UTI unit losses were not speculative, and a genuine tax-motivated transaction was not treated as a colourable device.

Loss from purchase and sale of UTI units was held not to be speculative loss under the Explanation to Section 73 because a UTI unit is not a share, and the deeming fiction in the UTI Act does not extend that characterisation. The resulting loss was therefore capable of treatment according to law and not barred from set-off on that basis. The document also states that a genuine transaction does not become a colourable device merely because it is motivated by tax advantage; tax planning within the framework of law remains permissible, and a later anti-avoidance provision did not invalidate the earlier transaction. Both substantive issues were stated in favour of the assessee.

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Issues: (i) Whether loss arising from purchase and sale of UTI units was speculative loss within the meaning of Section 73 of the Income-tax Act, 1961 and therefore not eligible for set-off; (ii) Whether the transaction, though genuine, was not bona fide because it was entered into with a motive to avoid tax and to claim the resulting loss.

Issue (i): Whether loss arising from purchase and sale of UTI units was speculative loss within the meaning of Section 73 of the Income-tax Act, 1961 and therefore not eligible for set-off.

Analysis: The statutory fiction under Section 32(3) of the Unit Trust of India Act, 1963 deems the UTI to be a company and the distribution to a unit holder to be dividend, but it does not make a UTI unit a share. The rule in Explanation to Section 73, which treats business of purchase and sale of shares as speculative business, could not be extended to UTI units. The Supreme Court had already held that UTI units are not shares for this purpose.

Conclusion: The loss was not speculative loss under Section 73 and the assessee was entitled to have it treated in accordance with law.

Issue (ii): Whether the transaction, though genuine, was not bona fide because it was entered into with a motive to avoid tax and to claim the resulting loss.

Analysis: A genuine transaction does not become a colourable device merely because it results in tax advantage. The later exposition of the law recognizes that tax planning within the framework of law is permissible, and motive alone does not invalidate an otherwise lawful transaction. The insertion of Section 94(7) also showed legislative recognition and regulation of such transactions from a later date, which did not justify treating the earlier genuine transaction as invalid solely on the basis of tax-saving motive.

Conclusion: The transaction was not liable to be disallowed as a colourable device, and the assessee succeeded on this issue as well.

Final Conclusion: Both substantive questions were answered in favour of the assessee, the loss could not be disallowed as speculative, and the appeal was allowed.

Ratio Decidendi: A genuine transaction within the framework of law does not lose its legal character merely because it is structured to obtain a tax advantage, and Explanation to Section 73 cannot be applied to UTI units as though they were shares.

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