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TMI Blog2010 (3) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... e questions of law, which were framed on 1.3.2004:- "(1) Whether the Tribunal was right in law in confirming that the loss of Rs. 51,61,875/- incurred on account of transactions of purchase and sale of 25 lacs units called 'US-64' was speculative loss under Section 73 of the Income Tax Act and that the assessee was not entitled to set off in respect of the aforestated loss accordingly? (2) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the transactions for purchase and sale of 25 lacs units called 'US-64' of the appellant with the Bank, after holding that these transactions were genuine, were (a) not bona fide transactions, (b) entered into with a motive to avoid liability for tax etc.?" 2. Few facts may first be noticed. The assessee-appellant is a Public Limited Company incorporated under the Companies Act, 1956. It is a subsidiary of Porritts & Spencer Ltd. U.K. and is engaged in manufacturing of engineered fabrics and industrial textiles. The registered as well as corporate office of the assessee-appellant is at Faridabad where it has its factory also. At all material times the assessee-appellant have been carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 25.3.1994 after making numerous deductions and allowances in the returned income. The Assessing Officer, however, did not allow deduction claimed for the short term capital loss of Rs. 51,61,875/- holding that the transactions of purchase and sale of units were not genuine transactions and was a device for tax avoidance. It further held that the loss incurred on account of these transactions was of speculative business within the meaning of Explanation to Section 73 of the Act. As such it was not allowable against the profits and gains of the business of the assessee-appellant. Accordingly, he taxed the entire dividend income of Rs. 45 lacs earned on these units as income from other sources. The Assessing Officer, however, allowed deduction of Rs. 35,13,700/- for it under Section 80M of the Act, which was calculated after 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 on record (Annexure 'B'). 6. On appeal before the CIT (A) Faridabad, the assessee-appellant challenged various additions and disallowances made by the Assessing Officer. The appeal was partially allowed by the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was knowing that dividend will be declared in the month of June and the same was declared also. The assessee claimed deduction u/s 80-M of the Income-tax Act. On the other hand, the assessee was knowing that there will be a loss on account of sale in the month of July and there was a loss of Rs. 51 lakh and odd, which it claimed against its business income. In this way, the assessee claimed deduction u/s 80-M and then he claimed deduction on account of loss against business income also. This lanning, in our considered view, cannot be approved, as the same was clear cut planning to reduce the tax effect, which is not permissible in the eyes of law. It is also worth noting that no banker will pass the entry after 60 days rom the date of actual transaction, which was entered on 21st May, 1990, as the same was entered on 21st July, the day when the units were sold by the assessee to the bank. This also clearly proves that there was a clear understanding between the banker and the assessee that the units will be sold after 60 days. Though the units were transferred in the name of assessee and then in the name of bank, but there is no material on record which suggests that phy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Walfort Share and Stock Brokers P. Ltd., [2009] 310 ITR421 (Bom), and has argued that it is not open to the revenue to raise an objection that even prior to insertion of Section 94(7), the loss arising from the transaction in question could be disallowed on the ground that the transaction was not a business transaction or that the loss was an artificial loss and not the actual loss. According to the learned counsel, the motive of the transaction is not relevant consideration. When the assessee-appellant has entered the transaction with a motive to earn losses, which eventually helped him in tax avoidance, the revenue cannot refuse to grant the benefit as long as the transaction is lawful and does not violate any express or implied provision. He has also placed reliance on a Division Bench judgment of this Court rendered in the case of Commissioner of Gift Tax v. Satya Nand Munjal, [2002] 256 ITR 516 (P&H). Placing reliance on the paras under Question No. 2, Mr. Aggarwal has argued that if on account of lacunae in the law or otherwise, the assessee-appellant becomes entitled to avoid payment of tax then it cannot be said that such a transaction would be void merely because it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax liability artificially. A particular emphasis has been made by Mr. Aggarwal in his submission by referring to paras 3, 4 and 5. 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 the Constitution Bench of Hon'ble the Supreme Court in the case of McDowell and Co. Ltd. (supra) where it has been held that even if the transaction is genuine, which has been actually acted upon, and the transaction has been entered into with the intention of tax avoidance, then it would constitute a colourable device. She has drawn our attention to the observation made by the Tribunal in respect of the transactions in question and argued that because the assessee-appellant was fully aware about the loss on account of sale in the month of July 1990, which, in fact, resulted into avoidance of the tax payment. Referring to the observations made in the extracted para 20.6 (supra), Ms. Dhugga has submitted that such a tax planning cannot be approved as it is aimed at prejudicing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected the contention of the revenue that Explanation to Section 73 of the Act, ( which makes the business of purchase and sale of shares as business of speculation) was applicable to the transaction of a sale and purchase of units. Therefore no detailed examination of the aforesaid question would be required. Accordingly, question No. 1 is answered in favour of the assessee-appellant and against the revenue-respondent and the view 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 the Tribunal for answering question No. 2. The Tribunal has recorded a finding that the transaction of purchase and sale of units between the parties was genuine, 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. The basis of the aforesaid conclusion reached by the Tribunal is that the assessee-appellant was aware that the prices of the units were high in the month of May and lowest in the month of July and even then the assesseeappellant entered the transaction. The Tribunal has further recorded a finding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) by concluding that the principle laid down by the House of Lord in Duke of Westminster's case (supra) have never been abandoned and, therefore, Hon'ble the Supreme Court in McDowell & Co. Ltd.'s case (supra) cannot deem to have laid down any different principle. In order to substantiate the aforesaid view their Lordships' of Hon'ble the Supreme Court placed reliance on a number of judgments of the House of Lords. Reference in this regard was made to a leading judgment rendered in the cases of Craven v. White, [1988] 3 All ER 495. In that case the House of Lords considered the impact of Furniss (Inspector of Taxes) v. Dawson, [1984] 1 All ER 530 (HL); IRC v. Burmah Oil Co. Ltd., [1982] Simon's Tax Case 30 (HL) (SC); and W.T. Ramsay Ltd. v. IRC, [1981] 1 All ER 865 (HL). After quoting the speeches of Lord Keith of Kinkel and Lord Oliver, Hon'ble the Supreme Court proceeded to conclude that even in the year 1988, the House of Lords emphasised the continued validity and application of the principle in Duke of Westminster's case (supra). Accordingly, the principle laid down in Duke of Westminster's case (supra) was reiterated. The observations of Hon'ble the Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity." 18. The aforesaid discussion would show that once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable devise and consequently earn any disqualification. Hon'ble the Supreme Court in the concluding paras of its judgment in Azadi Bachao Andolan (supra) has rejected the submission that an act, which is otherwise valid in law, cannot be treated as nonest merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per the perception of the revenue. The aforesaid view looks to be the correct view. It has ready support from the Division Bench judgment of this Court rendered in the case of Satya Nand Munjal (supra) and the Division Bench judgment of Orissa High Court in the case of Industrial Development Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara 16, speaking for the Full Bench, Hon'ble Mr. Justice S.S. Sandhawalia held that "the construction which the Supreme Court itself places on an earlier precedent is obviously binding and authoritative .......". The aforesaid view has also been followed by another Full Bench of this Court in the case of Subhash Chander Kamlesh Kumar v. State of Punjab, (1990-2) 98 PLR 666. In that case the Full Bench was considering the ratio of the judgment rendered by a Constitution Bench of Hon'ble the Supreme Court in the case of K.K. Puri v. State of Punjab, AIR 1980 SC 1008. The aforesaid judgment was analysed and explained by the later smaller Benches of Hon'ble the Supreme Court in the cases of Sreenivasa General Traders v. State of A.P., AIR 1983 SC 1246 and M/s Amar Nath Om Parkash v. State of Punjab, AIR 1985 SC 218. Accordingly, the Full Bench held that the later judgments although by smaller Benches, which have analysed and explained the Constitution Bench were binding. Accordingly, we take it as well settled that if a smaller Bench has lateron explained the judgment of a larger Bench of Hon'ble the Supreme Court then the later is binding. Examined in the aforesaid perspective, the v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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