SEN,J. - (1.) THE Tribunal has referred to this Court the following question of law under s. 256(1) of the IT Act, 1961 ('the Act'): "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Explanation to s. 73 of the IT Act, 1961 is not applicable when there was no purchase of shares by the assessee during the assessment year under consideration ?"
(2.) THE assessment year involved is 1978-79 for which the relevant period of account is the year ended on 3rd June, 1977. The facts found by the Tribunal are as under : "The assessee is a limited company. The assessment year involved in the case is 1978-79. The company during the relevant assessment year was engaged in dealing in paper, coal, chemicals, etc., and it was also engaged in coal handing. In the assessment for the assessment year under reference, the ITO made an addition of Rs. 1,20,632 with the following observation : Loss on share dealing to be considered later vide Explanation to s. 73 of the IT Act, 1961 as speculation loss : . Rs. Rs. Opening Stock 8,84,787 Less : . . Sales 60,339 . Against the above addition, the assessee filed an appeal before the CIT(A), The CIT(A) sustained the ITO's action on the point."
(3.) THE CIT(A) observed as follows : "The appellant deals in paper, coal, chemicals, etc. and is also engaged in business of coal handling. Besides it also deals in shares, debentures, etc. The major source of income during this year was no doubt from trading in coal, paper and from coal handling charges. During that year only 8 bonus shares of Hindusthan Sanitary Ltd. were sold an 500 debentures of Paresh Kothi Ltd. were redeemed. Otherwise there were no transactions in shares or debentures during the year under consideration. The loss in share dealings account as computed by the ITO exclusive of apportionment of Rs. 70,000, as mentioned earlier, mainly arose out of adjustment in the value of closing stock of shares. Explanation to s. 73(4) was added by Taxation Law (Amendment) Act, 1973 w.e.f. 1st April, 1977. Under Explanation where any part of the business of a company (other than an investment company or a banking or a financing company) consists in the purchase and sale of shares, such company for the purpose 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 shares. There is no doubt that the fiction embodied in the Explanation is only 'for the purpose of this section' that is, where losses are incurred in shares and are sought to be set off against other income. The ITO has worked out the loss at Rs. 1,20,632 exclusive of apportionment to the extent of Rs. 70,000 out of administrative expenses and interest charged to profits and loss account which is reproduced below : The fact that during the year there was sale of only 8 bonus shares in addition to redemption of 500 debentures and that there was no loss on either account does not make any difference to the position that there was loss in share account, as computed correctly by the ITO. The closing stock of shares was valued by the appellant at cost or market value, whichever is lower, whereas debentures were valued at cost. The loss, as correctly computed by the ITO at Rs. 1,20,632 arose mainly due to method of valuation of closing stock of shares adopted by the appellant-company. It is not the magnitude of transaction in shares which should decide as to whether the appellant is engaged in purchase or sale of shares. Besides, Explanation to s. 73(4) makes it clear that where any part of the business of a company consists in the purchase or sale of shares such company shall, for the purpose of s. 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of shares. It is also not necessary that there Closing stock 7,03,816 . . 7,64,155 . 1,20,632 . Rs. Rs. Opening Stock 8,84,787 Less : . Sales : 60,339 . Closing Stock 7,03,816 . 7,64,155 . Loss 1,20,632 should be both purchase and sale of shares in a particular year. Even though there was no purchase of shares during the year, there was certainly sale of shares, may be bonus shares. The loss having arisen as a result of share dealings part takes the character of speculation loss by virtue of Expln. 73(4). The Tribunal in further appeal held as follows : "In our opinion CIT(A) came to a wrong conclusion because he misread the Explanation to s. 73. In order to attract the Explanation it is necessary that there must be 'purchase and sale of shares'. As embodied in the Explanation, the CIT(A) was wrong in his assumption that in order to attract the Explanation the business of the company is to consist either in the purchase or sale of shares. When Explanation uses the words purchase and sale of shares instead of the words 'purchase or sale of shares' we do not think that the CIT(A) was at liberty to change the word 'and' to 'or'. He himself held that there was no purchase of shares during the year under examination. As such one of the conditions required under the Explanation was lacking in the instant case and as such the Explanation could not be used against the assessee-company. It is not the case of the Department that without the help of the Explanation the assessee-company can be said to be carrying on a speculation business. As such we are of the opinion that s. 73 could not be used to deny the deduction of the loss to the assessee-company. So, we are of the opinion that the disallowances could not have been made. As such, we allow this appeal and delete the said disallowance of Rs. 1,20,632". Sec. 73 of the Act deals with loss in speculation business. It provides as follows : "73. Losses in speculation business.--(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." ;