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2016 (9) TMI 214 - GUJARAT HIGH COURT

2016 (9) TMI 214 - GUJARAT HIGH COURT - [2017] 393 ITR 349 - Speculation business - Getting the shares by allotment on application in Public Issue is purchase within the meaning of the word `purchase' under Explanation to Section 73 - Tribunal held that the sale of such shares becomes the speculation business under the said Explanation - Held that:- Allotment of shares by way of application in Public Issue has been held in Khoday Distilleries Ltd. Versus Commissioner of Income Tax and Anr. [2008 .....

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of shares. As stated hereinabove, the words "allotment of shares" have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. We are of the view that whichever rule of interpretation is followed, whether literal or object wise or purposive, the transactions of the assessee cannot imaginably be deemed to be a speculative business. Therefore the first question is answered in favour of assessee and against the revenue. - Wh .....

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MR MANISH J SHAH, ADVOCATE FOR THE APPELLANT MRS MAUNA M BHATT, ADVOCATE FOR THE OPPONENT JUDGMENT ( PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. Being aggrieved and dissatisfied with the impugned judgment and order dated 24.03.2006 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as ITAT) in ITA No. 2358/Ahd/2004 for the assessment year 2001-02, the assessee has preferred Tax Appeal No. 957 of 2006 for consideration of the following substantial question of law .....

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.06.2007 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench A (hereinafter referred to as ITAT) in ITA No. 388/Ahd/2007 for the assessment year 2001-02, the assessee has preferred Tax Appeal No. 1644 of 2008 for consideration of the following substantial question of law: Whether the Appellate Tribunal is right in law and on facts in reversing the order of the CIT(A) and thereby cancelling the penalty levied under Section 271(1)(c)? 2. The assessee is a dealer in chemicals as also in sh .....

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order, dismissed the appeal filed by the assessee. 2.1 So far as Tax Appeal No. 1644 of 2008 is concerned, while finalizing assessment u/s 143(3), the Assessing Officer disallowed the claim of the assessee treating the same as speculation loss. Penalty u/s 271(1)(c) of the Act was levied by the revenue. In appeal, the CIT(A) confirmed the disallowance. The issue before the Tribunal in quantum appeal was referred to Special Bench and the Bench in its order dated 24.03.2006 in ITA No. 2358/Ahd/200 .....

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as revenue have preferred the present Tax Appeals for consideration of the aforesaid substantial question of law. 3. Mr. J.P. Shah, learned Counsel appearing with Mr. Manish Shah, learned advocate on behalf of the assessee has submitted that the Tribunal erred in holding that getting the shares by allotment on application in Public Issues of Public Limited Companies and eventually selling them is speculation business covered by Explanation to Section 73 of the Act. He has relied upon the decisio .....

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d upon a decision of the Apex Court in the case of Morgan Stanley Mutual Fund vs. Kartick Das with Dr. Arvind Gupta vs. Securities and Exchange Board of India and Others reported in (1994) 4 SCC 225. Relying upon the decision of the Apex Court in the case of Khoday Distilleries Ltd. vs. Commissioner of Income Tax and Another reported in [2008] 307 ITR 312 (SC), he submitted that the Apex Court has held thereunder that there was a vital difference between creation and transfer of shares and that .....

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by the Apex Court because it is well established that the company cannot trade in its own shares. He submitted that even if the provision is capable of two interpretations, one in favour of the assessee must be adopted bearing in mind the well settled rule of interpretation of taxing statutes. 3.3 So far as Tax Appeal No. 1644 of 2008 is concerned, Mr. Shah submitted that the Tribunal has rightly cancelled the levy of penalty. He submitted that the CIT(A) has wrongly confirmed the levy of penal .....

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and sale of shares and not how the shares came into existence. He submitted that the activity is to be looked into and not the transaction. He submitted that the business of the assessee is purchase of shares and therefore it will be covered under the head business activity and therefore the Tribunal has rightly considered to the same to be speculative loss. 4.1 Mr. Bhatt has relied upon a decision of the Calcutta High Court in the case of Commissioner of Income Tax vs. Arvind Investments Ltd. r .....

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is court to the various observations made by the Tribunal in its impugned order which are reproduced hereunder: 7.2 This statement is not specific to any particular provision but to the Amendment Act as a whole and talks about many objectives one of which is to fight and curb tax evasion. Nothing is specifically mentioned about the alleged avowed object with regard to the impugned Explanation. Clause 16 of the Noted on clauses (page 110 of the Reports) however dealing with this insertion on the .....

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da Nand & Sons 60 ITR 392 (SC), it was observed that When the words of a section are clear, but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in Heydon s case [1584] 3 Rep. 7B yields better results. To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider, according to Lord Cole; 1. what was the law before the Act was passed; 2. what was the mischief or defect for whi .....

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al task. It is more than a mere reading or mathematical formula because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that languate is at best an imperfect instrument for the expression of human though and it would be idle to expect every statutory provision to be drafted with divine presence and perfect clarity . 15.2 It is undoubtedly true that the marginal note t .....

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it prima facie furnishes some clue as to the meaning and purpose of the section. It is further observed that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason, for the introduction of the bill can certainly be referred to for the purpose of ascertaining the mischief .....

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. These two decisions have taken the objects of the introduction of the statute as a base understanding the meaning of the terms used therein and the wider meaning thereof at any time in the madras case and language of subsection 2 of section 52 of the Act in case before Supreme Court were giving absurd and unconstitutional results and therefore resort was had to the objects and reasons for introducing the provision. The in the 1st case was that the term at any time might include even the proper .....

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rs of the Parliament and also violative of fundamental rights enshrined under article 19(1)(f) of the Constitution. There is nothing of that sort in this case. There is no ambiguity also in the language used. Putting the share dealing transactions in one category is a reasonable classification and loss arising therefrom are put in one category of speculative loss entitled to same treatment as other losses except that set off thereof is restricted to income of that category. 27. We may examine th .....

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lready quoted provision of the Sales of Goods Act above defining what sales means. Sale in the case of a seller is purchase in the hands of the purchaser and therefore where under a contract of sale the property is transferred from the seller to the buyer, the contract is called a sale, conversely a purchase. The sale of shares is complete when the shares are allotted as on allotment it becomes an ascertained goods/property. 4.3 Mr. Bhatt has also relied upon the following decisions in support o .....

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on on which reliance is placed. Observations of Courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to .....

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to be given to the language actually used by that most distinguished judge." (II) Commissioner of Income Tax, A.P vs. T.N. Aravinda Reddy reported in [1979] 120 ITR 46 wherein it is held that the word purchase in S. 54(1) had to be given its common meaning viz. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration and that each release in this case was a transfer of the releasor s share for consideration to the releasee a .....

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her meaning given to the word "purchase" is "procure". The word "procure" consists of much wider import than the word "purchase". In the same dictionary, the word "procure" has been mentioned the meaning as "obtained by care or effort acquire". Purchase is thus a word of restricted meaning than the word "procure". While considering a taxing statute which deals with income from business the word "purchase" will theref .....

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r: 6. At the outset it is required to be noted that taking into account the facts on record and the question which have been posed for consideration of this Court as to whether the business loss suffered by the appellant is to be treated as speculation loss by applying the provisions of Explanation to Section 73 of the Act and will govern under Section 73 or Section 43 (5) of the Income Tax Act, this Court has considered the various decisions of different High Courts cited by the learned Counsel .....

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ing the trading of the shares, which has been rightly held by the A.O. and confirmed by the Tribunal and it cannot get settle as business income with the other trading. Thus, this Court is in agreement with the view taken in the case of R.P.G Industries Ltd., (supra) that the loss suffered by a company in share transactions is to be treated as a speculative loss within the meaning of Section 73 of the Act. 5. Having heard learned advocates for the parties and having gone through the materials on .....

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le will be speculation business. Section 73 of the Income Tax Act, 1961 deals with carry forward and set off losses from speculation business. Explanation to Section 73 is a deeming provision wherein if specified conditions are satisfied, purchase and sale of shares are deemed speculation activities. This explanation becomes very important now-a-days in view of more and more NBFC activities. In this context it shall be relevant to go through Section 73 of the Act and the Explanation thereto and .....

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tion business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expend .....

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nly of income which is chargeable under the heads" Interest on Securities", " Income from House Property", "Capital Gains" and " Income from other sources" or a Company the principal business of which is the business of banking or the granting of Loans & Advances) consists in the purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business to the extent to which .....

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ounsel, till allotment is made, shares did not exist. It is only on allotment that shares come into existence. In this connection, learned counsel placed reliance on the judgment of this Court in the case of Sri Gopal Jalan & Company v. Calcutta Stock Exchange Association Ltd. reported in 1964 (3) SCR 698. He also relied upon the judgment of this Court in the case of Sangramsinh P. Gaekwad and ors. V. Shantadevi P. Gaekwad (Dead) through LRs. and ors. reported in (2005) 11 SCC 314. Learned c .....

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ken by the Department, in this case, was conflicting inasmuch as according to the A.O. what was intended to be evaded was incometax by the Directors of the appellant-company whereas, according to the CIT(A), the exercise undertaken by the appellant-company was to evade wealth tax. Learned counsel submitted in the alternative that even assuming whilst denying that there was an intention to evade income tax or wealth tax, the correct course open to the Department was to include the income or wealt .....

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d "allotment" means appropriation out of previously unappropriated capital of a company, of a certain number of shares, to a person and till such allotment, the shares do not exist as such. It is only on allotment that the shares come into existence and in every case the words "allotment of shares" have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. 8. In our view, the judgment of this Court in Sri .....

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rights in possession. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. In this case, when twenty shareholders did not subscribe to the rights issue, the appellant allotted them to the seven investment companies, such allotment was not transfer. In the circumstances, Section 4 (1)(a) was not applicable as held by the Tribunal. .....

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