2019 (2) TMI 454 - HC - Income Tax

Avoidance of tax by certain transactions in securities - Scope of section 94 - interest income - Claim of exemption u/s 10(15) - loss on sale and re-purchase of units of the Unit Trust of India - assessee being not an owner of the shares - assessee did not have a business wholly or partly in securities. Held that - Sub-sections (1) and (4) of Section 94 are interlinked. We are of the opinion that the enquiry should commence from sub-section (1); where the owner of securities attempts to sell and repurchase, so that the interest income is not taxed in his hands. In that circumstances, the person to whom the securities are sold and then repurchased from; who actually earns the interest income and is liable to income-tax, but however is absolved from it by reason only of sub-section (1); would not in his assessment be entitled to claim for any loss that occurred in the transaction. Section 94 at one stroke discourages both the owner of securities, who sells and the purchaser from entering into a transaction, ostensibly to be one for avoidance of tax on the interest income. Pertinently, it is to be seen that sub-section (4) does not speak of an exemption under Section 10(15), but speaks of the interest income received by the person, who buys and re-sells the securities, not having the liability to income tax by reason only of sub-section (1), the deeming provision, which mulcts the liability of income tax on such interest income, on the owner of the securities, who sold it and then repurchased it. The loss claimed by the assessee on the sale of securities shall be allowed without any dis-allowance made under sub-section (4) of Section 94. Decided in favor of assessee and against the revenue.

Summary

Issues: Interpretation of Section 94 of the Income Tax Act, 1961 regarding the applicability of sub-sections (1) and (4) in transactions involving securities.

Analysis:
1. The judgment involves appeals connected by questions of law raised concerning the interpretation of Section 94 of the Income Tax Act, 1961. The primary issue revolves around the applicability of sub-sections (1) and (4) of Section 94 in transactions involving securities by an assessee for the year 1991-92.

2. The first question of law raised was whether the Tribunal was correct in not applying Section 94(4) to specific transactions of the assessee, resulting in a loss not considered for computation of profits and gains. The second issue questioned whether the assessee could be deemed as having a business in dealing with securities, considering the treatment of loss on the sale of securities as capital loss in an earlier year.

3. The transactions in question involved the purchase and sale of units, where the Assessing Officer invoked Section 94 due to a claimed loss of ?2,14,65,000 on the purchase and sale of units in the same year. The Tribunal reversed the disallowance under Section 94(4) based on the assessee not being an owner of the shares and not having a business in securities.

4. The interpretation of Section 94(1) and (4) was crucial in determining the liability of the assessee in the transactions. Sub-section (4) applies to persons dealing in securities, and the judgment emphasized the interconnection between sub-sections (1) and (4) to prevent tax avoidance through transactions in securities.

5. The court highlighted that sub-section (4) does not consider exemptions like Section 10(15) but focuses on interest income received by a person not deemed as income due to sub-section (1). The judgment clarified that the deeming provision under sub-section (1) shifts the tax liability to the seller-repurchaser in such transactions.

6. The court concluded that in the present case, no deeming fiction applied to the interest income exempted under Section 10(15), leading to a ruling in favor of the assessee. The judgment also addressed ancillary grounds related to the prospective application of sub-section (7) of Section 94, following previous Supreme Court rulings.

7. Ultimately, the Tribunal's decision to allow the assessee's claim on the sale of securities without disallowance under Section 94(4) was upheld, leading to the rejection of one appeal by the Revenue and the allowance of the other appeal by the assessee.

Conclusion:
The judgment provides a detailed analysis of the interpretation of Section 94 of the Income Tax Act, 1961, particularly focusing on the application of sub-sections (1) and (4) in transactions involving securities. It clarifies the tax implications and liability of parties engaging in such transactions, emphasizing the prevention of tax avoidance practices.