2011 (3) TMI 21 - HC - Income Tax

Disallowance of loss On account of purchase and resale of UTI units - The assessee incurred a loss of Rs. 63,84,000/- which is the subject matter of dispute - The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends - In the case of Union of India Vs. Azadi Bachao Andolan (2003 -TMI - 6130), that a citizen is free to carry on his business within the four corners of the law and that mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon Appeal is allowed

Issues Involved:
1. Justification of the Tribunal in upholding the findings of the Assessing Officer.
2. Whether the findings of the Tribunal were contrary to the materials on record or based on no material and thus perverse.
3. Applicability of the McDowell's case to the present transaction and whether it was misconstrued.

Issue-Wise Detailed Analysis:

1. Justification of the Tribunal in upholding the findings of the Assessing Officer:
The Tribunal upheld the findings of the Assessing Officer, who disallowed the loss incurred by the assessee in the purchase and sale of UTI units. The Assessing Officer concluded that the loss was pre-determined and not genuine, as the assessee had entered into an irrevocable commitment to sell the units back at a lower price even before the purchase transaction materialized. The Tribunal agreed with this view, asserting that the transaction was a sham and collusive.

2. Whether the findings of the Tribunal were contrary to the materials on record or based on no material and thus perverse:
The Tribunal's findings were challenged on the grounds that they were contrary to the materials on record and based on no substantial evidence. The assessee argued that the loss was real and substantiated by the purchase and sale transactions, interest paid on loans, brokerage, and stamp duty. The Tribunal, however, did not accept the assessee's explanation, maintaining that the loss was pre-determined and the transaction was a colourable device to reduce tax liability.

3. Applicability of the McDowell's case to the present transaction and whether it was misconstrued:
The Tribunal applied the ratio of the McDowell's case, concluding that the transaction was solely for reducing the assessee's tax liability. However, the assessee contended that this application was based on a misconstruction of the McDowell's decision. The Supreme Court in Commissioner of Income-tax vs. Walfort Share And Stock Brokers P. Ltd. clarified that even if a transaction is pre-planned, it does not impeach its genuineness if it is within the legal framework. The Supreme Court also emphasized that mere tax planning, without any motive to evade taxes through colourable devices, is permissible.

Judgment:
The High Court, after considering the Supreme Court's decision in Walfort Share And Stock Brokers, found that the assessee's transaction, even if pre-planned, was genuine and within the legal framework. The Court noted that the dividend received was tax-free under Section 10(33) of the Income-Tax Act and that the transaction could not be considered an abuse of the law. Consequently, the Court set aside the order of the Tribunal, holding that the assessee was entitled to claim the loss on the transaction. The Assessing Officer was directed to treat the loss arising from the transaction and grant the benefit of exemption as recognized by the Supreme Court.

Conclusion:
The appeal was allowed, and the assessee's claim for the loss was upheld. The findings of the Tribunal were overturned, and the transaction was recognized as genuine and within the legal provisions.

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