2012 (9) TMI 755 - HC - Income Tax

Whether loss arising from purchase and sale of units is not allowable as the transaction is a colourable device to avoid tax despite the fact that the actual purchase and sale has taken place and the assessee has actually incurred the loss - Assessee had purchased units of the UTI from Bank of America Sold back the same units to Bank of America on very next day Assessee receive dividend and incurred a STCL, set off with LTCG and carried forward the balance STCL AO point was that the units sold by them on 31.5.1991 were in the name of the assessee - Bank had purchased these units from the assessee earlier in two lots in 1990 s remained in the name the assessee UTI confirmed that the transfers were registered in the name of the assessee from 31.5.1990 till 14.5.1994 and assessee received dividends till 1994 - Held that - As the revenue does not dispute that the transactions in fact had taken place between the assessee and the Bank of America. Revenue s only point is that there was no registration of the units in the actual holder s name. If the Revenue had questioned the transaction as not legal, and not based on the amendment to Section 94, which came into existence only with effect from 1.4.2002, then Section 94 would not have come into play in considering the merits of the claim. Thus, on principle, when the Revenue had accepted the transfer, the sole ground on which the transaction was held to be a colourable one could not be sustained. Appeal decides in favour of assessee

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the loss arising from the purchase and sale of units is not allowable as the transaction is a colourable device to avoid tax.
2. Whether the Tribunal was right in restoring the order of the Assessing Officer, without appreciating that the assessing officer invoked the provisions of Section 94, which is not applicable to the facts of this case.

Detailed Analysis:

Issue 1: Colourable Device to Avoid Tax
The Tribunal held that the loss from the purchase and sale of units was not allowable as the transaction was a colourable device to avoid tax. The assessee purchased units from the Bank of America on 31.5.1991 and sold them back on 1.6.1991, incurring a loss of Rs. 1,60,65,000/-. The assessee received dividends amounting to Rs. 1,65,75,000/- and sought to set off the loss against capital gains. The Tribunal concluded that the transaction was entered into solely to gain a deduction under Section 80M and was thus a colourable device, referencing the Supreme Court's decision in McDowell & Co., which disallows tax avoidance through artificial transactions.

Issue 2: Applicability of Section 94
The Tribunal restored the order of the Assessing Officer, who invoked Section 94(4) to ignore the loss and compute taxable income without allowing the set-off. The Commissioner of Income Tax (Appeals) had previously held that Section 94 was not applicable, as units of the Unit Trust of India were not considered securities under the provision at the time. The High Court agreed with this view, noting that the definition of securities in Section 94 was amended to include units only from 1.4.2002, and thus the provision was not applicable to the assessment year 1992-93.

High Court's Conclusion:
The High Court held that the Tribunal's reasoning was flawed. The transaction was genuine, and the assessee was entitled to the deduction under Section 80M. The High Court referenced the Supreme Court's decision in Commissioner of Income Tax Vs. Walfort Share and Stock Brokers P. Ltd., which clarified that using beneficial provisions under the law does not constitute a colourable device. The High Court found no basis to apply Section 94 to the transaction, as the units were not considered securities at the relevant time. Consequently, the High Court set aside the Tribunal's order and allowed the assessee's appeal.