Deeming fiction cannot be extended by implication: UTI units were treated as not being shares for capital gains purposes.

A deeming fiction must be confined to the legal effect expressly created by statute and cannot be extended to treat UTI units as shares unless the law specifically says so. On that footing, section 32(3) of the Unit Trust of India Act, 1963 was read as deeming only the UTI to be a company and distributions to unit-holders as deemed dividend, not as converting units into shares. The later amendment to the proviso to section 2(42A) with effect from assessment year 1995-96 was treated as supporting the opposite position only for subsequent years. The commentary records that the assessment was regarded as erroneous and prejudicial, and the capital gains were treated as short-term capital gains for the year concerned.

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Issues: Whether the Commissioner was justified in exercising revisionary jurisdiction under section 263 on the ground that units of the Unit Trust of India were not shares for the relevant assessment year and the gains on their sale were taxable as short-term capital gains.

Analysis: The deeming fiction in section 32(3) of the Unit Trust of India Act, 1963 was confined to treating the UTI as a deemed company and the income distributed to a unit-holder as deemed dividend. In the absence of a specific deeming provision treating units as shares, that fiction could not be extended to classify the units as shares for the relevant year. The amendment to the proviso to section 2(42A) with effect from assessment year 1995-96 supported the contrary position only for later years. As the Assessing Officer had accepted the gains as long-term capital gains without proper enquiry, the assessment order was erroneous and prejudicial to the interests of the Revenue.

Conclusion: The Commissioner rightly invoked section 263, and the gains were taxable as short-term capital gains for the year under consideration.

Final Conclusion: The assessee's challenge to the revision order failed, and the revisionary assessment of the capital gains was sustained.

Ratio Decidendi: A deeming provision must be confined to the legal fiction it expressly creates and cannot be extended by implication to treat UTI units as shares unless the statute specifically so provides.

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