2016 (9) TMI 214 - HC - Income Tax

Speculation business - Getting the shares by allotment on application in Public Issue is purchase within the meaning of the word purchase under Explanation to Section 73 - Tribunal held that the sale of such shares becomes the speculation business under the said Explanation - Held that - Allotment of shares by way of application in Public Issue has been held in Khoday Distilleries Ltd. Versus Commissioner of Income Tax and Anr. 2008 (11) TMI 16 - SUPREME COURT under the Gift Tax Act which is a direct tax not amounting to be a transaction. Thus, the Apex Court has held that the same shall not amount to be purchase. The Tribunal has wrongly relied upon the decision of the Apex Court in the case of T.N. Arvinda Reddy (1979 (10) TMI 1 - SUPREME Court) which has nothing to do with the point at issue. As held in the decision in the case of Khoday Distilleries (supra) there is a vital difference between creation and transfer of shares. As stated hereinabove, the words allotment of shares have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. We are of the view that whichever rule of interpretation is followed, whether literal or object wise or purposive, the transactions of the assessee cannot imaginably be deemed to be a speculative business. Therefore the first question is answered in favour of assessee and against the revenue. When we have come to the conclusion that the allotment of shares cannot be termed as purchase, then the assessee cannot be said to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Thus it shall not be covered under Explanation to Section 73 and therefore the second question is also answered in favour of assessee.

Summary

Issues Involved:

1. Whether getting shares by allotment on application in a Public Issue constitutes a 'purchase' under Explanation to Section 73 of the Income Tax Act.
2. Whether the sale of such shares is considered a speculation business under the said Explanation.
3. Whether the Appellate Tribunal was right in reversing the order of the CIT(A) and canceling the penalty levied under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Definition of 'Purchase' under Explanation to Section 73:

The primary issue was whether the allotment of shares in a Public Issue constitutes a 'purchase' under Explanation to Section 73 of the Income Tax Act. The assessee argued that the allotment of shares in a Public Issue does not amount to a purchase, relying on the decision in Shri Gopal Jalan and Co. vs. Calcutta Stock Exchange Association Ltd., which stated that the word 'purchase' cannot be applied to the legal transaction of becoming a shareholder through application and allotment. The court examined the Tribunal's interpretation and found that the Tribunal erred in holding that allotment of shares is equivalent to purchase. The court referred to the Supreme Court's decision in Khoday Distilleries Ltd. vs. Commissioner of Income Tax, which differentiated between 'creation' and 'transfer' of shares, concluding that allotment does not constitute a purchase.

2. Speculation Business under Explanation to Section 73:

The second issue was whether the sale of shares allotted in a Public Issue constitutes a speculation business. The Tribunal had held that such transactions are speculative under Explanation to Section 73, which deems purchase and sale of shares by certain companies as speculative activities. The court disagreed, ruling that since allotment of shares is not a purchase, the subsequent sale does not fall under speculation business. The court emphasized that the Explanation to Section 73 should not be applied to transactions that are not inherently speculative, thereby ruling in favor of the assessee.

3. Penalty under Section 271(1)(c):

The final issue was whether the Tribunal was correct in canceling the penalty levied under Section 271(1)(c) for concealment of income. The Tribunal had deleted the penalty, observing that the issue was debatable and not a clear case of concealment. The court upheld the Tribunal's decision, agreeing that the matter was subject to interpretation and thus, did not warrant a penalty for concealment. The court noted that the Special Bench's involvement indicated the complexity and debatable nature of the issue.

Conclusion:

The court concluded that the allotment of shares in a Public Issue does not constitute a purchase under Explanation to Section 73, and thus, the sale of such shares does not amount to speculation business. Consequently, the penalty under Section 271(1)(c) was not applicable. The judgment in ITA No. 2358/Ahd/2004 was quashed, and the judgment in ITA No. 388/Ahd/2007 was confirmed. Tax Appeal No. 957 of 2006 was allowed, and Tax Appeal No. 1644 of 2008 was dismissed.