High Court rules in favor of assessee, allowing deduction under Section 80M, emphasizing genuine transaction.

The High Court overturned the Tribunal's decision, ruling in favor of the assessee. It held that the transaction involving the purchase and sale of units was genuine and not a colorable device to avoid tax. The Court emphasized that the assessee was entitled to the deduction under Section 80M and that utilizing beneficial provisions of the law does not amount to tax avoidance. Additionally, the Court found that Section 94 was not applicable to the case as the units involved were not considered securities during the relevant assessment year. As a result, the High Court allowed the assessee's appeal and set aside the Tribunal's order.

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Issues Involved:
1. Whether the Tribunal was right in holding that the loss arising from the purchase and sale of units is not allowable as the transaction is a colourable device to avoid tax.
2. Whether the Tribunal was right in restoring the order of the Assessing Officer, without appreciating that the assessing officer invoked the provisions of Section 94, which is not applicable to the facts of this case.

Detailed Analysis:

Issue 1: Colourable Device to Avoid Tax
The Tribunal held that the loss from the purchase and sale of units was not allowable as the transaction was a colourable device to avoid tax. The assessee purchased units from the Bank of America on 31.5.1991 and sold them back on 1.6.1991, incurring a loss of Rs. 1,60,65,000/-. The assessee received dividends amounting to Rs. 1,65,75,000/- and sought to set off the loss against capital gains. The Tribunal concluded that the transaction was entered into solely to gain a deduction under Section 80M and was thus a colourable device, referencing the Supreme Court's decision in McDowell & Co., which disallows tax avoidance through artificial transactions.

Issue 2: Applicability of Section 94
The Tribunal restored the order of the Assessing Officer, who invoked Section 94(4) to ignore the loss and compute taxable income without allowing the set-off. The Commissioner of Income Tax (Appeals) had previously held that Section 94 was not applicable, as units of the Unit Trust of India were not considered securities under the provision at the time. The High Court agreed with this view, noting that the definition of securities in Section 94 was amended to include units only from 1.4.2002, and thus the provision was not applicable to the assessment year 1992-93.

High Court's Conclusion:
The High Court held that the Tribunal's reasoning was flawed. The transaction was genuine, and the assessee was entitled to the deduction under Section 80M. The High Court referenced the Supreme Court's decision in Commissioner of Income Tax Vs. Walfort Share and Stock Brokers P. Ltd., which clarified that using beneficial provisions under the law does not constitute a colourable device. The High Court found no basis to apply Section 94 to the transaction, as the units were not considered securities at the relevant time. Consequently, the High Court set aside the Tribunal's order and allowed the assessee's appeal.

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