1996 (8) TMI 149 - AT - Income Tax

Assessing Officer Assessment Year Banking Company Business Income Capital Loss Purchase And Sale Speculation Business Speculation Loss

Issues Involved:
1. Applicability of Section 73 of the Income-tax Act, 1961 to the loss incurred on the sale of units of Unit Trust of India (UTI).
2. Distinction between units of UTI and shares of a company.
3. Whether the assessee-company's transaction in units constitutes a speculation business.
4. Legality of the Commissioner's invocation of Section 263 of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Applicability of Section 73 of the Income-tax Act, 1961:

The primary issue revolves around whether the loss of Rs. 61,60,000 incurred by the assessee on the sale of units of UTI should be treated as a speculation loss under Section 73 of the Income-tax Act, 1961. The Commissioner of Income Tax (CIT) invoked Section 263, arguing that the loss was speculative and could not be set off against other business income. The assessee contended that Section 73 does not apply to transactions involving units of UTI, as units are distinct from shares. The CIT's position was based on the premise that units and shares should be treated similarly for tax purposes. However, the Tribunal disagreed, stating that the legal fiction created by Section 32(3) of the UTI Act, 1963, does not extend to treating units as shares under Section 73 of the Income-tax Act.

2. Distinction Between Units of UTI and Shares of a Company:

The Tribunal examined the nature of units of UTI and shares of a company, noting several distinguishing features. Units are issued under the UTI Act, 1963, whereas shares are governed by the Companies Act, 1956. Units can be repurchased by UTI, while shares cannot be repurchased by the issuing company without following specific procedures. The Tribunal emphasized that units and shares are not interchangeable for the purposes of the Income-tax Act, as supported by various statutory provisions and circulars from the Company Law Board and the Central Board of Direct Taxes (CBDT).

3. Whether the Assessee-Company's Transaction in Units Constitutes a Speculation Business:

The Tribunal considered whether the assessee's transactions in units of UTI constituted a speculation business. The assessee argued that the transactions involved actual delivery of units, and thus, could not be classified as speculative under Section 43(5) of the Income-tax Act. The Tribunal noted that there was no evidence to contradict the assessee's claim of actual delivery. Furthermore, the Tribunal highlighted that the assessee-company was not engaged in the business of dealing in shares or units, but had made an investment in units, distinguishing it from a speculation business.

4. Legality of the Commissioner's Invocation of Section 263 of the Income-tax Act, 1961:

The Tribunal scrutinized the legality of the CIT's invocation of Section 263, which allows for revision of orders that are erroneous and prejudicial to the interests of revenue. The Tribunal found that the CIT's order was based on an incorrect interpretation of the law, particularly the applicability of Section 73 to units of UTI. The Tribunal concluded that the original assessment order dated 18-3-1993, which allowed the loss as a short-term capital loss, was not erroneous and did not cause prejudice to the revenue. Consequently, the Tribunal vacated the CIT's order and allowed the assessee's appeal.

Conclusion:

The Tribunal held that the Explanation to Section 73 of the Income-tax Act, 1961, was erroneously invoked by the Commissioner. The loss incurred on the sale of units of UTI was not speculative and could be set off against the business income. The original assessment order was upheld, and the assessee's appeal was allowed.

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