9911796707
TMI Blog2012 (4) TMI 394X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of manufacturing of automobile tyre, tube, valves and accessories and hydraulic and pneumatic equipment. The Assessee claimed long term capital loss amounting to Rs. 6,34,72,767/-. The Assessee had acquired 53,43,485 units (including 4,56,891 bonus units) under the US 64 Scheme of Unit Trust of India (UTI) during the assessment years 1992-93 to 2001-02 at a total cost of Rs. 7,14,42,394/-. The same units were converted by UTI into 6.75% Tax Free Bonds in the previous year relevant to AY 04-05, W.e.f. 1-6-2003. The Assessee worked out the indexed cost of acquisition of the units at Rs. 11,69,07,617 and after reducing the value at which units were converted viz., Rs. 5,34,34,850 , the Assessee arrived at long term capital loss of Rs. 6,34,72,767/-. The Assessees claim was for determination of long term capital loss and for carry forward of the same for set off in subsequent assessment years in accordance with law. 3. The AO did not allow the claim as made by the Assessee. He held that as per Section 45, only conversion of capital asset into stock in trade amounts to 'transfer' for the purpose of capital gains. Hence, conversion of US 64 into 6.75% Tax-free US 64 Bonds doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. No other conversion amounts to transfer for the purpose of capital gains. 2.10 It is further to explain here that, "Units referred to in sub-section (2) of section 80CCB" as mentioned in section 45(6) of the I.T. Act are clearly the same units as mentioned in sub-section (1) of Section 80CCB which specifically mentions about the units of any mutual fund specified under clause (23D) of Section 10 or the Unit Trust of India established under the Unit Trust of India Act, 1963. These units are formulated as the Equity Linked Savings Scheme which has been referred to in subsection (2) of 80CCB. Thus, the units repurchased are clearly covered by the provisions of section 45(6) of the I.T. Act. 2.11 In view of the above legal position and the discussion held, the claim of the assessee for long term capital loss of Rs. 6,34,72,767/- is hereby disallowed. However, Short Term Capital Loss, which is the difference between the purchase price and sale price, is allowed to the assessee. As per the computation filed along with the return of income, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classified as ELSS under Section 80CCB of the Act. 2. US 64 Units are "Capital Asset" to the Assessee within the meaning of Section 2(14) of the Act. Indeed, the subject units were held as investments by the assessee. Further Section 2(14) of the Act in defining capital asset excludes from the ambit thereof six types of assets. The consequence is that both i.e. capital gain and ca1tal loss arising from the transfer of such asset (for example, certain gold bonds and special bearer bonds) have to be ignored. The said units are not so excluded from the ambit of Section 2(14) of the Act. 3. Both the assets, US 64 units and the Tax Free Bonds are distinctly different assets, US 64 units are 'risk' prone 'equity' instruments, having no fixed or regular return. Further its capital value is not assured and it is open ended. On the other hand, Tax Free Bonds are debt instruments, giving fixed returns and have defined period of life. Their par value is assured as the bonds have Government backing. 4. It can be said that the act of conversion involves parting with one asset and obtaining another asset in lieu of the parted asset. In another sense, the act of conversion can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether conversion of units into bonds would amount to loss, the CIT(A) held as follows: "1.12 I have examined the issue. There is no denying that US 64 represents a capital asset within the meaning of section 2(14). As per the repurchase scheme, built into the US 64 scheme, the Trust shall repurchase the units on the acceptance date at the respective prices prevailing on that date. The price at which the unit was to be repurchased shall be arrived at by dividing the value, at the close of business, of the net assets of the Trust, by the number of units. In other words, the essential three conditions of section 45 i.e. (i) that there should be a capital asset (ii) there shall be a transfer and (iii) there shall be a surplus on such transfer, are being fulfilled, in as much as on redemption of US 64, the rights of the appellant are extinguished in the said unit and a totally new unit, 6.7% interest free bonds, at a fresh valuation, are being issued. Thus, while on the one hand there is an extinguishment of rights, on the other hand a surplus/loss arises as a result of the conversion." 9. The CIT(A) however proceeded to hold that the entire loss claimed by the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led any appeal against the order of CIT(A) holding that Sec. 45(6) of the Act does not apply to the case of the Assessee and the finding that conversion of US 64 units into 6.75% tax free bonds amounts to a transfer. Therefore these findings of the CIT(A) has become final. 12. Before we proceed to narrate the contentions on behalf of the Assessee, a brief history about US 64 scheme has to be given. The Unit Trust of India (UTI) is the largest mutual fund in the country created in 1964 through an act of parliament. Mutual Funds are financial institutions that invest people's money in various schemes, giving a 'gauranteed' return to the investor. The UTI (of which the Unit Scheme 1964 (US-64 scheme) is the largest) was set-up specifically to channel small savings of citizens into investments giving relatively large returns/interest. The US-64 scheme had 2 crore investors, the bulk of whom were small savers, retired people, widows and pensioners. Besides the US-64 the UTI managed 87 other schemes giving investors various options. Liberalisation of the economy immediately led to the liberalisation of the UTI, throwing it to the mercy of the stock market. In 1992, the US-64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to redeem their units at Rs. 10/- per unit. Those who did not exercise the option for redemption had to compulsorily accept 6.75% tax-free bonds repayable at the end of 5 years in lieu of their existing holding of units. Thus w.e.f 1-6-2003 US 64 scheme became a close ended scheme in the form of 6.75% tax-free bonds. This is the scheme under which the units of US 64 Scheme held by the Assessee got converted into 6.75% tax free bonds repayable after 5 years from 1.6.2003. 13. In tune with the aforesaid bailout package, the parliament introduced provisions in the Income Tax Act, 1961 (the Act) whereby tax concessions were extended to unit holders of US 64 Scheme. These provisions were as follows: 14. The Finance Act, 2003 introduced Sec. 10(33) w.e.f. 1-4-2003 i.e. applicable for AY 03-04. "(33) any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002) and where the transfer of such asset takes place on or after the 1st day of April, 2002;" 15. By the same Finance Act, 2003, Sec. 10(34) and (35) were introduced but to take effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total income of an Assessee and this is contained in section 60 to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Section 66 reads as under:- "Total income - in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII." The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of "incomes on which tax is not payable" and similar words are used in Chapter VII only thus leaving out by implication incomes which do not form part of total income at all as per Chapter III from the scope of s. 66. 17. From the charging provisions of the Act, it is clear that both profit as well as loss which is negative profit must enter into computation, wherever it becomes material. The charge is on total income of the Assessee. Sec. 2 (4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to set off the loss as aforesaid against its taxable business income. Admittedly under section 10(27) of the Act any income derived from a business or livestock breeding or poultry or dairy farming was not included in computing the total income of a previous year of any person. The question before the Hon'ble Calcutta High Court was regarding the correctness of the claim made by the assessee which was rejected by the revenue authorities as well as the Tribunal. The Hon'ble Calcutta High Court held that cl. (27) of s. 10 excludes in express terms only "any income derived from a business of livestock breeding or poultry or dairy farming". It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act and therefore loss from the said business can be set off against other business income. 18. The ld. Counsel for the assessee submitted that in the present case what is excluded is income arising on transfer of units of US 64 scheme and not the source itself and therefore when there is a loss on transfer of units of US 64 Scheme, the assessee should be entitled to claim the same for carry forward for set off in accordance with law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leave the assessee with lighter tax burden should be applied and in this regard reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT v. Bosotto Bros. Ltd. [1940] 8 ITR 41. The submission of the ld. Counsel for the assessee was that since income on transfer of units of the administrator of the specified undertaking is not excluded in the computation of total income, the loss on transfer of such units should be allowed. 20. We have considered the submissions of the learned counsel for the Assessee. We will first take up for consideration as to whether Sec. 10(33) of the Act or Sec. 10(35) of the Act will apply. As we have already seen under clause (b) to Sec. 10(35) of the Act, income by way of income received in respect of units from the administrator of the specified undertaking will not form part of the total income under the Act. The proviso to Sec. 10(35) however makes it clear that the income arising from transfer of unit of the administrator of the specified undertaking is not covered by clause (b) of Sec. 10(35) of the Act. The stand of the Assessee is that if income arising from transfer of units of administrator of the specified unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to above. It was to give relief to unit holders of US 64 who option for redemption during the period from 1.4.2002 till redemption under the scheme pursuant to the UT (TUR) Act, i.e., 31.5.2003, that Sec. 10(33) of the Act was brought in the statute book. Sec. 10(33) is applicable only to units being units of US64 scheme. After redemption or conversion of units of US64 scheme pursuant to the UTI (TUR) Act, units of unit scheme 1964 virtually became extinct and the question of giving exemption from capital gain tax did not arise for consideration at all after 31.5.2003. Because the transfer in the case of the Assessee of units of US 1964 scheme by conversion to 6.75% tax free bonds is claimed to have taken place on 31.5.2003, the case of the Assessee falls only u/s. 10(33) of the Act. 22. There were other unit schemes which were taken over by the specified undertaking under the UTI (TUR) Act. They were not covered by Sec. 10(33) of the Act. Sec. 10(35) of the Act therefore specifically exempts w.e.f. 1-4-2004, only income received in respect of units from the Administrator of the specified undertaking. The proviso to Sec. 10(35) of the Act cannot cover units of US 1964 scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he incomes from these two heads were exempt under s. 10(27) of the I.T. Act, 1961. The appellate authorities confirmed the order of the ITO. Section 10 stipulates that in computing the total income of the previous year of any person any income falling within the different categories mentioned in different clauses of s.10 should not be included and sub-s. (27) provided for non-inclusion of " any income derived from a business of livestock breeding or poultry or dairy farming ". The Hon'ble Calcutta High Court accepted the plea of the Assessee. Reliance has been placed by the learned counsel for the Assessee on the following observations of the Hon'ble Court: "Under the I.T. Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged and s. 4 of the Act provides that the Central Act enacts that the incomes shall be charged for any assessment year and in accordance with and subject to the provisions of the 1961 Act in respect of the total income of the previous year or years or whatever the case may be. The schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta High Court finally concluded by holding as follows: "It appears to us that cl. (27) of s. 10 excludes in express terms only "any income derived from a business of livestock breeding or poultry or dairy farming". It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act." 29. Before the Hon'ble Calcutta High Court the Revenue placed strong reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118. The facts of the case were, the assessee claimed capital loss on sale of shares of Rs. 28,662 during the previous year relevant to assessment year 1955-56. The Income-tax Officer disallowed the loss on the ground that it was a loss of a capital nature. The CIT(A) confirmed the order of the ITO. Before Tribunal the Assessee modified its claim and sought that the loss which had been held to be a "capital loss" by the authorities below, should be allowed to be carried forward and set off against profits and gains, if any, under the head "capital gains" earned in future, as laid down in subsections (2A) and (2B) of section 24 of the Act. The Tribunal accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and brought it into its present form. As a result of the Finance (No. 3) Act of 1956, "capital gains" again became taxable in the assessment year 1957-58. The position that emerges is that "capital gains" arising between April 1, 1948, and March 31, 1956, were not taxable. The capital loss in question related to this period. 31. In the above background of law, the Hon'ble Supreme Court held as follows: "From the charging provisions of the Act, it is discernible that the words "income" or "profits and gains" should be understood as including losses also, so that, in one sense "profits and gains" represent "plus income" whereas losses represent "minus income". In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although section 6 classifies income under six heads, the main charging provision is section 3 which levies income-tax, as only one tax, on the "total income" of the assessee as defined in section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Assessee. We are of the view that the source (both capital gain and capital loss) viz., sale of units of US 64 is itself excluded and not only income (capital gain) arising on sale of units of US 64 alone that is excluded by Sec. 10(33) of the Act. In this regard we also notice from the history of US 64 scheme that the Government wanted to bail out small investors and came out with the scheme whereby they are allowed to exit from the scheme without much loss. The provisions of Sec. 10(33) of the Act were inserted only with a view to ensure that those who gained on capital by transfer of US 64 Scheme do not pay tax on such gain. The provisions are not meant to enable an Assessee to claim loss by indexation for set off against other capital gain chargeable to tax. The intention of the legislature was only to restore status quo ante and not to confer any benefit of carry forward of capital loss for set off against capital gain chargeable to tax in the subsequent Assessment years. The economic reasons for insertion of Sec. 10(33) of the Act clearly shows that the source viz., transfer of capital asset being units of US 64 itself that has been excluded by the will of the Legislature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37. The CIT(A) held as follows: "3.1 I have considered the facts in this case. Sub-section 4, of section 80HHC, lays down the conditions that: "(4) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section" 3.2 In other words, there cannot be a discrepancy between the certificate issued by the auditors and the claim of the assessee in the return of income. In the instant case, the auditors have very clearly certified the figures of total turnover and deduction u/s. 80HHC. The A.O. has rightly computed the figure as per the auditors report. This ground of appeal is dismissed." 38. Aggrieved by the order of the CIT(A) the assessee has raised Ground No. 2 before the Tribunal. 39. The ld. counsel for the assessee reiterated the submissions as were made before the CIT(A) and further submitted that the decision of the Hon'ble Bombay High Court in the case of Sudarshan Chemicals Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X
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