TMI Blog2004 (9) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... before me on behalf of the assessee based on the object for which Explanation below section 73 was inserted. It was pointed out that the Explanation was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1977 and that the circular No. 204 dated 24-7-1976 stated that "the object of this provision is to curb the device some time resorted to by the business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control". The contention is that in the present case, there is admittedly no such device and no business houses or controlling groups are involved, the case being one of a simple share broker who also traded on own account, and, therefore, the Explanation ought not to have been invoked. A reference was made to the following judgments of the Supreme Court in which the object with which a statutory provision was introduced was considered very material in deciding whether provision is attracted to a particular factual situation: 1. ADI(Inv.) v. Kum. A.B. Shanti [1997] 225 ITR 258 (SC) (sic) 2. Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC) 3. CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich they wager upon the increase or fall in the price of the shares without actual intending to give or take delivery of the scrips. The transaction is periodically or ultimately settled only by payment of the difference. The Legislature apparently thought that the actual purchase and sale of shares by certain companies should be deemed to be speculative transactions as there was evidence to show that some companies were adopting a device to manipulate the prices of the shares, which are dealt with amongst controlling groups, to reduce their taxable income. That was the reason why the Explanation was inserted. While inserting the Explanation, care was taken to leave out of its sweep, companies which do not have any income under the head "business" on the footing that these companies would be pre-dominantly investment companies carrying on genuine investment business for the benefit of the members or the shareholders and should, therefore, be spared the rigour of the Explanation. Banking companies or finance companies who in the course of their business may have share dealings were also excluded presumably on the assumption that these companies are not likely to indulge in manipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the declared value, he can invoke section 52(2) and take the market value of the asset as representing the real sale price and proceed to compute the capital gains on that basis, without proving understatement in any manner. The argument of the assessee was that it was incumbent upon the ITO to prove actual understatement of the sale price by cogent evidence, and only if such proof is furnished, can the section be invoked. The Supreme Court laid down the following propositions regarding the rule of interpretation to be followed in the case of such provisions: (a) the strict literal interpretation must be avoided, if it would result in absurdity or mischief; (b) the language of such a provision should be construed having regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs; (c) a fair and reasonable construction of such provision would be to read into it a condition that it would apply only where there is an actual understatement of consideration; (d) any circular issued by the CBDT at the time of introducing the provision or closely thereafter, explaining the object of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased's purchasing powers. In other words, the policy behind the provision is to counteract or render nugatory any attempt at avoidance or evasion of state duty in this manner." It was further observed as under: "We would not like to understand the proviso to section 46(1)(b) as merely enunciating a rule of evidence. On the contrary we hold that the proviso has to be read as part and parcel, or the summum bonum of the entire object of Parliament contained in section 46(1)(b) as respects the extent of the abatement of the debt and the extent of the cutting down of the abatement, both put together." Thus, in the case of a tax avoidance provision despite the clear language, the courts have not applied the law on the basis of the plain language of the provision and have not hesitated to look into the object or policy behind the provision to ascertain the true meaning of the section and the above two decisions clearly show that a tax avoidance provision has been applied only where the situation warranted, namely, where there was attempt on the part of the tax payer to circumvent the law with the motive of reducing his tax liability. The courts have eschewed a wooden approach, by ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y business houses as mentioned in para 19.2 of the circular. It is also of significance that the Explanation applies only to companies and that too only to a limit category of companies. Other assessable entities are excluded. All this is a clear pointer, in my humble opinion, to the position that only if there is reason to believe that a device is being adopted by the companies to reduce their taxable income shall the Explanation be invoked. The intention of the Legislature is also made clear by excluding other categories of assessable entities from the sweep of the provision. For instance, an individual or a partnership firm is excluded from the operation from the Explanation. The reason is not far to seek. It is the considered opinion of the Legislature that a provision was needed to be introduced only to check the malpractice adopted by business houses controlling companies by manipulating the share dealings inter se. Further, such transactions, even in the case of certain categories of companies were permitted and were treated as normal business transactions so that the loss arises out of such transactions could be adjusted against the normal business profits. The ban is appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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