute over the fact that the assessee had taken delivery of shares before selling them. The assessee company had claimed set off of unabsorbed speculation loss relating to assessment year 1995-96 and 1997-98 carried forward in the current assessment year 2003-04. The carried forward loss was denied by the department on the ground that the profits earned from sale of shares could not be treated as speculation profits because delivery of shares had been taken by the assessee. In the backdrop of these facts, .the moot point for consideration is whether Explanation to Section 73 would be applicable to cases where the assessee company, whose business consists of dealing in shares, has taken delivery of shares or not? In order to consider this issue, we may first refer to various relevant statutory provisions:
(i) Explanation to Section 28 which deals with scope of ‘profits and gains of business or profession1. This explanation reads as under:-
“Where speculative transactions carried on by an assessee are of such a nature as to constitute a business the business (hereinafter referred to as ‘speculation business”” shall be deemed to be distinct and separate from any other business.”
(ii) The speculative transaction has been defined in Section 43 sub-section (5) as under:-
” ‘Speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips “.
The above two provisions are part of Chapter-IV dealing with computation of business income.
(iii) Section 73 which is part of Chapter VI dealing with set off of losses reads as under:
“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( I), so much of the loss as is not so set off or the whole loss where the assesse 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] “
(iv) Section 72 deals with carry forward and set off of business losses.
10. As noted earlier as per Explanation to Section 28 the business which comprises of speculative transaction is to be treated as distinct and separate from other business. In line with this, separate provisions have been made for set off of losses in Section 72 and Section 73. Therefore, it cannot be said that Section 73 is limited only to such cases where there is loss in speculative transaction. The purpose of section 73 is set off of carried forward speculative losses against income from speculative transactions.
11. The next main issue to be considered is whether Explanation to Section 73 is attracted in the present set of facts or not. A bare reading of Explanation to Section 73 would reveal that if following ingredients are fulfilled then Explanation to Section 73 would be attracted and secondly, the transactions would be treated as speculative transactions.
i) The part of the business of a company consists of purchase and sale of shares of other companies,
ii) The gross total income of the company does not consist mainly of income which is chargeable under the head “Interest on securities”, “Income from house property”, “capital gains” and ‘Income from other sources”,
iii) The principal business of the company is not that of banking or granting of loans and advances.
12. We are here mainly concerned with the first ingredient of Explanation. It is noteworthy that the legislature itself has used the phrase “purchase and sale of shares” in the Explanation without any qualification in contra distinction to the term used in Section 43(5) where it is specifically stated that the transactions are settled otherwise then by way of actual delivery. Thus, the term “purchase and sale” has to be given full effect and its meaning cannot be restricted only with reference to such transaction where delivery of shares has not been taken. Any such attempt would imply doing violence with the statute which is not permissible. Ld CIT (A) in his order has referred to CBDT Circular No.204 dt.24.7.1976 and has pointed out that as per this circular the object of the provisions was to curb device being resorted to by some business to manipulate and reduce the taxable income by booking speculative losses. Therefore, the purpose of introduction of the Explanation was to cover losses. This circular does not deal with the ambit of Explanation. As a matter of fact, the legislature consciously did not qualify the words ‘purchase and sale” in order to cover all kinds of contingencies which a company could possibly qualify resort to in order to manipulate its income by way of loss being brought into business by any device.
13. The revenue’s contention is that only delivery based transactions as contemplated u/s.43(5) were to be considered as speculative transactions. This argument is devoid of any merit because, then there was no necessity of incorporating Explanation to Section 73. As a matter of fact, Explanation to Section 73 enlarges the ambit of speculative transaction in case of such company where part of its business is to deal in shares. This has been so held in the case of Starline Ispat & Alloys Ltd (supra), wherein, it has been observed as under:
“Explanation to Section 73 expands the scope of ‘speculation business’ a little farther, by introducing a deeming fiction. This deeming fiction provides that where business of a company includes purchasing and selling of shares of other companies, to that extent, the company shall be deemed to be carrying speculation business”.
14. We are, therefore, of the considered opinion that in case of a company, if part of its business consists of dealing in shares then all types of transactions, , whether delivery based or non-delivery based, will be treated as speculative transactions. The decisions of the Hon’ble Bombay High Court in the case of Prasad Agents (P)Ltd., v. ITO, 21 DTR (Bom) 217 (supra) as well as the decisions of the Tribunal in Samba Trading & Investment (P)Ltd v. ACIT, 58 ITR 360 (Bom), ACIT v. Sucham Finance & Investment (I) Ltd., 105 ITD 353 (Mum), Starline Ispat & Alloys v. DCIT, 108 TTJ 321 (Mum) & JCIT v. Kalindi Holdings (P)Ltd., 106 TTJ 272 (Hyd) clearly approve this proposition of law.