2010 (3) TMI 179 - HC - Income Tax

High Court rules in favor of assessee-appellant in tax case on 'US-64' units. Loss not speculative.

The High Court ruled in favor of the assessee-appellant in a tax case involving the purchase and sale of 'US-64' units. The court held that the loss ... Speculative loss - short term capital loss - Explanation to Section 73 - deeming provision in Section 32(3) of the Unit Trust of India Act, 1963 - colourable device - tax avoidance versus tax evasion - Duke of Westminster principle - recognition by insertion of sub section (7) in Section 94Speculative loss - short term capital loss - Explanation to Section 73 - deeming provision in Section 32(3) of the Unit Trust of India Act, 1963 - Whether the loss on purchase and sale of 25 lakh UTI 'US-64' units was a speculative loss under Explanation to Section 73 or a short term capital/business loss allowable for set off - HELD THAT: - The Court held that the question is no longer res integra and applied the ratio of the Supreme Court in Apollo Tyres Ltd., where it was held that the deeming provision in Section 32(3) of the Unit Trust of India Act, 1963, which makes UTI a deemed company and income a deemed dividend, does not treat UTI units as deemed shares for purposes of treating purchase and sale of units as speculative transactions. Consequently the Explanation to Section 73 that treats purchase and sale of shares as speculative could not be extended to UTI units. On that basis the Tribunal's conclusion that the loss was a speculative loss under Explanation to Section 73 was erroneous and the loss must be regarded as a business/short term capital loss allowable for set off as claimed by the assessee. [Paras 11, 12, 22]Question No. 1 answered in favour of the assessee; the transaction did not attract Explanation to Section 73 and the loss was not a speculative loss.Colourable device - tax avoidance versus tax evasion - Duke of Westminster principle - recognition by insertion of sub section (7) in Section 94 - Whether the bona fides of the genuine transactions could be impugned and treated as a colourable device because they were entered into with a motive to reduce tax liability - HELD THAT: - The Court examined the Tribunal's factual finding that the purchase and sale were genuine but concluded that the law as recently expounded by the Supreme Court in Azadi Bachao Andolan explains and confines McDowell's case. The Court observed that merely because a transaction is entered into with a motive to obtain a tax advantage, it does not ipso facto become a colourable device if the transaction is otherwise genuine and within law. The Court further noted that Parliament subsequently recognised and regulated such transactions by inserting sub section (7) in Section 94 with effect from 1.4.2002, underscoring legislative recognition of purchase and sale of units and the treatment of income therefrom. Applying the principle that tax planning permissible within the statutory framework cannot be disregarded merely for motive, the Court held that the Tribunal erred in disallowing the loss on the ground of motive to reduce tax. [Paras 13, 16, 20, 21, 22]Question No. 2 answered in favour of the assessee; the genuine transactions could not be treated as colourable device merely because they were intended to obtain a tax advantage.Final Conclusion: Both questions of law framed on admission are answered in favour of the assessee and against the revenue; the Tribunal's view to the extent that the loss was speculative or the transactions a colourable device is set aside and the appeal succeeds. 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 73The 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 AvoidanceThe 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.