Suhas Chandra Sen, J. - (1.) The Tribunal has referred the following questions of law to this court under Section 256(1) of the Income-tax Act, 1961 : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law holding that even if it is admitted that this was a speculative transaction, this cannot be taken as speculative business within the meaning of Explanation 2, Section 28 of the Income-tax Act, 1961? (2) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that, in the instant case, as there was one isolated transaction, the finding of the Tribunal that it was a loss in business and not in speculative business was correct and it is in that view holding that the Appellate Assistant Commissioner was justified in allowing the loss in such transaction ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the loss of Rs. 91,000 (rupees ninety one thousand) arising from speculative transaction in purchase and also sale of shares should be allowed to be set off against the other income ? (4) Whether, the finding of the Tribunal that the instant case is a case of damages paid for breach of contract is vitiated in law being based on partly relevant material or being based on no evidence or being based on evidence contradictory and/or being inconsistent with the evidence on record or whether such finding is otherwise unreasonable and perverse ?"
(2.) The assessee is a Hindu undivided family. The assessment year involved is 1974-75 for which the accounting year ended on March 31, 1974. The claim of the assessee is that he carried on a business in purchase and sale of shares and securities under the name of Bikram Traders. The assessee made a declaration on March 30, 1972, that he had converted his investments in shares into stock-in-trade. During the previous year, the assessee had purchased 10,000 shares of Orient Paper Mills Ltd. at the rate of Rs. 38.30 per share from M/s. Kothari & Co., share brokers. The delivery of shares was taken by making a payment of Rs. 3,83,000 on August 22, 1973. On August 22, 1973, the assessee entered into a contract for sale of those shares at the rate of Rs. 39.30 per share. The shares were, however, not delivered to the share brokers. On September 20, 1973, the assessee entered into another contract with the same share broker for the purchase of the same number of shares at the rate of Rs. 48.40 per share. There was no delivery of shares in this transaction also. The assessee paid the difference in price of Rs. 91,000 to the share broker. Ultimately, on October 17, 1973, the assessee entered into another contract for sale of 10,000 shares to the same share broker at Rs. 45.80 per share. The shares were actually delivered on that very date. The assessee claimed to have made a profit of Rs. 75,839 in the process of sale after deducting the transfer charges. The sale and repurchase effected on August 27, 1973, had resulted in a loss of Rs. 91,000. The assessee claimed this loss as business loss and wanted to adjust this loss against the profit of Rs. 75,839. The case made out before the Income-tax Officer and also the Appellate Assistant Commissioner was that the sale and purchase of the shares without delivery made on August 22, 1973, and September 20, 1973, respectively, were done by way of hedging loss. This assertion was negatived by the Income-tax Officer by holding that the sale was effected just one month before the declaration of the dividend and the repurchase was effected just nine days before the annual general meeting of the company where dividends were declared. At this time, the share prices were expected to be at the highest. The assessee, by virtue of his close association with the company, could not have been unaware of these facts. Therefore, the sale and repurchase of the shares were done not to guard against a falling market but at a time when the prices were going up higher and higher. It had also been stated on behalf of the assessee before the Income-tax Officer that the reasons for non-delivery of the shares after having sold them on August 22, 1973, was that the share scrips had been sent to the company for registration after purchase. The shares were received back on October 17, 1973, on which date the ultimate sale and delivery had taken place. The Income-tax Officer has pointed out that this case is not consistent with the claim of hedging against loss made out on behalf of the assessee. The Income-tax Officer was of the view that the real intention behind the transaction was to derive income from dividend from the shares which were exempt from tax under Section 80K of the Income-tax Act. The Income tax Officer hold that the loss of Rs. 91,000 arose out of speculative transaction and did not qualify for adjustment against the other income of the assessee.
(3.) It was contended on behalf of the assessee before the Appellate Assistant Commissioner that it was a case of hedging and that the loss should be allowed as business loss. In the alternative, it was argued that, even if the transaction was treated as speculative being an isolated transaction, it would not be treated as "speculation business" within the meaning of Explanation 2 to Section 28.;