2019 (2) TMI 653 - HC - Income Tax

Loss occurred on the purchase and sale of the units - Applicability of Section 94(4) - Avoidance of tax by certain transactions in securities - Held that - No such deeming fiction applied on the interest income obtained by the assessee by reason only of which the interest receivable by him is exempted from taxation. The fact that Section 10(15) exempts such interest income is not relevant, insofar as sub-section (4) speaking only of the interest received by an assessee being deemed to be not his income by reason of the provisions under sub-section (1). In such circumstances, we answer the first question of law framed in favour of the assessee and against the Revenue. We notice that the Tribunal has also considered the second issue of the assessee s purchase of securities being capital investment made, with which we do not think we have to deal with as we have found on the other issue that the assessee cannot be mulcted with the liability by adding back the loss claimed. There is also an ancillary ground raised on the application of sub-section (7) of Section 94, which is held in favour of the assessee and against the Revenue holding it to be prospective in application from 01.04.2002. The Hon ble Supreme Court in CIT v. Walfort Share and Stock Brokers Private Limited 2010 (7) TMI 15 - SUPREME COURT has upheld the judgment relied on by the Tribunal. 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.

Summary

Issues involved:
Interpretation of Section 94 - Applicability of sub-sections (1) and (4) - Claimed loss on purchase and sale of securities - Exemption under Section 10(15) - Disallowance by Assessing Officer - Tribunal's decision - Enhancement of tax payable - Application of sub-section (7) of Section 94.

Detailed Analysis:

1. Applicability of Section 94 and Claimed Loss:
The case involved transactions of purchasing and selling units of the Unit Trust of India, leading to a claimed loss by the assessee. The Assessing Officer invoked Section 94, disallowing the loss, which was upheld by the First Appellate Authority. However, the Tribunal reversed the disallowance, stating that sub-section (4) of Section 94 did not apply to the assessee as they were not the owner of the shares and did not have a business dealing in securities. The issue revolved around the interpretation of Section 94, specifically sub-sections (1) and (4), which are interconnected.

2. Interpretation of Sub-sections (1) and (4) of Section 94:
Sub-section (1) of Section 94 addresses the avoidance of tax in transactions involving securities and the liability of interest income. On the other hand, sub-section (4) deals with persons carrying on a business in securities and the computation of profits and losses. The Tribunal found that the assessee did not fall under sub-section (1) as they did not sell and repurchase the securities, thus absolving them from the applicability of sub-section (4). The judgment emphasized that sub-sections (1) and (4) are interlinked, aiming to discourage transactions for tax avoidance purposes.

3. Exemption under Section 10(15) and Tribunal's Decision:
The Tribunal concluded that there was no deeming fiction applied to the interest income received by the assessee under Section 10(15), making the interest exempt from taxation. As a result, the Tribunal ruled in favor of the assessee, disallowing the loss claimed on the sale of securities. The judgment clarified that sub-section (4) did not address the exemption under Section 10(15) but focused on interest income received by a person not deemed as their income under sub-section (1).

4. Enhancement of Tax Payable and Application of Section 94(7):
An ancillary issue raised was the application of sub-section (7) of Section 94, which the Tribunal held in favor of the assessee, applying it prospectively from 01.04.2002. The judgment referenced a Supreme Court decision supporting the Tribunal's interpretation. Consequently, the Tribunal upheld its decision disallowing the loss claimed by the assessee on the sale of securities, rejecting the appeal by the Revenue and allowing the appeal by the assessee.

In conclusion, the High Court of Kerala upheld the Tribunal's decision, rejecting the Revenue's appeal and allowing the assessee's appeal regarding the claimed loss on the sale of securities. The judgment provided a detailed analysis of the interpretation of Section 94, specifically sub-sections (1) and (4), emphasizing the interconnected nature of these provisions in addressing tax avoidance in securities transactions.