2010 (3) TMI 179 - HC - Income Tax

Speculative loss sale and purchase of units US-64 Section 94(7) - bonafide transactions evasion of tax - on 21.5.1990 the assessee-appellant had purchased 25 lacs units of US 64 of Unit Trust of India (UTI) at the then prevalent market rate of Rs. 15/- per unit, for a total consideration of Rs. 3,75,00,000/- from ANZ Grindlays Bank - On account of non-availability of surplus funds and cost of holding them on interest being un-profitable, the assessee-appellant sold the units on 21.7.1990 to ANZ Grindlays Bank, New Delhi, at the then prevailing market rate of Rs. 13.01 per unit, for a total consideration of Rs. 3,25,25,000/-, after deducting interest of Rs. 9,86,300/- at the rate of 16% on the total sale consideration of Rs. 3,75,00,000/- for a period of 60 days. - Accordingly, the assessee-appellant in its return of income for the Assessment Year 1991-92 claimed the loss as a short term capital loss and also claimed set-off against its income and offered dividend income of Rs. 45 lacs after the statutory deduction for tax. Held that Hon ble the Supreme Court in the matter of Apollo Tyres Ltd. 2008 -TMI - 6081 - SUPREME Court specifically rejected the contention of the revenue that Explanation to Section 73 of the Act, ( which makes the business of purchase and sale of shares as business of speculation) was applicable to the transaction of a sale and purchase of units. Sale and purchase of US-64 units not to be treated as speculative loss eligible for set off decided in favor of assessee. On the issue of tax planning versus tax evasion versus tax avoidence, held that once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable devise and consequently earn any disqualification. Hon ble the Supreme Court in the concluding paras of its judgment in Azadi Bachao Andolan (2008 -TMI - 6130 - SUPREME Court) has rejected the submission that an act, which is otherwise valid in law, cannot be treated as nonest merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per the perception of the revenue. The aforesaid view looks to be the correct view. - The argument of the learned counsel for the revenue respondent based on the judgment rendered in the case of McDowell & Co. Ltd. ( 2008 -TMI - 40038 - SUPREME Court) cannot be accepted because the judgment rendered by Hon ble Mr. Justice O. Chinnappa Reddy in McDowell s case has been explained in detail by the later judgment of Hon ble the Supreme Court in the case of Azadi Bachao Andolan (2008 -TMI - 6130 - SUPREME Court). It is well settled that if a smaller Bench of Hon ble the Supreme Court has lateron explained its earlier larger Bench then the later judgment is binding on the High Court

Summary

Issues Involved:
1. Whether the loss incurred on the purchase and sale of units called 'US-64' was speculative under Section 73 of the Income Tax Act.
2. Whether the transactions for purchase and sale of 'US-64' units were bona fide or entered into with a motive to avoid tax liability.

Detailed Analysis:

Issue 1: Speculative Loss under Section 73

The primary question was whether the loss of Rs. 51,61,875/- incurred by the assessee-appellant on the purchase and sale of 'US-64' units was speculative under Section 73 of the Income Tax Act and whether it could be set off against business income.

The Tribunal upheld the view that the transactions were speculative. However, the High Court referred to the Supreme Court's ruling in Apollo Tyres Ltd. v. Commissioner of Income Tax, [2002] 255 ITR 273, which clarified that units of UTI cannot be deemed as shares. The Supreme Court had specifically rejected the contention that Explanation to Section 73, which makes the business of purchase and sale of shares as speculation business, was applicable to the transaction of sale and purchase of units.

Thus, the High Court concluded that the Tribunal's view was erroneous. Question No. 1 was answered in favor of the assessee-appellant, holding that the loss incurred was not speculative and could be set off against business income.

Issue 2: Bona Fide Transactions and Tax Avoidance

The second issue was whether the transactions were bona fide or entered into with a motive to avoid tax liability. The Tribunal had found the transactions genuine but not bona fide, suspecting tax avoidance motives.

The High Court examined the principles laid down by the Supreme Court in McDowell & Co. Ltd. v. C.T.O., [1985] 154 ITR 148 and Union of India v. Azadi Bachao Andolan, [2003] 263 ITR 706. The latter judgment clarified that a genuine transaction aimed at tax avoidance does not automatically become a colorable device. The Court emphasized that as long as the transaction is within the legal framework, motives of tax avoidance do not render it invalid.

The High Court noted that the Tribunal had recognized the transactions as genuine and that the primary objective was to earn dividends, which were tax-free under Section 80-M of the Act. The subsequent sale at a loss, intended for set-off, was also within legal bounds.

The Court also referenced Section 94(7) of the Act, effective from 1.4.2002, which acknowledges and regulates such transactions. Consequently, Question No. 2 was answered in favor of the assessee-appellant, affirming that the transactions were bona fide and lawful.

Conclusion:
The High Court concluded that both issues were resolved in favor of the assessee-appellant. The loss incurred on the sale of 'US-64' units was not speculative and could be set off against business income. Additionally, the transactions were bona fide and within legal parameters, despite the tax avoidance motives. The appeal was allowed, and the Tribunal's findings were overturned.

Judgment:
The appeal succeeds, with both questions answered in favor of the assessee-appellant and against the revenue-respondent. The judgment was delivered by the bench comprising HON'BLE MR. JUSTICE M.M. KUMAR and HON'BLE MR. JUSTICE JITENDRA CHAUHAN.