M/S Porrits & Spencer (Asia) Ltd v. The Commissioner Of Income-Tax, Faridabad

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. ITA No. 10 of 2004 (O&M) Date of Decision: March 31, 2010 M/s Porrits & Spencer (Asia) Ltd. …Appellant Versus The Commissioner of Income-tax, Faridabad …Respondent CORAM:HON'BLE MR. JUSTICE M.M. KUMAR M.M. KUMAR, J. The assessee-appellant has approached this Court by invokingSection 260A of the Income-tax Act, 1961 (for brevity, ‘the Act’)challenging order dated 3.6.2003, passed by the Income Tax AppellateTribunal, Delhi Bench “D”, Delhi (for brevity, ‘the Tribunal’), in ITA No.1711 (Del)/97, in respect of Assessment Year 1991-92. The Tribunal hasupheld the view taken by the Commissioner of Income Tax (Appeals),Faridabad, inasmuch as, it has not allowed the short term capital loss of Rs.51,61,875/- incurred by the assessee-appellant on sale of units called as‘US-64’. The instant appeal was admitted on the claim of the assessee- appellant on the following two substantive questions of law, which wereframed on 1.3.2004:- “(1)Whether the Tribunal was right in law in confirming thatthe loss of Rs. 51,61,875/- incurred on account oftransactions of purchase and sale of 25 lacs units called‘US-64’ was speculative loss under Section 73 of theIncome Tax Act and that the assessee was not entitled toset off in respect of the aforestated loss accordingly?the loss of Rs. 51,61,875/- incurred on account oftransactions of purchase and sale of 25 lacs units called‘US-64’ was speculative loss under Section 73 of theIncome Tax Act and that the assessee was not entitled toset off in respect of the aforestated loss accordingly? (2)Whether on the facts and in the circumstances of the casethe Tribunal was right in law in holding that thetransactions for purchase and sale of 25 lacs units called‘US-64’ of the appellant with the Bank, after holding thatthese transactions were genuine, were (a) not bona fidetransactions, (b) entered into with a motive to avoidliability for tax etc.?”the Tribunal was right in law in holding that thetransactions for purchase and sale of 25 lacs units called‘US-64’ of the appellant with the Bank, after holding thatthese transactions were genuine, were (a) not bona fidetransactions, (b) entered into with a motive to avoidliability for tax etc.?” 2.Few facts may first be noticed. The assessee-appellant is aPublic Limited Company incorporated under the Companies Act, 1956. It isa subsidiary of Porritts & Spencer Ltd. U.K. and is engaged inmanufacturing of engineered fabrics and industrial textiles. The registeredas well as corporate office of the assessee-appellant is at Faridabad where ithas its factory also. At all material times the assessee-appellant have beencarrying on the business of manufacturing and selling machine clothing fordifferent applications to a diverse range of industries in India and abroad.3.For the Assessment Year 1991-92, the assessee-appellant filedits return of income on 30.12.1991 declaring an income of Rs.2,93,17,260/-. It was accompanied with computations, mandatory auditreports under Section 44AB of the Act, Annual Report containing Profit and Loss Account, Balance Sheet and other relevant documents. It isappropriate to mention that on 21.5.1990 the assessee-appellant hadpurchased 25 lacs units of ‘US’64’ of Unit Trust of India (UTI) at the thenprevalent market rate of Rs. 15/- per unit, for a total consideration of Rs.3,75,00,000/- from ANZ Grindlays Bank, New Delhi. The units werepurchased on credit for the purposes of making investment. The units wereduly transferred by the UTI to the assessee-appellant on 30.5.1990, which isevident from the certificates issued in the name of the assessee-appellant.On 5.7.1990, the Board of Directors of the assessee-appellant decided forthe sale of the units in question. On 6.7.1990, the assessee-appellantreceived the dividend of Rs. 45 lacs on the said units. On 20.7.1990, theANZ Grindlays Bank, New Delhi, debited the overdraft account of theassessee-appellant by Rs. 3,75,00,000/- i.e. the consideration at which thesaid units were sold by the bank to the assessee-appellant. 4.On account of non-availability of surplus funds and cost ofholding them on interest being un-profitable, the assessee-appellant sold theunits on 21.7.1990 to ANZ Grindlays Bank, New Delhi, at the thenprevailing market rate of Rs. 13.01 per unit, for a total consideration of Rs.3,25,25,000/-, after deducting interest of Rs. 9,86,300/- at the rate of 16%on the total sale consideration of Rs. 3,75,00,000/- for a period of 60 days.It is apparent that the assessee-appellant incurred a loss of Rs. 51,61,875/-in this transaction, which represents the difference between the purchaseprice and the sale price plus cost of transferring units, such as expenses onstamps etc. Accordingly, the assessee-appellant in its return of income forthe Assessment Year 1991-92 claimed the loss as a short term capital lossand also claimed set-off against its income and offered dividend income ofRs. 45 lacs after the statutory deduction for tax. 5.The assessment was completed vide order dated 25.3.1994 aftermaking numerous deductions and allowances in the returned income. TheAssessing Officer, however, did not allow deduction claimed for the shortterm capital loss of Rs. 51,61,875/- holding that the transactions of purchaseand sale of units were not genuine transactions and was a device for taxavoidance. It further held that the loss incurred on account of thesetransactions was of speculative business within the meaning of Explanationto Section 73 of the Act. As such it was not allowable against the profitsand gains of the business of the assessee-appellant. Accordingly, he taxedthe entire dividend income of Rs. 45 lacs earned on these units as incomefrom other sources. The Assessing Officer, however, allowed deduction ofRs. 35,13,700/- for it under Section 80M of the Act, which was calculatedafter deducting from the total dividend the alleged interest of Rs. 9,86,300/-for the loan for purchasing them. A copy of the assessment order is onrecord (Annexure ‘B’). 6.On appeal before the CIT (A) Faridabad, the assessee-appellantchallenged various additions and disallowances made by the AssessingOfficer. The appeal was partially allowed by the CIT (A), vide order dated31.1.1997 (Annexure ‘C’). The CIT (A) upheld the view of the AssessingOfficer opining that the transaction concerning unit ‘US-64’ was speculativein nature. He affirmed the finding of the Assessing Officer declining set-offof the aforesaid short term capital loss. 7.The order of the CIT (A) was challenged by both the assessee-appellant as well as the revenue-respondent. Both the appeals were decidedby consolidated impugned order dated 3.6.2003 (Annexure ‘A’). Both theappeals were partially allowed. The Tribunal held that the transactions withregard to purchase and sale of unit ‘US-64’ with the ANZ Grindlays Bank, 7.The order of the CIT (A) was challenged by both the assessee-appellant as well as the revenue-respondent. Both the appeals were decidedby consolidated impugned order dated 3.6.2003 (Annexure ‘A’). Both theappeals were partially allowed. The Tribunal held that the transactions withregard to purchase and sale of unit ‘US-64’ with the ANZ Grindlays Bank, New Delhi, were genuine and that the loss incurred by the assessee-appellant on these transaction was loss of speculation business. Thetransactions were not bona fide because they were entered into with amotive to reduce the liability of tax which is not permissible in law.Accordingly, it was held that the assessee-appellant was not entitled to set-off of the said loss against its income from business. The Tribunalconsidered Division Bench judgment of the Bombay High Court rendered inthe case ofTwinstar Holdings Ltd.v. Anand Kedia, Deputy CIT, [2003]260 ITR 6 and the judgment of Hon’ble the Supreme Court rendered in thecase of McDowell & Co. Ltd. v. C.T.O., [1985] 154 ITR 148 andproceeded to record the following findings:- “20.6…… No doubt transactions were genuine, as ANZbank confirmed in having selling (sold?) the units to assesseeand then buying the same from assessee. Though one entry waspassed on 20[th] July, 1990, but there was an entry showing debitbalance against the assessee on account of purchase and sale ofthese units. But these transactions cannot be said that theywere entered bonafidely as clearly emerges from the facts of thepresent case that assessee was knowing that the prices of unitswere highest in the month of May and lowest in the month ofJuly, even then the assessee entered into transactions. On onehand, the bank is say (saying?) that it has already adjusted theamount of interest @ 16% in selling price of units sold toassessee, and on the other hand, the assessee is saying that nointerest was paid. These two contradictory stands itself showthat there was a planning to purchase the shares and then soldthe same after 60 days and this planning was with a motive, asbank confirmed in having selling (sold?) the units to assesseeand then buying the same from assessee. Though one entry waspassed on 20[th] July, 1990, but there was an entry showing debitbalance against the assessee on account of purchase and sale ofthese units. But these transactions cannot be said that theywere entered bonafidely as clearly emerges from the facts of thepresent case that assessee was knowing that the prices of unitswere highest in the month of May and lowest in the month ofJuly, even then the assessee entered into transactions. On onehand, the bank is say (saying?) that it has already adjusted theamount of interest @ 16% in selling price of units sold toassessee, and on the other hand, the assessee is saying that nointerest was paid. These two contradictory stands itself showthat there was a planning to purchase the shares and then soldthe same after 60 days and this planning was with a motive, as the assessee was knowing that dividend will be declared in themonth of June and the same was declared also. The assesseeclaimed deduction u/s 80-M of the Income-tax Act. On theother hand, the assessee was knowing that there will be a losson account of sale in the month of July and there was a loss ofRs. 51 lakh and odd, which it claimed against its businessincome. In this way, the assessee claimed deduction u/s 80-Mand then he claimed deduction on account of loss againstbusiness income also. This planning, in our considered view,cannot be approved, as the same was clear cut planning toreduce the tax effect, which is not permissible in the eyes oflaw. It is also worth noting that no banker will pass the entryafter 60 days from the date of actual transaction, which wasentered on 21[st] May, 1990, as the same was entered on 21[st] July,the day when the units were sold by the assessee to the bank.This also clearly proves that there was a clear understandingbetween the banker and the assessee that the units will be soldafter 60 days. Though the units were transferred in the name ofassessee and then in the name of bank, but there is no materialon record which suggests that physical delivery of the units inquestion were handed over to the assessee or not, as it seemsthat the physical possession was with ANZ, to secure the sumof Rs. 3.75 crore invested on behalf of assessee against sale ofunits to the assessee.” (Italics added) 8.Mr. Santosh Aggarwal, learned counsel for the assessee-appellant has argued that buying and selling of units by the assessee-appellant could not be treated as speculative business and Explanation to Section 73 of the Act would not apply. Accordingly, the loss in buying andselling of units of the UTI has to be regarded as business loss and notspeculation loss, which could be disallowed by the revenue. It is submittedthat the proposition would not be affected by virtue of Section 32(3) of theUnit Trust of India Act, 1963, which creates a fiction to create the UTI adeemed company and distribution of income received by the unit holder adeemed dividend for the purposes of the Act. Therefore, it cannot be saidthat Section 32(3) makes the unit of the UTI as a deemed share which couldbe covered by the concept of speculative business. In support of hissubmission, learned counsel has placed reliance on the judgment of Hon’blethe Supreme Court rendered in the case of Apollo Tyres Ltd.v.Commissioner of Income Tax, [2002] 255 ITR 273. 9.However, more fundamental argument advanced by Mr.Aggarwal is that as long as the transaction of purchase and sale of units‘US-64’ was within the parameters fixed by law then irrespective of theconsequences such a transaction in law cannot be regarded as tainted onemerely because the loss to be incurred in the transaction is intended to beused as set-off in respect of the rest of the income. Learned counsel hasurged that by virtue of Section 94(7) of the Act, which has been inserted bythe Finance Act, 2001, with effect from 1.4.2002, such like transactionshave been legally acknowledged and recognised, therefore, the Tribunal hascommitted grave error in discarding the genuine transactions merelybecause it would result into claim of short term capital loss. According tothe learned counsel even if it is regarded as tax planning, avoidance of taxas against evasion has been held to be permissible. In support of hissubmission, learned counsel has placed reliance on a Division Benchjudgment of Bombay High Court rendered in the case ofCommissioner of Income Taxv. Walfort Share and Stock Brokers P. Ltd., [2009] 310ITR421 (Bom), and has argued that it is not open to the revenue to raise anobjection that even prior to insertion of Section 94(7), the loss arising fromthe transaction in question could be disallowed on the ground that thetransaction was not a business transaction or that the loss was an artificialloss and not the actual loss. According to the learned counsel, the motive ofthe transaction is not relevant consideration. When the assessee-appellanthas entered the transaction with a motive to earn losses, which eventuallyhelped him in tax avoidance, the revenue cannot refuse to grant the benefitas long as the transaction is lawful and does not violate any express orimplied provision. He has also placed reliance on a Division Benchjudgment of this Court rendered in the case ofCommissioner of Gift Tax v. Satya Nand Munjal, [2002] 256 ITR 516 (P&H). Placing reliance onthe paras under Question No. 2, Mr. Aggarwal has argued that if on accountof lacunae in the law or otherwise, the assessee-appellant becomes entitledto avoid payment of tax then it cannot be said that such a transaction wouldbe void merely because it was intended to save the payment of tax.Accordingly, it has been submitted that as long as the law existed before theamendment in Section 94(7) of the Act, the assessee-appellant was entitledto tax advantage despite the fact that a prudent businessman may not investin a transaction to earn losses. Mr. Aggarwal has also placed reliance on theview taken by a Division Bench of Orissa High Court in the case ofIndustrial Development Corporation of Orissa Ltd.v. Commissioner of Income Tax, [2004] 268 ITR 130 (Orissa), and argued that a transaction,which is otherwise valid in law, cannot be treated as nonest merely on thebasis of some underlying motive, supposedly resulting in some economicdetriment or prejudice to the revenue. Therefore, Mr. Aggarwal has urged that it must be held that a transaction even if it is otherwise valid in law andresults in reduction of tax to an assessee, the same cannot be ignored on theground that the underlying motive of entering into such a transaction by theassessee was to reduce its tax liability to the State. He has also placedreliance on the observations made by Hon’ble the Supreme Court in the caseofUnion of Indiav. Azadi Bachao Andolan, [2003] 263 ITR 706, whichhas laid down the aforesaid view, followed by the Division Bench of OrissaHigh Court. He has placed particular reliance on concluding three paras ofthe judgment to buttress his stand. For the same proposition, reliance hasbeen placed on two Division Bench judgments of the Delhi High Courtrendered in the cases ofCommissioner of Income Taxv. Hindustan TinWorks Ltd., (2009) 226 CTR (Del) 42 and Commissioner of Income Taxv. Vikram Aditya and Associates P. Ltd., [2006] 287 ITR 268 and also aDivision Bench judgment of Madras High Court in the case ofCommissioner of Income Taxv. Lakshmi Mills Co. Ltd., [2007] 290 ITR663. Mr. Aggarwal has then placed reliance on certain observations madeby a Division Bench of this Court in the case ofCommissioner of Income-tax, Patialav. Punjab State Electricity Board, [2009] 183 Taxman 419(Punj. & Har.). Referring to the question of law framed and answered bythe Division Bench of this Court, learned counsel has pointed out that evenif the intention is to avoid tax and the transaction is within the four cornersof law, the benefit of transaction cannot be refused merely because it wouldresult into avoidance of tax liability artificially. A particular emphasis hasbeen made by Mr. Aggarwal in his submission by referring to paras 3, 4 and5. 10.Ms. Urvashi Dhugga, learned counsel for the revenue has,however, submitted that the transaction like the one in hand, cannot be 10.Ms. Urvashi Dhugga, learned counsel for the revenue has,however, submitted that the transaction like the one in hand, cannot be regarded as bona fide as it is hit by the intention of avoiding payment of tax.In that regard she has placed reliance on the observations made by theConstitution Bench of Hon’ble the Supreme Court in the case of McDowelland Co. Ltd. (supra) where it has been held that even if the transaction isgenuine, which has been actually acted upon, and the transaction has beenentered into with the intention of tax avoidance, then it would constitute acolourable device. She has drawn our attention to the observation made bythe Tribunal in respect of the transactions in question and argued thatbecause the assessee-appellant was fully aware about the loss on account ofsale in the month of July 1990, which, in fact, resulted into avoidance of thetax payment. Referring to the observations made in the extracted para 20.6(supra), Ms. Dhugga has submitted that such a tax planning cannot beapproved as it is aimed at prejudicing the tax effect, which is impermissiblein the eyes of law. She has also highlighted that no banking companywould pass the entry after 60 days from the date of actual transaction. Shehas pointed out that the transaction was entered into on 21.5.1990 whereasthe entry was made on 21.7.1990. Accordingly, she has submitted that it isnot arms length transaction but appears to be collusive transaction betweenthe assessee-appellant and the banking company on a clear understandingthat the units were to be sold after 60 days. According to her, even thephysical delivery of the units was not ever handed over to the assessee-appellant, which remained in the custody of the ANZ Grindlays Bank, NewDelhi, so as to secure Rs. 3,75,00,000/- invested by the assessee-appellant.She has also placed reliance on the Division Bench judgment of BombayHigh Court rendered in the case of Twinstar Holdings Ltd. (supra). RE: QUESTION NO. 1 11.Question No. 1 is no longer res integra because Hon’ble the Supreme Court in the case of Apollo Tyres Ltd. (supra) has considered asimilar question and in the concluding portion of the judgment, whilerejecting the contention of the revenue that the business of purchase andsale of units by the assessee would amount to a business of speculation, heldas under:- “……We have examined the provisions of the UTI Actand we are of the opinion that even though the said sectioncreates a fiction to make the UTI as a deemed company anddistribution of income received by the unit holder as a deemeddividend, by virtue of these deemed provisions, it cannot besaid that it also makes the unit of the UTI a deemed share. Inour opinion, a deeming provision of this nature as found insection 32(3) should be applied for the purpose for which thesaid deeming provision is specifically enacted, which in thepresent case is confined only to deeming the UTI as a companyand deeming the income from the units as a dividend. If as amatter of fact, the Legislature had contemplated making theunits as also a deemed share then it would have stated so. In theabsence of any such specific deeming in regard to the units asshares it would be erroneous to extend the provisions of section32(3) of the UTI Act to the units of UTI for the purpose ofholding that the unit is a share. ……” 12.It is pertinent to mention that Hon’ble the Supreme Courtspecifically rejected the contention of the revenue that Explanation toSection 73 of the Act, ( which makes the business of purchase and sale ofshares as business of speculation) was applicable to the transaction of a saleand purchase of units. Therefore no detailed examination of the aforesaid question would be required. Accordingly, question No. 1 is answered infavour of the assessee-appellant and against the revenue-respondent and theview of the Tribunal to that extent is held to be erroneous. RE: QUESTION NO. 2 12.It is pertinent to mention that Hon’ble the Supreme Courtspecifically rejected the contention of the revenue that Explanation toSection 73 of the Act, ( which makes the business of purchase and sale ofshares as business of speculation) was applicable to the transaction of a saleand purchase of units. Therefore no detailed examination of the aforesaid question would be required. Accordingly, question No. 1 is answered infavour of the assessee-appellant and against the revenue-respondent and theview of the Tribunal to that extent is held to be erroneous. RE: QUESTION NO. 2 13.It would be appropriate to notice the categorical findings of theTribunal for answering question No. 2. The Tribunal has recorded a findingthat the transaction of purchase and sale of units between the parties wasgenuine, as is evident from the perusal of extracted para 20.6. The Tribunal,however, went on to hold that the transactions were entered bona fide. Thebasis of the aforesaid conclusion reached by the Tribunal is that theassessee-appellant was aware that the prices of the units were high in themonth of May and lowest in the month of July and even then the assessee-appellant entered the transaction. The Tribunal has further recorded afinding that there was a planning to purchase the shares and then to sell thesame after 60 days, which was with a obvaious motive. The assessee-appellant was aware that dividends on the units were to be declared in themonth of June, which happened and accordingly the assessee-appellantclaimed deduction under Section 80-M of the Act. The assessee-appellantwas also aware that there would be loss on account of sale of the units in themonth of July, which accordingly occurred. The assessee-appellant claimedset off of amounting to Rs. 51,61,875/- against its business income. 14.The question which falls for consideration is whether to applythe principle laid down by Hon’ble the Supreme Court in the case ofMcDowell & Co. Ltd. (supra), wherein it was held that the judgment ofHouse of Lords inIRCv. Duke of Westminster, [1936] AC 1 (HL), wasnot applicable. In other words, even if the transaction is genuine and even ifit is actually acted upon, it would be permissible in law, inasmuch as, it is part of continuous tax planning which may be aimed at avoidance of tax notevasion of tax. The aforesaid principle is based on the premise that a taxpayer may resort to a devise to divert the income before it arrives to him andeffectiveness of the devise would not depend upon consideration of moralitybut on the operation of the Act. 15.On the strength of the Division Bench judgment of the BombayHigh Court rendered in the case of Twinstar Holdings Ltd. (supra),learned counsel for the revenue-respondent has argued that if the transactionis entered into with the intention of tax avoidance and it was known to theparties before hand then even if the transaction is genuine, it wouldconstitute a colourable devise. The aforesaid view is sought to be supportedby the observations made in the case of McDowell & Co. Ltd. (supra). .On the contrarythe main plank of argument of the learned counsel for theassessee-appellant is that intention and motives are irrelevant. Theaforesaid argument has been canvassed on the strength of the judgment ofBombay High Court rendered in the case of Walfort Share and StockBrokers P. Ltd. (supra) and the view expressed by Hon’ble the SupremeCourt in the case of Azadi Bachao Andolan (supra). 16.In the case of Azadi Bachao Andolan (supra), Hon’ble theSupreme Court has explained its earlier judgment rendered in the case ofMcDowell & Co. Ltd. (supra) by concluding that the principle laid downby the House of Lord in Duke of Westminster’s case (supra) have neverbeen abandoned and, therefore, Hon’ble the Supreme Court in McDowell &Co. Ltd.’s case (supra) cannot deem to have laid down any differentprinciple. In order to substantiate the aforesaid view their Lordships’ ofHon’ble the Supreme Court placed reliance on a number of judgments of theHouse of Lords. Reference in this regard was made to a leading judgment rendered in the cases ofCravenv. White, [1988] 3 All ER 495. In thatcase the House of Lords considered the impact of Furniss (Inspector ofTaxes)v. Dawson, [1984] 1 All ER 530 (HL); IRCv. Burmah Oil Co.Ltd., [1982] Simon’s Tax Case 30 (HL) (SC); andW.T. Ramsay Ltd.v.IRC, [1981] 1 All ER 865 (HL). After quoting the speeches of Lord Keithof Kinkel and Lord Oliver, Hon’ble the Supreme Court proceeded toconclude that even in the year 1988, the House of Lords emphasised thecontinued validity and application of the principle in Duke ofWestminster’s case (supra). Accordingly, the principle laid down in Dukeof Westminster’s case (supra) was reiterated. The observations of Hon’blethe Supreme Court in that regard reads as under:- “With respect, therefore, we are unable to agree with theview that Duke of Westminster’s case [1936] AC 1 (HL); 19TC 490 is dead, or that its ghost has been exorcised in England.The House of Lords does not seem to think so, and we agree,with respect. In our view, the principle in Duke ofWestminster’s case [1936] AC 1 (HL); 19 TC 490 is very muchalive and kicking in the country of its birth. And as far as thiscountry is concerned, the observations of Shah, J. in CIT v.Raman [1968] 67 ITR 11 (SC) are very mcuh relevant eventoday. We may in this connection usefully refer to the judgmentof the Madras High Court in M.V. Vallipappan v. ITO, [1988]170 ITR 238, which has rightly concluded that the decision inMcDowell [1985] 154 ITR 148 (SC) cannot be read as layingdown that every attempt at tax planning is illegitimate and mustbe ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect ofreducing the tax burden of the assessee, must be looked uponwith disfavour. Though the Madras High Court had occasion torefer to the judgment of the Privy Council in IRC v. ChallengeCorporation Ltd. [1987] 2 WLR 24, and did not have thebenefit of the House of Lords' pronouncement in Craven’s case[1988] 3 ALL ER 495 (HL); [1990] 183 ITR 216 (HL), theview taken by the Madras High Court appears to be correct andwe are inclined to agree with it.” 17.Hon’ble the Supreme Court also proceeded to approve thefollowing view of Gujarat High Court in Banyan and Berryv.Commissioner of Income Tax, [1996] 222 ITR 831, while interpreting McDowell’s case (supra):- “The court nowhere said that every action or inaction onthe part of the taxpayer which results in reduction of taxliability to which he may be subjected in future, is to be viewedwith suspicion and be treated as a device for avoidance of taxirrespective of legitimacy or genuineness of the act; aninference which unfortunately, in our opinion, the Tribunalapparently appears to have drawn from the enunciation made inMcDowell’s case [1985] 154 ITR 148 (SC). The ratio of anydecision has to be understood in the context it has been made.The facts and circumstances which lead to McDowell'sdecision leave us in no doubt that the principle enunciated inthe above case has not affected the freedom of the citizen to actin a manner according to his requirements, his wishes in themanner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the samefall in the category of colourable device which may properly becalled a device or a dubious method or a subterfuge clothedwith apparent dignity.” 18.The aforesaid discussion would show that once the transactionis genuine merely because it has been entered into with a motive to avoidtax, it would not become a colourable devise and consequently earn anydisqualification. Hon’ble the Supreme Court in the concluding paras of itsjudgment in Azadi Bachao Andolan (supra) has rejected the submissionthat an act, which is otherwise valid in law, cannot be treated as nonestmerely on the basis of some underlying motive supposedly resulting in someeconomic detriment or prejudice to the national interest as per theperception of the revenue. The aforesaid view looks to be the correct view.It has ready support from the Division Bench judgment of this Courtrendered in the case of Satya Nand Munjal (supra) and the DivisionBench judgment of Orissa High Court in the case of IndustrialDevelopment Corporation of Orissa Ltd. (supra) and various otherjudgments of Delhi and Madras High Courts (supra).20.When the principles laid down in the case of Azadi Bachao Andolan (supra) are applied to the facts of the present case it becomesevident that the question is liable to be answered in favour of the assessee-appellant and against the revenue-respondent. In the present case, thetransaction concerning purchase of units has been held to be genuine by theTribunal. It is also evident that the basic object of purchasing the units bythe assessee-appellant was to earn dividends, which are tax free underSection 80-M of the Act and to sell the units by suffering losses. Thus, itcannot be concluded by any stretch of imagination that the assessee- appellant used any colourable devise, particularly when it has beenrecognized with effect from 1.4.2002 by incorporating sub-section (7) ofSection 94 of the Act. By inserting the aforesaid provision, the Parliamenthas now recognized and regulated the purchase and sale of units and thedividends/income received from such units. Therefore, question No. 2 isliable to be answered against the revenue-respondent.21.The argument of the learned counsel for the revenue- 21.The argument of the learned counsel for the revenue-respondent based on the judgment rendered in the case of McDowell & Co.Ltd. (supra) cannot be accepted because the judgment rendered by Hon’bleMr. Justice O. Chinnappa Reddy in McDowell’s case has been explained indetail by the later judgment of Hon’ble the Supreme Court in the case ofAzadi Bachao Andolan (supra). It is well settled that if a smaller Bench ofHon’ble the Supreme Court has lateron explained its earlier larger Benchthen the later judgment is binding on the High Court. In that regard reliancemay be placed on a Full Bench judgment of this Court rendered in the caseofState of Punjab v. Teja Singh, (1971) 78 PLR 433. Speaking for theBench, Hon’ble Mr. Justice S.S. Sandhawalia observed as under:- “Now it is trite learning to say that when an earlier judgment ofthe Supreme Court is analysed and considered by a latter Benchof that Court then the view taken by the latter as to the trueratio of the earlier case is authoritative. In any case latter viewis binding on the High Courts. ……”the Supreme Court is analysed and considered by a latter Benchof that Court then the view taken by the latter as to the trueratio of the earlier case is authoritative. In any case latter viewis binding on the High Courts. ……” Likewise, reliance may be placed on another Full Bench judgment of this Court in M/s Daulat Ram Trilok Nathv. State ofPunjab, AIR 1976 P. & H. 304. In para 16, speaking for the Full Bench,Hon’ble Mr. Justice S.S. Sandhawalia held that “the construction which theSupreme Court itself places on an earlier precedent is obviously binding Likewise, reliance may be placed on another Full Bench judgment of this Court in M/s Daulat Ram Trilok Nathv. State ofPunjab, AIR 1976 P. & H. 304. In para 16, speaking for the Full Bench,Hon’ble Mr. Justice S.S. Sandhawalia held that “the construction which theSupreme Court itself places on an earlier precedent is obviously binding and authoritative …….”. The aforesaid view has also been followed byanother Full Bench of this Court in the case ofSubhash Chander KamleshKumarv. State of Punjab, (1990-2) 98 PLR 666. In that case the FullBench was considering the ratio of the judgment rendered by a ConstitutionBench of Hon’ble the Supreme Court in the case ofK.K. Puriv. State ofPunjab, AIR 1980 SC 1008. The aforesaid judgment was analysed andexplained by the later smaller Benches of Hon’ble the Supreme Court in thecases ofSreenivasa General Tradersv. State of A.P., AIR 1983 SC 1246andM/s Amar Nath Om Parkash v. State of Punjab, AIR 1985 SC 218.Accordingly, the Full Bench held that the later judgments although bysmaller Benches, which have analysed and explained the ConstitutionBench were binding. Accordingly, we take it as well settled that if a smallerBench has lateron explained the judgment of a larger Bench of Hon’ble theSupreme Court then the later is binding. Examined in the aforesaidperspective, the view expressed by Hon’ble the Supreme Court in the caseof Azadi Bachao Andolan (supra), has to be accepted as binding.Therefore, it cannot be said that the principle of law laid down by the Houseof Lords in Duke of Westminster’s case (supra), as followed, explainedand applied in the case of Azadi Bachao Andolan (supra), is no longerapplicable. The principle is found applicable in its native country andcannot be deemed to have been abandoned. Moreover, no such principleshaving been laid down in the case of McDowell & Co. Ltd. (supra) by themajority judgment, it is not possible to accept the argument advanced by therevenue-respondent. Accordingly, the second question is also answeredagainst the revenue-respondent and in favour of the assessee-appellant. 22.As a sequel to the aforesaid discussion, this appeal succeeds.Question Nos. 1 and 2 are answered in favour of the assessee-appellant and against the revenue-respondent. March 31, 2010 Pkapoor (M.M. KUMAR)JUDGE (JITENDRA CHAUHAN)JUDGE