Jhaveri, J. (Oral)
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:
(i) Whether on the facts and in circumstances of the case, getting the shares by allotment on application in Public Issue is purchase within the meaning of the word 'purchase' under Explanation to Section 73 ?
(ii) Whether on the facts and in circumstances of the case, the Tribunal was right in law in holding that the sale of such shares becomes the speculation business under the said Explanation ?
1.1 Similarly, being aggrieved and dissatisfied with the impugned judgment and order dated 08.06.2007 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 shares. The assessee applied in the Public Issue of certain companies and was allotted shares which it eventually sold and in the process suffered loss. The Assessing Officer rejected the contention of the assessee that the application of shares from the primary market and loss incurred on the sale of such shares does not fall within the purview of being categorized as speculated loss under the provisions of Explanation to Section 73 of the Act. On appeal before the ITAT, by impugned judgment and 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/2004 held that the loss on account of trading in shares was a speculative loss. Meanwhile the penalty levied by Assessing Officer was confirmed by CIT(A). On appeal before the ITAT, the ITAT deleted the penalty by observing that the very fact that matter had been referred to Special Bench by itself indicated that the issue was debatable and therefore could not be a case of concealment.
2.2 Being aggrieved and dissatisfied with the impugned judgment and order passed by the ITAT, the assessee as well 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 decision of the Apex Court in the case of Shri Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd. reported in AIR 1964 SC 250 which quotes with approval Lord Greene M.R. In V.G.M. Holdings Ltd. 1942-1 Ch 235; "it seems to me that the word 'purchase' cannot with propriety be applied to the legal transaction under which a person, by the machinery of application and allotment, becomes a shareholder in the company. He does not purchase anything when he does that......"
3.1 Mr. Shah has also relied upon a decision of the Apex Court in the case of Morgan Stanley Mutual Fund v. Kartick Das with Dr. Arvind Gupta v. 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. v. 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 the allotment by the assessee of all the rights shares to only seven out of 27 shareholders was not 'transfer' and section 4(1)(a) was not applicable.
3.2 Referring to the aforesaid decisions, Mr. Shah has submitted that if the provision is interpreted keeping the object in mind, the provision will not apply to these transactions and even if the rule of literal interpretation is to be adopted even then the provision will not apply because allotment in Public Issue of shares is not purchase as held 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 penalty.
4. Mr. Manish Bhatt, learned Senior Counsel has appeared with Ms. Mauna Bhatt, learned advocate on behalf of the Department. He has drawn the attention of this Court to Section 73 of the Income Tax Act and the explanation thereto and submitted that the language of the Explanation is required to be borne in mind more particularly when there is no reason to have to resort to external aids of construction. He submitted that what is to be seen is that the business of the assessee is in purchase 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 v. Arvind Investments Ltd. reported in (1991) 192 ITR 365 wherein the Court held therein that the Explanation to Section 73 applied to the case of the assessee therein whose entire business consisted of dealing in shares and that the loss incurred by the assessee was a speculation loss. He submitted that in the present case also the main business of the assessee was purchasing shares and therefore this decision squarely applies on the facts of the present case.
4.2 Mr. Bhatt, during the course of his arguments has taken this 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 other hand reads rather as under:
"This clause seeks to add an Explanation to section 73 of the Act. The proposed Explanation seeks to treat the business of purchase and sale of shares by companies which are not investment, banking or finance companies, as speculation business. The result of this would be that losses from such dealings will be set off only against gains from similar dealings in shares."
14.2 When To Apply The Mischief Rule: It can also be when to apply the mischief Rule. In Shahzada Nand & Sons 1966 (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 which the law had not provided 3. What remedy Parliament has appointed; 4 the reason of the remedy. In Sevantilal Maneklal Sheth 1968 (68) ITR 503 (SC), the Supreme Court again observed that it is a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute. In K.P. Varghese 131 ITR 597 (SC) also it was observed that "The task of interpretation of a statutory enactment is not a mechanical 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 language 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 to a section cannot be referred to for the purpose of construing the section but as observed in K.P. Varghese v. ITO (1981) 131 ITR 597 (SC), it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins M.R. In Bushel v. Hammond (1904) 2 KB 563 (CA), to show what the section is dealing with. It cannot control the interpretation of the words of a section, particularly when the language of the section is clear and unambiguous but, being part of the statute 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 sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. In Anandji Haridas & Co. (P.) Ltd. 1975 (99) ITR 592 (SC) also it was so held that where the language of a provision is manifestly clear and unequivocal, it has to be construed as it stands, according to its plain grammatical - sense without addition or deletion of any words. It would not be permissible to use the speech of the Finance Minister to construe the clear language of the statute.
18. 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 property inherited or by testamentary succession. It was therefore the meaning to the term was given restricting it to 'derivation of property prior to advance of the debt or loan' and 'because at the time when property became part of creditors' resources there must be some nexus between the resources and the consideration for the debt. Similarly in the 2nd case the wide language in Section 52(2) was giving rise to tax an item which was not income or even receipt and therefore outside the legislative powers 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 this issue from a different angle. What the Explanation provide is the any business of a company consists of purchase and sales of shares of another company, therefore we have to see is whether business is of purchase and sale of shares and not what is the nature and mode of such purchase. The assessee does not dispute that on allotment shares are acquired. He only disputes that they are not purchases. When acquisition is with a price it is a purchase as held in T N Arvind Reddy (Supra). We have already 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 of his submissions:
(I) Bharat Petroleum Corpn. Ltd. and Another v. N.R. Vairamani and Another reported in (2004) 8 SCC 579 paras 8 & 9 whereof read as under:
"8. As rightly submitted by learned counsel for the appellants provisions similar to Sections 3 and 9 of the Tenants Act were not under consideration in Hindustan Petroleum's case (supra).
9. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision 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 define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes. In London Graving Dock Co. Ltd. v. Horton (1951 AC 737 at p.761), Lord Mac Dermot observed:
"The matter cannot, of course, be settled merely by treating the ipsissima vertra of Willes, J as though they were part of an Act of Parliament and applying the rules of interpretation appropriate thereto. This is not to detract from the great weight to be given to the language actually used by that most distinguished judge."
(II) Commissioner of Income Tax, A.P v. T.N. Aravinda Reddy reported in (1979) 120 ITR 46 wherein it is held that the word 'purchase' in Section 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 and the transferee, the assessee, "purchased" the share of each of his brothers and the assessee was, therefore, entitled to the relief under Section 54(1).
(III) State of Karnataka and others v. Sri Chamundeswari Sugar Limited reported in (2008) 7 SCC 469 wherein para 16 reads as under:
"16. Normal meaning of the word 'purchase' is acquisition for money or for any consideration. That is the primary meaning. In Concise Oxford Dictionary, apart from the two meanings "buy, acquire", another 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 therefore, have to be seen in the commercial sense. In the commercial sense, a transaction of purchase is a part of a transaction of sale. A transaction of sale can never be complete unless there is a transfer of property from the seller as well and the buyer who is the purchaser, must, therefore, acquire the property before he can claim to have purchased the property."
(IV) Decision of this Court rendered in Tax Appeal No. 1132 of 2006 on 29.06.2016 more particularly para 6 & 6.1 which read as under:
"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 for the revenue.
6.1 In this regard, the decision in case of R.P.G. Industries Ltd. (supra) is relevant and has rightly been relied upon by the learned Counsel for the revenue. This Court is of the opinion that the explanation to Section 73 will have a bearing on the issue since the company is dealing with the purchase and sale of the shares and even considering the loss on different valuation of the shares, it will govern under the definition of the speculation loss, as also the assessee is doing 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 record, it is an admitted position that the Special Bench of the Tribunal was constituted to decide the following question:
"Whether on the facts and in the circumstances of the case, loss arising from sale of shares applied for by a dealer and allotted to it in Public Issue is hit by Explanation to Section 73 of the Income-tax Act 1961?"
5.1 The Tribunal while deciding the said question has held that even the acquisition of shares by allotment on application in Public Issue and their eventual sale 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 the same reads as under:
"73. Losses in speculation business (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and. gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation 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 expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
Explanation to Section 73 reads as under :
Where any part of the business of a Company(other than a company whose gross total income consists mainly 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 the business consists of the purchase and sale of such shares".
5.2 In this regard, it shall also be useful to reproduce relevant paragraphs of the decision in the case of Khoday Distilleries Ltd. (supra) which read as under:
"5. Shri Soli J. Sorabjee, learned senior counsel appearing on behalf of the appellant, submitted that gift tax is not attracted on initial allotment of shares because there is no transfer of any existing movable property, namely, the shares. According to the learned counsel, 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 counsel further submitted that there is a vital difference between tax planning and tax evasion. According to the learned counsel, it is perfectly legitimate and permissible for an assessee to so arrange his affairs with a view to reduce its tax liability and such tax planning cannot be equated with tax evasion. In this connection, learned counsel submitted that the transaction in question was not sham or fictitious but real and it was given effect to. Moreover, it was contended that the stand taken by the Department, in this case, was conflicting inasmuch as according to the A.O. what was intended to be evaded was income-tax 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 wealth in the income tax or wealth tax assessment of the concerned assessee. For the afore stated reasons, learned counsel submitted that the High Court should not have interfered with the decision of the Tribunal.
7. At the outset, we may state that none of the above arguments have been considered by the High Court in its impugned judgment. In the case of Sri Gopal Jalan & Company (supra) a question arose as to the meaning of the word "allotment". It was held that in Company Law the word "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 Gopal Jalan & Company (supra) squarely applies to the present case. There is a vital difference between "creation" and "transfer" of shares. As stated herein above, 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. A share is a chose in action. A chose in action implies existence of some person entitled to the rights in action in contradistinction from 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 t
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hat 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. " 5.3 Thus, from the above decision it is clear that allotment of shares by way of application in Public Issue has been held by the Apex Court under the Gift Tax Act which is a direct tax not amounting to be a transaction. Thus, the Apex Court has held that the same shall not amount to be purchase. The Tribunal has wrongly relied upon the decision of the Apex Court in the case of T.N. Arvinda Reddy (supra) which has nothing to do with the point at issue. As held in the decision in the case of Khoday Distilleries (supra) there is a vital difference between "creation" and "transfer" of shares. As stated herein above, 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 in Tax Appeal No. 957 of 2006 is answered in favour of assessee and against the revenue. 6. When we have come to the conclusion that the allotment of shares cannot be termed as purchase, then the assessee cannot be said to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Thus it shall not be covered under Explanation to Section 73 and therefore the second question in Tax Appeal No. 957 of 2006 is also required to be answered in favour of assessee. Accordingly, the levy of penalty u/s 271(1)(c) shall not arise and therefore the question raised in Tax Appeal No. 1644 of 2008 is also answered in favour of assessee. 7. In view of the above, the questions raised for consideration in the present appeals are answered in favour of the assessee and consequently, the impugned judgment and order passed by the ITAT in ITA No. 2358/Ahd/2004 dated 24.03.2006 is quashed and set aside. The Tribunal is wrong in holding that getting the shares by allotment on application in Public Issue is purchase within the meaning of the word 'purchase' under Explanation to Section 73 and in holding that the sale of such shares becomes the speculation business under the said Explanation. The judgment and order in ITA No. 388/Ahd/2007 dated 08.06.2007 is confirmed. Hence, Tax Appeal No. 957 of 2006 is allowed and Tax Appeal No. 1644 of 2008 is dismissed. No costs.