- (1.) This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against an order dated 27th June, 2002 passed by the Income-tax Appellate Tribunal, "E" Bench, Kolkata, in I.T.A. No. 2600(Cal) of 1997 relating to the Assessment Year 1990-91 thereby partly allowing the appeal filed by the appellant and affirming the order of the Commissioner of Income-tax (Appeals) upholding the disallowance of loss on account of purchase and resale of UTI units. The Tribunal, however, made it clear that the allowance of loss should be restricted to the extent of dividend brought to tax by the Assessing Officer and consequently, to that extent, the appeal was allowed.
(2.) Being dissatisfied, the assessee has come up with the present appeal: At the time of admission of this appeal, a Division Bench of this Court formulated the following questions of law: "This appeal will be heard on the substantial question of law as to whether the Learned Tribunal was justified in upholding the findings of the Assessing Officer and whether the findings of the learned Tribunal were contrary to the materials on record and/or were based on no material and were therefore perverse. The appeal will also be heard on the further question as to whether the findings of the learned Tribunal that the unit transactions which took place in the present case were solely for reducing the assessee s tax liability and that the ratio of the McDowell s case apply to the present case are based on a misconstruction of the said decision."
(3.) The facts leading to the filing of this appeal may be summed up thus: a) The assessee had purchased 35 lakh units of UTI from Peerless General Finance & Investment Co. Ltd. ("Peerless") on 29th May, 1989 at the rate of Rs.14.75 per unit for a total consideration of Rs.5,16,25,000/-. Those very units were sold back to Peerless on 31st July, 1989 at the rate of 13 per unit for the aggregate consideration of Rs.4,55,00,000/-. b) While the units were purchased cum-dividend, as the booking closing date was 30th June, 1989 and the shares were purchased on 29th May, 1989, those units having been sold after the book closure, i.e. on 31st July, 1989, were sold ex-dividend. The assessee also received dividend at the rate of 18% on those units, which worked out to be Rs.63 lakh. Thus, in connection with the aforesaid transaction, the assessee incurred a loss of Rs.63,84,000/- which is the subject matter of dispute. c) It may also be mentioned that the assessee paid interest amounting to Rs.13,13,890/- for loan obtained during the time it had purchased those units and paid brokerage of Rs.1,40,000/- for purchasing the units and also incurred stamp duty of Rs.2,59,000/- on this purchase. d) Another peculiar factor of the transaction was that at the time of purchase of the aforesaid units at the rate of Rs.14.75 per unit on 29th May, 1989, the assessee also entered into an irrevocable commitment to sell back those units to Peerless at the rate of Rs.13 per unit on 31st July, 1989. Thus, at the very beginning, the assessee entered into a commitment to sell the units at a lower price. e) While, in the original assessment proceedings, the Assessing Officer did not take any objection to the loss so incurred by the assessee, the CIT, in exercise of his revisional power under Section 263 of the Act restored the matter to the file of the Assessing Officer for de novo examination of the matter. f) In passing such order, the CIT observed as follows: "From the above discussion, it appears that the assessee entered into an agreement by buying a loss in advance. This aspect of the case has not been enquired into by not making enquiry with the Peerless General Finance & Investment Co. Ltd. and the bank. Therefore, the AO made an assessment which was both erroneous and prejudicial to the interest of revenue. "In view of the above legal position discussed in the preceding paragraphs based on decided cases of several High Courts, I have no hesitation in coming to the conclusion as I have done. The AO will make a fresh assessment and in doing so shall offer reasonable opportunity of being heard to the assessee. He would also make enquiries as are necessary to come to a finding in this case." g) After the matter was restored to the file of the Assessing Officer, he came to the conclusion that the explanation furnished by the assessee regarding the loss incurred was vague and without substance. It was further observed that the fact remained that the assessee agreed to sell the units at a loss and thus, the loss was known right from the time when the purchases were made and therefore, the loss was a pre-determined loss. The Assessing Officer also was not satisfied about the assessee s explanation that it incurred the loss in expectation of high dividend from UTI. The Assessing Officer, thus, disallowed, inter alia, the loss incurred by the assessee in purchase and sale of the units amounting to Rs.63,84,000/-. h) On an appeal being preferred, the assessee submitted before the CIT(A) that the loss on purchase and sale of share was a real loss and it was neither vague nor without substance, as alleged by the Assessing Officer. The assessee further contended that Unit Trust of India, being a Government of India Enterprise, there cannot be any kind of connivance between the UTI and the assessee and that the allegation of pre-determined loss in the sale of units was not correct because the dividend received by the assessee was not taken into account by the Assessing Officer. i) CIT(A), however, was not impressed by the aforesaid contention of the assessee and came to the conclusion that the loss on sale of units was pre-determined. The CIT(A) took note of the correspondence run between the assessee and Peerless from which it was clear that even before the purchase transaction could materialize, the assessee had undertaken to sell units back to Peerless those units at a lower price. The CIT (A), in essence, held that the transaction was a sham and collusive transaction. j) Being dissatisfied, the assessee preferred an appeal before the Tribunal below and as indicated earlier, the Tribunal below allowed the appeal only to this extent by agreeing with the learned counsel for the assessee that when the loss on account of sale of units was being disallowed, it was not open to the Assessing Officer to tax income from dividend from the transaction which had been treated as a sham transaction and a colourable device. The Tribunal, thus, only decided to direct the Assessing Officer to exclude the dividend earned on these units from the income of the assessee and thus, the loss on account of purchase and resale of units would allow only to the extent of net dividend income, i.e. after allowing deduction under Section 80M brought to tax.;