Ita/122/2001 Of The Commr. Of Income Tax, Coimbatore v. The Periakaramalai Tea & Produce Co. Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 30TH SEPTEMBER 2010 / 8TH ASWINA 1932 ITA.No. 122 of 2001() --------------------- ITA.379/COCH/1993 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: -------------------- THE COMMISSIONER OF INCOME TAX, COIMBATORE. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR IT RESPONDENT/RESPONDENT: --------------- THE PERIAKARAMALAI TEA & PRODUCE CO.LTD COIMBATORE. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 30/09/2010, THE COURT ON 30/09/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &K.SURENDRA MOHAN, JJ. ....................................................................I.T. Appeal No.122 of 2001 ....................................................................Dated this the 30th day of September, 2010. C.R. JUDGMENT Ramachandran Nair, J. The Revenue has filed this Income Tax Appeal under Section260A of the Income Tax Act (hereinafter called "the Act") raisingseveral questions as substantial questions of law for our decision.However, on going through the impugned orders and after hearing theSenior counsel for the appellant, we find that only two questions of lawarise from orders of the Tribunal. First one which we consider as asubstantial question of law is whether the Tribunal was justified inallowing business loss claimed by the assessee on purchase and sale ofunits of the Unit Trust of India. The other question pertains todepartment's claim for assessment of interest allegedly accrued to theassessee in respect of a loan advanced to another company. However,we find from the orders of the Tribunal that the other company towhich the assessee advanced the loan had become a sick industry I.T.A. No.122/2001 unable to pay interest to the assessee. So much so, the Tribunal foundthat the first appellate authority rightly disallowed the department'sclaim. Further, it is seen from the first appellate authority's orderconfirmed by the Tribunal that if interest becomes payable from theborrower company, or is actually paid by them to the assessee, thensuch interest is assessable in the relevant year in which interest accruesor is received by the assessee. We do not find any merit in thedepartment's Appeal on this question and we, therefore, confirm thefinding of the Tribunal. However, first question calls for detailedconsideration and, therefore, we proceed to consider the same. Sincethe counsel engaged by the assessee died during pendency of theI.T.A., we directed the Registry to issue fresh notice intimating death ofthe assessee's counsel. Even though notice was served with suchintimation, assessee has not chosen to engage another counsel.Therefore, we proceed to dispose of the appeal after hearing Seniorcounsel appearing for the appellant-department. 2. The facts leading to the controversy are the following. Theassessee is a plantation company engaged essentially in production andsale of tea. In order to offset the tax liability assessee adopted a 2. The facts leading to the controversy are the following. Theassessee is a plantation company engaged essentially in production andsale of tea. In order to offset the tax liability assessee adopted a shortcut method, of course practised by several companies which is bypurchase of massive number of units of Unit Trust of India on cum-dividend basis shortly before declaration of dividend and sale of thesame at a lower price i.e. ex-dividend immediately after receiving thedividend. In the purchase and sale of units assessee made a loss inbusiness, set off the same against other business profits therebyavoiding tax liability. In effect assessee does not suffer a loss becausethe loss on purchase and sale of units is made up by earning income byway of dividend received from the Unit Trust of India on 30th June ofthe year which is not taxable. The exact nature of the businesstransaction entered into by the assessee is stated in all the ordersincluding that of the Tribunal which is as follows. During the previousyear the assessee entered into a contract with a share broker in Madraswho agreed to purchase 15,00,000 units of Unit Trust of India for theassessee at the rate of R.14.90 per unit and agreed to sell the sameshortly thereafter for the assessee at the rate of Rs.13.20. Under thisdeal the assessee booked a business loss of Rs.26,62,500/-. Theinteresting feature of the deal is that the broker arranged to purchaseunits from Pearless General Finance and Investment Company Limited on condition of resale to the same company which provided loan to theassessee to fund the purchase for 60 days on payment of interest at 17%per annum. In terms of the contract, units of the U.T.I., 15 lakhs innumber, were purchased at the rate of Rs.14.90 per unit from PearlessGeneral Finance and Investment Ltd. on 7.5.1990 and were resold tothe very same company i.e. Pearless General Finance and InvestmentCompany on 9.7.1990 at the rate of Rs.13.20 per unit leading toassessee suffering a loss of Rs.26,62,500/-. Even though the purchaseand sale of units has led to a loss to the assessee, in effect assesseegained in two ways, first one being the tax saved on the business lossof Rs.26,62,500/- which is the loss booked by the assessee in thepurchase and sale of units and second is the interest-free dividendreceived by the assessee. Of course the net gain should be consideredafter deducting the interest paid by the assessee for the fund borrowedfor purchase of the units and also the commission and charges paid tothe brokers for arranging the deal. In the course of assessment for therelevant assessment year 1991-92, the Assessing Officer afterconsidering in detail the scope of tax planning adopted by the assesseecame to the conclusion that the purchase and sale of units is in effect I.T.A. No.122/2001 "speculation business" and so much so, assessee is not entitled to setoff the loss arising out of the same against business profits by virtue ofSection 73(1) of the Act. However, C.I.T.(Appeals) by relying onExplanation to Section 73 of the Act held that units of U.T.I. are notshares of a company and so much so, purchase and sale of units doesnot amount to "speculation business" and hence assessee is entitled toset off of loss arising out of the transaction against business income.The C.I.T.(Appeals) relied on decision of the Income Tax AppellateTribunal in the case of APOLLO TYRES LTD. which got confirmedby this court in COMMISSIONER OF INCOME-TAX VS. APPOLLOTYRES LTD. reported in (1999) 237 ITR 706, which again isconfirmed by decision of the Supreme Court reported in (2002) 255ITR 273. On second appeal by the Revenue, the Tribunal confirmedthe orders of the C.I.T.(Appeals) against which this appeal is filed. 3. Senior counsel appearing for the Department contended thatthe transaction is literally "speculation business" because assesseebooked specific loss in advance in the purchase and sale of units ofU.T.I. speculating that there will be net gain by getting tax-freedividend on units and tax saving on the business loss booked which according to the expectation of the assessee would be much more thanthe business loss suffered. Even though the issue raised is apparentlycovered in favour of the assessee by decision of this court in the case ofAPPOLLO TYRES referred above (237 ITR 706) wherein thetransaction involved is similar to the one arising in this case and thesaid decision is confirmed by the Supreme Court by decision inAPPOLLO TYRES LTD. VS. COMMISSIONER OF INCOME-TAX(2002) 255 ITR 273 and the decisions are binding on us, we still feelwe should express our view on the subject, particularly because neitherthis court nor Supreme Court proceeded to consider scope ofspeculation business and whether the loss therefrom can be allowed tobe set off against business profits under Section 73(1) of the Act. 4. In the first place, in our view, Explanation under Section 73does not define or exhaustively deal with speculation business. On theother hand what this Explanation says is that when a company otherthan an investment company or banking company is engaged inpurchase and sale of shares of other companies, such activity shall bedeemed to be speculation business. This Court in APPOLLO TYRES'case referred above rightly held that units of U.T.I. cannot be treated as I.T.A. No.122/2001 shares of a company and so much so, Explanation to Section 73 is notattracted and the Honourable Supreme Court confirmed the said findingof this court. We do not think there can be any controversy on thisissue because units issued by U.T.I. are neither shares nor even equal tothe shares of a company. However, the question is whether purchaseand sale of units, though not coming within the description of shares ofa company, can constitute speculation business particularly, the way inwhich the assessee has done it. 5. We notice that speculation business visualised under thevarious provisions of the Income Tax Act do not limit it to purchaseand sale of shares of a company alone. First reference of speculationbusiness is found in Explanation 2 to Section 28 where it is defined as abusiness involving speculative transactions. Speculative transaction is defined under Section 43(5) of the Act which is as follows: "S.43(5) "Speculative transaction" means a transaction inwhich a contract for the purchase or sale of any commodity,including stocks and shares, is periodically or ultimatelysettled otherwise than by the actual delivery or transfer ofthe commodity or scrips: ........." What is clear from the above definition is that speculative business is not limited to purchase and sale of stocks or shares alone, but purchase I.T.A. No.122/2001 defined under Section 43(5) of the Act which is as follows: "S.43(5) "Speculative transaction" means a transaction inwhich a contract for the purchase or sale of any commodity,including stocks and shares, is periodically or ultimatelysettled otherwise than by the actual delivery or transfer ofthe commodity or scrips: ........." What is clear from the above definition is that speculative business is not limited to purchase and sale of stocks or shares alone, but purchase I.T.A. No.122/2001 and sale of any commodity in a speculative manner will also be aspeculative transaction and when it is done in the course of business oras part of business, it becomes speculation business. We do not findany artificial definition given to speculation business in the Act and inour view, the normal literal meaning of speculation applies to IncomeTax Act as well. The literal meaning of speculation contained in thedictionary is investment with the hope of gain but with possibility ofloss, gamble recklessly etc. In this case we have already noticed thatthe assessee purchased 15 lakhs units in May 1990 i.e. shortly beforedeclaration of the dividend and the sale is immediately after declarationof dividend and both the transactions are with one company which gaveloan for the purchase of the units and also repurchased the same unitsas stated above. The speculation involved is obvious i.e. the possibilityof getting more in tax saving combined with the dividend likely to bereceived over the loss suffered and expenditure incurred by way ofinterest and charges paid to the broker. Therefore, in our view, thetransaction of purchase and sale of units when done as a business in aspeculative manner, the loss therefrom could be set off only againstprofit arising in speculation business in terms of Section 73(1) of the I.T.A. No.122/2001 Act. Assessee in fact claimed set off of loss from speculation businessagainst income from tea plantation which in our view, is not admissibleby virtue of the prohibition contained in Section 73(1) of the Act. 6. Even though our view is in favour of the Revenue, we arebound to follow the decision of the Supreme Court in APPOLLOTYRES' case referred above wherein the Supreme Court has confirmedjudgment of this court on identical issue. Therefore, following thejudgment of the Supreme Court in APPOLLO TYRES' case reported in255 ITR 273 we dismiss the departmental appeal. C.N.RAMACHANDRAN NAIRJudge K.SURENDRA MOHANJudge pms