2012 (11) TMI 719 - HC - Income Tax

Business loss or capital loss - Loss arising on redemption of units as business loss - held that - Going by the decision of the Apex Court in G.Venkataswami Naidu & Co. V. Commissioner of Income-Tax 1958 (11) TMI 5 - SUPREME COURT that ultimately the intention and the circumstances alone have to have a bearing on the question as to whether the transaction is only of investment or in the nature of trade, since the question as to whether the income earned as an income from investment or an income arising from a nature of adventure in the nature of trade has to rest on a finding of fact, particularly with reference to the intention of the party herein and the surrounding circumstances, in the absence of any such finding of the Tribunal, matter remanded back to tribunal.

Issues Involved:
1. Nature of the transaction: Whether the loss arising on redemption of units should be treated as business loss or capital loss.
2. Assessment of the transaction's intent: Whether the transaction was a colourable one aimed at tax avoidance.
3. Tribunal's application of precedent: Whether the Tribunal correctly applied the decision of the Special Bench of the Mumbai Tribunal in Wallfort Shares & Stock Brokers Ltd. v. ITO.

Issue-wise Detailed Analysis:

1. Nature of the Transaction:
The main issue was whether the assessee, who is not in the business of buying and selling stocks and shares, is entitled to claim the loss arising on redemption of units as a business loss. The assessee engaged in various businesses, including film production, real estate development, and dealing in properties, purchased Blue Chip Fund Units for Rs.7.00 crores and sold them for Rs.5,62,276,853/-, incurring a loss of Rs.1,30,57,575/-. The assessee claimed this loss as a business loss to be set off against other business income.

The Assessing Officer argued that the assessee had not indulged in buying and selling shares in the previous year and that the transaction was a solitary investment in mutual funds, thus not an adventure in the nature of trade. The Commissioner of Income Tax (Appeals) upheld this view, stating that the transaction was structured to avoid tax liability, referencing the decision in Mc Dowell & Co. Ltd. v. CIT.

2. Assessment of the Transaction's Intent:
The Assessing Officer and the Commissioner of Income Tax (Appeals) viewed the transaction as a colourable device aimed at tax avoidance. They pointed out that the assessee's intention was not to earn profit but to adopt a mechanism to set off its income from other trade activities. The Commissioner of Income Tax (Appeals) highlighted that the assessee had followed the same modus operandi in the subsequent year, resulting in a capital loss, and had claimed deduction under Section 80M of the Income Tax Act on the dividend income.

The Tribunal, however, without delving into the facts, followed the decision of the Special Bench of the Mumbai Tribunal in Wallfort Shares & Stock Brokers Ltd. v. ITO and set aside the assessment, allowing the assessee's appeal.

3. Tribunal's Application of Precedent:
The Revenue contended that the Tribunal had not rendered any finding on the nature of the transaction but merely applied the decision of the Mumbai Tribunal, which was subsequently considered by the Supreme Court in Commissioner of Income-Tax v. Walfort Share and Stock Brokers P. Ltd. The Supreme Court's decision should be viewed based on the facts stated therein, and the transaction in question, held for just six days and sold at a loss, indicated a colourable transaction.

The High Court referred to various judgments, including Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd., G. Venkataswami Naidu & Co. v. Commissioner of Income-Tax, Commissioner of Income-Tax, West Bengal-II, Calcutta v. Central Kurkhend Coal Co. Ltd., and Commissioner of Income-tax v. Malabar Building Products Ltd., to determine whether the transaction was an adventure in the nature of trade or an investment. The Court emphasized that the intention and circumstances surrounding the transaction are crucial in determining its nature.

Conclusion:
The High Court concluded that the Tribunal had not made a proper inquiry into the facts to determine whether the investments in mutual funds were in the course of business or an adventure in the nature of trade. Therefore, the Court set aside the Tribunal's order and remanded the matter back for de novo consideration. The Court also referred to the CBDT's instruction that disallowance of claims on the ground of tax avoidance should be considered only after in-depth investigation and proper recording of relevant facts.

The Tax Case was disposed of with no costs, and the matter was remanded to the Tribunal for proper inquiry to determine whether the assessee is entitled to claim the business loss to be set off against other business income.

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