THE COMMR. OF INCOME TAX, COIMBATORE vs. THE PERIAKARAMALAI TEA & PRODUCE CO. LTD

The facts leading to the controversy are the following. The assessee is a plantation company engaged essentially in production and sale of tea. In order to offset the tax liability assessee adopted a shortcut method, of course practised by several companies which is by purchase of massive number of units of Unit Trust of India on cum- dividend basis shortly before declaration of dividend and sale of the same at a lower price i.e. ex-dividend immediately after receiving the dividend. In the purchase and sale of units assessee made a loss in business, set off the same against other business profits thereby avoiding tax liability. In effect assessee does not suffer a loss because the loss on purchase and sale of units is made up by earning income by way of dividend received from the Unit Trust of India on 30th June of the year which is not taxable. The exact nature of the business transaction entered into by the assessee is stated in all the orders including that of the Tribunal which is as follows. During the previous year the assessee entered into a contract with a share broker in Madras who agreed to purchase 15,00,000 units of Unit Trust of India for the assessee at the rate of R.14.90 per unit and agreed to sell the same shortly thereafter for the assessee at the rate of Rs.13. 20. Under this deal the assessee booked a business loss of Rs.26,62,500/-. The interesting feature of the deal is that the broker arranged to purchase units from Pearless General Finance and Investment Company Limited on condition of resale to the same company which provided loan to the assessee 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 in number, were purchased at the rate of Rs.14.90 per unit from Pearless General Finance and Investment Ltd. on 7.5.1990 and were resold to the very same company i.e. Pearless General Finance and Investment Company on 9.7.1990 at the rate of Rs.13.20 per unit leading to assessee suffering a loss of Rs.26,62,500/-. Even though the purchase and sale of units has led to a loss to the assessee, in effect assessee gained in two ways, first one being the tax saved on the business loss of Rs.26,62,500/- which is the loss booked by the assessee in the purchase and sale of units and second is the interest-free dividend received by the assessee. Of course the net gain should be considered after deducting the interest paid by the assessee for the fund borrowed for purchase of the units and also the commission and charges paid to the brokers for arranging the deal. In the course of assessment for the relevant assessment year 1991-92, the Assessing Officer after considering in detail the scope of tax planning adopted by the assessee came to the conclusion that the purchase and sale of units is in effect "speculation business" and so much so, assessee is not entitled to set off the loss arising out of the same against business profits by virtue of Section 73(1) of the Act. However, C.I.T.(Appeals) by relying on Explanation to Section 73 of the Act held that units of U.T.I. are not shares of a company and so much so, purchase and sale of units does not amount to "speculation business" and hence assessee is entitled to set off of loss arising out of the transaction against business income. The C.I.T.(Appeals) relied on decision of the Income Tax Appellate Tribunal in the case of APOLLO TYRES LTD. which got confirmed by this court in COMMISSIONER OF INCOME-TAX VS. APPOLLO TYRES LTD. reported in (1999) 237 ITR 706, which again is confirmed by decision of the Supreme Court reported in (2002) 255 ITR 273. On second appeal by the Revenue, the Tribunal confirmed the orders of the C.I.T.(Appeals) against which this appeal is filed.

Senior counsel appearing for the Department contended that the transaction is literally "speculation business" because assessee booked specific loss in advance in the purchase and sale of units of U.T.I. speculating that there will be net gain by getting tax-free dividend on units and tax saving on the business loss booked which according to the expectation of the assessee would be much more than the business loss suffered. Even though the issue raised is apparently covered in favour of the assessee by decision of this court in the case of APPOLLO TYRES referred above (237 ITR 706) wherein the transaction involved is similar to the one arising in this case and the said decision is confirmed by the Supreme Court by decision in APPOLLO TYRES LTD. VS. COMMISSIONER OF INCOME-TAX (2002) 255 ITR 273 and the decisions are binding on us, we still feel we should express our view on the subject, particularly because neither this court nor Supreme Court proceeded to consider scope of speculation business and whether the loss therefrom can be allowed to be set off against business profits under Section 73(1) of the Act.

In the first place, in our view, Explanation under Section 73 does not define or exhaustively deal with speculation business. On the other hand what this Explanation says is that when a company other than an investment company or banking company is engaged in purchase and sale of shares of other companies, such activity shall be deemed to be speculation business. This Court in APPOLLO TYRES' case referred above rightly held that units of U.T.I. cannot be treated as shares of a company and so much so, Explanation to Section 73 is not attracted and the Honourable Supreme Court confirmed the said finding of this court. We do not think there can be any controversy on this issue because units issued by U.T.I. are neither shares nor even equal to the shares of a company. However, the question is whether purchase and sale of units, though not coming within the description of shares of a company, can constitute speculation business particularly, the way in which the assessee has done it.

We notice that speculation business visualised under the various provisions of the Income Tax Act do not limit it to purchase and sale of shares of a company alone. First reference of speculation business is found in Explanation 2 to Section 28 where it is defined as a business 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 in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the 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 and sale of any commodity in a speculative manner will also be a speculative transaction and when it is done in the course of business or as part of business, it becomes speculation business. We do not find any artificial definition given to speculation business in the Act and in our view, the normal literal meaning of speculation applies to Income Tax Act as well. The literal meaning of speculation contained in the dictionary is investment with the hope of gain but with possibility of loss, gamble recklessly etc. In this case we have already noticed that the assessee purchased 15 lakhs units in May 1990 i.e. shortly before declaration of the dividend and the sale is immediately after declaration of dividend and both the transactions are with one company which gave loan for the purchase of the units and also repurchased the same units as stated above. The speculation involved is obvious i.e. the possibility of getting more in tax saving combined with the dividend likely to be received over the loss suffered and expenditure incurred by way of interest and charges paid to the broker. Therefore, in our view, the transaction of purchase and sale of units when done as a business in a speculative manner, the loss therefrom could be set off only against profit arising in speculation business in terms of Section 73(1) of the Act. Assessee in fact claimed set off of loss from speculation business against income from tea plantation which in our view, is not admissible by virtue of the prohibition contained in Section 73(1) of the Act.

Even though our view is in favour of the Revenue, we are bound to follow the decision of the Supreme Court in APPOLLO TYRES' case referred above wherein the Supreme Court has confirmed judgment of this court on identical issue. Therefore, following the judgment of the Supreme Court in APPOLLO TYRES' case reported in 255 ITR 273 we dismiss the departmental appeal. C.N.RAMACHANDRAN NAIR Judge K.SURENDRA MOHAN Judge pms