2015 (1) TMI 567 - HC - Income Tax

Speculative transaction - transactions entered into by the appellant in respect of ACC shares and the loss of ₹ 14.82 lacs incurred - adverse price fluctuation - Scope of section 43(5) - Held that - The undisputed facts in this case, contain ingredients of hedging. The result of those transactions, however, was gain in the holding of shares by the assessee by incurring loss of the said sum of ₹ 14.82 lacs, the value of increase in the holding of the appellant in the shares in that period. Therefore, when ultimately the appellant sold those shares at an even greater value, it was denied the windfall profit it would have made if it had not hedged at all. For the reasons aforesaid we answer the questions in the negative. - Decided in favour of assessee. Treatment of dividend stripping transactions as sham or bogus - Share transaction of the assessee in respect of UTI Master Share Units - Held that - the appellant incurred a loss of ₹ 68,900/- and was in receipt of dividend income of ₹ 1,26,000/- as claimed by it or as held by the Tribunal, it made a profit of ₹ 56,000/- and the dividend amount and consequently deduction under Section 80M and credit for tax deducted at source has to be excluded from the appellant's assessment - Held that - Though the contract was entered into, it was not specifically performed. There was an alteration made thereto in as much as the assessee obtained the dividends and then sold the shares at the reduced price to its buyer. Alteration of contract is permissible in law. The Hon'ble Supreme Court in Walfort Share and Stock Brokers's case 2010 (7) TMI 15 - SUPREME COURT had made the position clear regarding dividend stripping by owners of shares in the period prior to 1st April, 2002, while this court had clearly held until change by registration is effected in the books of the company, the transferor continues to be the holder of the shares. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 43(5) of the Income Tax Act, 1961 regarding transactions involving ACC shares.
2. Treatment of Unit Trust Master share transaction for assessment under Section 80M and tax deduction.

Issue 1:
The first issue in the judgment pertains to the interpretation of Section 43(5) of the Income Tax Act, 1961 regarding transactions involving ACC shares. The appellant argued that the transactions in question were hedging transactions and fell outside the purview of speculative transactions. The appellant's counsel emphasized that the transactions were entered into to guard against loss in holdings of stocks and shares through price fluctuations. The counsel cited relevant legal precedents to support the argument, highlighting that hedging transactions are excepted from speculative transactions. The appellant incurred a loss due to the rising market price of ACC shares, and it was contended that the transactions were not speculative as they were entered into for hedging purposes. The High Court agreed with the appellant, noting that the transactions contained elements of hedging, and the loss incurred was due to the increase in the value of shares, denying the appellant a windfall profit. The court ruled in favor of the appellant on this issue.

Issue 2:
The second issue in the judgment involved the treatment of Unit Trust Master share transactions for assessment under Section 80M and tax deduction. The appellant purchased Unit Trust of India Master shares and subsequently entered into a contract to sell them. The appellant claimed a deduction for dividends received and showed a loss in the share transactions. The appellant's counsel relied on legal precedents to argue that losses over and above the dividend received should be allowed, indicating that Parliament has not treated such transactions as fictitious. The respondent contended that there was a contract that would have yielded a profit if not for the dividend stripping. The High Court analyzed the facts and legal principles, concluding that until a change in registration is effected, the transferor remains the holder of the shares. The court ruled in favor of the appellant on both parts of this issue, allowing the appeal.

In conclusion, the High Court judgment addressed the interpretation of Section 43(5) in the context of ACC share transactions and the treatment of Unit Trust Master share transactions for assessment and tax deduction, ruling in favor of the appellant on both issues.