Case Law Details

Case Name : ITO Vs. Ethno Financial Research Pvt. Ltd. (ITAT Delhi)
Appeal Number : ITA No. 2743(Del) of 2008
Date of Judgement/Order : 30/10/2009
Related Assessment Year : 2005- 2006
Courts : All ITAT (5586) ITAT Delhi (1274)


9. We have heard both the parties and perused the material on record. In this case there no dispute that trading in shares is not the business of the assessee as authorised by memorandum of association. It is also a fact that the assessee had dealt in futures and as well as traded in shares of other companies. Therefore, we have to see the applicability of the Explanation to section 73 of the Act to the share trading activities carried on by the assessee. As per Explanation to Section 73. where any part of business of the company an assessee whose gross total income is not consisted 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 or” banking or the granting of loans and advances, consists of the purchase and sale of shares of other companies, such company shall, for the purposes of section 73, be deemed to be carrying on a speculation business to the extent to winch the business consists of the purchase and sale of such shares. The provisions of Explanation to section 73 do not distinguish between the transaction of trading in shares on actual delivery or without delivery basis. Admittedly the assessee does not fall under any of the exceptions provided in the Explanation and hence, the purchase and sale of shares traded during the year under consideration is in nature of speculation business within the meaning of proviso to section 73 of IT Act, 1961.

9.1 Hon’ble Madhya Pradesh High Court in the case of Intermetal hade Ltd. (supra) has held that the Explanation to section 73 does not apply to an investment company or a company whose principal business is banking or money lending. If the business of a company which does not fall within the excluded categories consists of purchase and sales of shares of other company, than such a company shall be deemed to carrying in speculation business for the purpose of section 73 to the extent to which the business consists of purchase and sale of shares.

9.2 Hon’ble Calcutta High in the ease of Arvind investments Ltd. (supra) has also held the similar view. In this case it has been held that the Explanation to section 73 applies to the case of the assessee whose entire business consisted of dealing in shares. A loss incurred by the assessee was a speculation loss.

9.3 In the case of Mysore Rolling Mills (supra) Hon’ble Kamataka High Court held that where shares have been purchased as an investor, the provisions of Explanation to section 73 could not be applied.

10. From the decisions of Hon’ble Courts referred to above, it is clear that/where assessee is engaged in trading in share of other companies, the business carried on by the assessee will be in nature of speculative business and profit or loss arising there from will be the speculative profit/loss/ In the instant case, admittedly, the assessee’s business is not excluded Horn applicability of provisions of Explanation to section 73. Therefore, the profit arising on sale of shares will be speculative profits and in our considered opinion, A.O. has rightly assessed the same as speculative business.

11. Now let us examine the contention of Id AR of the assessee about Board Circular no 201 which is Explanatory Notes explaining the insertion of Explanation to section 73. The Board under section 110 has power, inter alia, to tone down the rigour of law and ensure a fair enforcement to its provisions by issuing circulars in exercise of its powers conferred upon n under section i 19 which arc binding on the authorities in the administration of the Act. Under section 119 (2j(aj), however, the circulars as contemplated therein cannot be adverse to the assessee. The power is given for the purpose of just, proper and efficient management of work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and fiscal laws may be correctly applied. Hard cases which could be properly categorized as belonging to a class thus can be given benefit of relaxation of law by issuing circulars binding on the taxing authorities. The Ld. AK of the assessee has relied on various decisions wherein the circulars issued by the CBD’J haves been held to be binding on the A.O. The Explanatory Notes to the amendment brought to the statute are not circulars issued u/s Il9(2)(b) of the Act. Since, the Explanatory Notes are neither orders nor directions issued under the power conferred under the section 119. the decisions relied by the assessee cannot be applied to the facts of the assessee’s case.

11.1 Hon’ble Delhi High Court in the case of Bhandari Company P. Ltd.(supra) has held that where language of statute is plain, the speech of Finance Minister. Notes of clauses and circulars issued by the Company Law Board to the effect that deposits from directors and shareholders excluded from the definition of deposit could not be resorted for interpreting provisions.

11.2 Hon’ble. Supreme Court in the case of K.P. Varghese vs. 1TO, 131 1TR 597 has held that the speech made by the Members of Legislature during the course of debate on a Bill are inadmissible for interpreting the statutory provisions but me speech made by the mover of the Bill can be referred to for the purpose of ascertaining the mischief to be remedied by the legislation and the object arid the purpose for which the legislation is enacted. As to the marginal note to the section, their Lordships of Hon’ble Supreme Court have held they cannot be referred to for the purpose of construing the section but can be relied upon as indicating the drift of section or to show what die section is dealing with. As to the circulars issued be the CBDT, their Lordships have held that they are valuable evidence of contemporaneous exposition, but must give way where the language of statute is unambiguous.

11.3 Hon’ble Madras High Court in the case of Puthuthofam Ltd. (supra) has held that it well settled that the explanation given to the Members of Parliament either in the shape of Notes on Clauses or Memorandum explaining the provisions are not aids to the construction. The statute has to he construed on its own words and not on what the supposed intention behind it was except in the somewhat rare event of the provisions not yielding any meaning unless the intention is taken into account.

11.4 Hon’ble Bombay High Court in the case of Associated Cement Co. Ltd.(supra) has held that the memorandum explaining the provisions of the Finance Bill or the circular of Board cannot be used to curtain or modify the clear meaning of an expression used in the statute. Hon’ble Bombay High Court in the case of CIT vs. Central Bank of India Ltd. (bull Bench) supra has held that where there is no ambiguity in language used in the statute, the notes on clauses and memorandum explaining provisions cannot be referred to as aids in interpretation.

12. From the decisions of various courts referred to above it is clear that where the language of statute is clear, the notes on clauses and memorandum explaining the statutory provisions cannot he resorted to interpret the statutory provisions the language used in explanation to section 73 is plain, clear and unambiguous. Therefore, the memorandum explaining the provisions of amendment cannot be resorted to for the purpose of interpretation. As discussed above the explanatory notes are not circulars issued under section 119(2)(b) of the Act and. therefore, the decision relied upon by the Ld. Counsel for the assessee are distinguishable on facts The decision relied by the assessee in the case of vegetable products (supra) is also not applicable as there is no split of opinion on the applicability of the notes and clauses and memorandum explaining the statutory provisions. Rather Hon’ble Supreme Court as discussed above in the case of K.P. Varghese has held that explanatory notes cannot be used for interpreting the provisions of law. In view of above discussions, in our considered opinion. Ld. CIT(A) was not justified in deleting the addition on the basis of Explanatory Notes, therefore. The income from trading of shares as observed above will be speculative business within the meaning of provision of explanation of section 73 of the Act. We, therefore, set the order of the CIT (A) and restore the order of the A.O.


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