Tax planning is valid

[2010] 3 taxmann.com 69 (Punj. & Har.)

Once transaction is held to be 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

Tribunal was not right in law in holding that the transactions for purchase and sale of 25 lacs units called `US-64' of the assessee with the Bank, after holding that those transactions were genuine, were (a) not bona fide transactions, (b) entered into with a motive to avoid liability for tax etc.

HIGH COURT OF PUNJAB & HARYANA

Porrits & Spencer (Asia) Ltd.

v.

CIT

ITA No. 10 of 2004 (O&M)

March 31, 2010

RELEVANT EXTRACTS:

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1. The assessee-appellant has approached this Court by invoking Section 260A of the Income-tax Act,1961 (for brevity, `the Act') challenging order dated 3.6.2003,passed by the Income Tax Appellate Tribunal, Delhi Bench "D " ,Delhi (for brevity,`the Tribunal '),in ITA No. 1711 (Del)/97,in respect of Assessment Year 1991-92.The Tribunal has upheld the view taken by the Commissioner of Income Tax (Appeals), Faridabad, inasmuch as, it has not allowed the short term capital loss of Rs. 51,61,875/-incurred by the assessee-appellant on sale of units called as `US-64 ' .The instant appeal was admitted on the claim of the assessee-appellant on the following two substantive 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 the business of manufacturing and selling machine clothing for different applications to a diverse range of industries in India and abroad.

11. Question No.1 is no longer res integra because Hon 'ble the Supreme Court in the case of Apollo Tyres Ltd.(supra)has considered a similar question and in the concluding portion of the judgment, while rejecting the contention of the revenue that the business of purchase and sale of units by the assessee would amount to a business of speculation, held as under:-

"……We have examined the provisions of the UTI Act and we are of the opinion that even though the said section creates a fiction to make the UTI as a deemed company and distribution of income received by the unit holder as a deemed dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of the UTI a deemed share. In our opinion, a deeming provision of this nature as found in section 32(3)should be applied for the purpose for which the said deeming provision is specifically enacted, which in the present case is confined only to deeming the UTI as a company and deeming the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the units as also a deemed share then it would have stated so. In the absence of any such specific deeming in regard to the units as shares it would be erroneous to extend the provisions of section 32(3)of the UTI Act to the units of UTI for the purpose of holding that the unit is a share.… …"

12.It is pertinent to mention that Hon 'ble the Supreme Court specifically rejected 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 assessee- appellant entered the transaction. The Tribunal has further recorded a finding that there was a planning to purchase the shares and then to sell the same after 60 days, which was with a obvaious motive. The assessee- appellant was aware that dividends on the units were to be declared in the month of June, which happened and accordingly the assessee-appellant claimed deduction under Section 80-M of the Act. The assessee-appellant was also aware that there would be loss on account of sale of the units in the month of July, which accordingly occurred. The assessee-appellant claimed set off of amounting to Rs.51,61,875/ -against its business income.

14. The question which falls for consideration is whether to apply the principle laid down by Hon'ble the Supreme Court in the case of McDowell & Co. Ltd.(supra), wherein it was held that the judgment of House of Lords in IRC v. Duke of Westminster, [1936 ]AC 1 (HL),was not applicable. In other words, even if the transaction is genuine and even if it is actually acted upon, it would be permissible in law, inasmuch as, it is part of continuous tax planning which may be aimed at avoidance of tax not evasion of tax. The aforesaid principle is based on the premise that a tax payer may resort to a devise to divert the income before it arrives to him and effectiveness of the devise would not depend upon consideration of morality but on the operation of the Act.

15. On the strength of the Division Bench judgment of the Bombay High Court rendered in the case of Twinstar Holdings Ltd.(supra), learned counsel for the revenue-respondent has argued that if the transaction is entered into with the intention of tax avoidance and it was known to the parties before hand then even if the transaction is genuine, it would constitute a colourable devise. The aforesaid view is sought to be supported by the observations made in the case of McDowell & Co. Ltd.(supra). On the contrary the main plank of argument of the learned counsel for the assessee-appellant is that intention and motives are irrelevant. The aforesaid argument has been canvassed on the strength of the judgment of Bombay High Court rendered in the case of Walfort Share and Stock Brokers P. Ltd.(supra)and the view expressed by Hon'ble the Supreme Court in the case of Azadi Bachao Andolan (supra).

16.In the case of Azadi Bachao Andolan (supra),Hon 'ble the Supreme Court has explained its earlier judgment rendered in the case of McDowell & Co. Ltd.(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 Supreme Court in that regard reads as under:-

"With respect, therefore, we are unable to agree with the view that Duke of Westminster 's case [1936 ] AC 1 (HL);19 TC 490 is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster ' s case [1936 ] AC 1 (HL);19 TC 490 is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. Raman [1968 ] 67 ITR 11 (SC)are very much relevant even today. We may in this connection usefully refer to the judgment of the Madras High Court in M. V. Vallipappan v. ITO,[1988 ] 170 ITR 238,which has rightly concluded that the decision in McDowell [1985 ] 154 ITR 148 (SC)cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd.[1987 ] 2 WLR 24,and did not have the

benefit of the House of Lords' pronouncement in Craven 's case [1988 ] 3 ALL ER 495 (HL);[1990 ] 183 ITR 216 (HL),the view taken by the Madras High Court appears to be correct and we are inclined to agree with it."

17. Hon 'ble the Supreme Court also proceeded to approve the following view of Gujarat High Court in Banyan and Berry v. Commissioner of Income Tax,[1996 ]222 ITR 831 ,while interpreting McDowell 's case (supra):-

"The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell 's case [1985 ] 154 ITR 148 (SC).The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in 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 Corporation of Orissa Ltd.(supra)and various other judgments of Delhi and Madras High Courts (supra).

20. When the principles laid down in the case of Azadi Bachao Andolan (supra)are applied to the facts of the present case it becomes evident that the question is liable to be answered in favour of the assessee-appellant and against the revenue-respondent. In the present case, the transaction concerning purchase of units has been held to be genuine by the Tribunal. It is also evident that the basic object of purchasing the units by the assessee-appellant was to earn dividends, which are tax free under Section 80-M of the Act and to sell the units by suffering losses. Thus, it cannot be concluded by any stretch of imagination that the assessee- appellant used any colourable devise, particularly when it has been recognized with effect from 1.4.2002 by incorporating sub-section (7) of Section 94 of the Act. By inserting the aforesaid provision, the Parliament has now recognized and regulated the purchase and sale of units and the dividends/income received from such units. Therefore, question No.2 is liable to be answered against the revenue-respondent.