Section 73: mututal Fund Units not Covered !

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While it is clear that Explanation to Section 73 is applicable on shares of a company and units purchase and sale does not come within its purview, there can be sepculative trade in case of mutual fund units u/s 43(5) and if any loss arises from such trades in iunits, it can not be adjusted with business income. This issue was before Kerala High Court in CIT vs Periakaramalai Tea & Produce Co. Ltd.[ 2011] 238 CTR 449 (KER.) which although gave final verdict in favour of assessee , but only because of Apex court judgment in Appolo Tyres on defferent issue.

Facts Related to Reassessment Case under Section 147

The assessee company, producer and seller of tea, purchased units of UTI on cum-dividend basis shortly before declaration of dividend from a company. Thereafter, it sold said units to the same company at a lower price, i.e., ex-dividend immediately after receiving dividend. In the purchase and sale of units, the assessee suffered a loss which was set off against other business profits.
The A.O considered the purchase and sale of units as ‘speculation business’ within teh meaning of Explanation to section 73 and held that the assessee was not entitled to set off the loss arising out of the same against its business profits by virtue of section 73(1).
However, the Commissioner (Appeals) as well as did not agree with A.O and based on the decision of Tribunal in the case of Appollo Tyres Ltd., which got confirmed by Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 / 122 Taxman 562 .

The issue before , Kerala in Periakaramalai Tea & Produce Co. Ltd vs Cit 238 CTR 449 (KER.) [2011] was

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.

Kerala held on issue of Reassessment Proceeding under Section 147

The Kerala held vide its order 30-09-2010 as under :

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 Apollo Tyres Ltd.’s case (supra) 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 Hon’ble 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 lakh 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 Apollo Tyres Ltd.’s case (supra) wherein the Supreme Court has confirmed judgment of this Court on identical issue. Therefore, following the judgment of the Supreme Court in Apollo Tyres Ltd.’s case (supra) we dismiss the departmental appeal.

Thus , the assessee and taxpayer should always take note of the aforesaid judgment of the Kerala in a case of reassessment proceeding under section 147