2010 (9) TMI 846 - HC - Income Tax

Speculative business - whether the Tribunal was justified in allowing business loss claimed by the assessee on purchase and sale of units of the Unit Trust of India? assessee is a plantation company engaged essentially in production and sale of tea. Held that - the assessee purchased 15 lakh units in May 1990, i.e., shortly before declaration of the dividend and the sale is immediately after declaration of dividend and both the transactions are with one company which gave loan for the purchase of the units and also repurchased the same units as stated above. The speculation involved is obvious i.e., the possibility of getting more in tax saving combined with the dividend likely to be received over the loss suffered and expenditure incurred by way of interest and charges paid to the broker. Therefore, in our view, the transaction of purchase and sale of units when done as a business in a speculative manner, the loss therefrom could be set off only against profit arising in speculation business in terms of section 73(1) of the Act. Assessee in fact claimed set off of loss from speculation business against income from tea plantation which in our view, is not admissible by virtue of the prohibition contained in section 73(1) of the Act following the judgment of the Supreme Court in Apollo Tyres Ltd. s case (2002 (5) TMI 5 - SUPREME Court) we dismiss the departmental appeal.

Summary

Issues:
1. Allowance of business loss claimed on purchase and sale of units of Unit Trust of India.
2. Assessment of interest accrued to the assessee in respect of a loan advanced to another company.

Issue 1: Allowance of Business Loss on Purchase and Sale of Units of Unit Trust of India

The Revenue filed an Income-tax Appeal questioning the Tribunal's decision to allow the business loss claimed by the assessee on the purchase and sale of units of Unit Trust of India. The Tribunal found that the other company to which the assessee advanced the loan had become a sick industry unable to pay interest to the assessee. The Tribunal upheld the first appellate authority's decision to disallow the department's claim for interest accrued. However, the primary question was whether the Tribunal was justified in allowing the business loss. The assessee engaged in a transaction involving the purchase and sale of units to offset tax liability, resulting in a loss. The Assessing Officer considered it as "speculation business," disallowing the set-off against business profits. The CIT (Appeals) disagreed, allowing the set-off based on the nature of the transaction. The Tribunal upheld this decision, citing precedents. The Department contended that the transaction constituted speculation business, despite the legal interpretation that it did not fall under the definition of shares. The Court acknowledged the lack of a specific definition of speculation business in the Act but concluded that the transaction, conducted in a speculative manner, should be treated as speculation business. Despite the Court's view in favor of the Revenue, it was bound by the Supreme Court's decision in a similar case, leading to the dismissal of the departmental appeal.

Issue 2: Assessment of Interest Accrued on Loan Advanced to Another Company

The second issue involved the assessment of interest accrued to the assessee in connection with a loan advanced to another company. The Tribunal found that the borrower company had become unable to pay interest to the assessee, leading to the disallowance of the department's claim. The Tribunal confirmed that if interest became payable or was received by the assessee, it would be assessable in the relevant year. Despite the Department's appeal, the Court upheld the Tribunal's decision, dismissing the claim for interest accrued.

In summary, the judgment addressed two main issues: the allowance of business loss on the purchase and sale of units of Unit Trust of India and the assessment of interest accrued on a loan advanced to another company. The Court upheld the Tribunal's decision to allow the business loss set-off, following legal interpretations and precedents. Additionally, the Court confirmed the disallowance of the department's claim for interest accrued, based on the borrower company's inability to pay. Despite expressing a view in favor of the Revenue regarding speculation business, the Court was bound by the Supreme Court's decision in a similar case, leading to the dismissal of the departmental appeal.