By TIOL News Service

MUMBAI, MAY 10, 2016: THE issue is - Whether if the assessee has earned income from sale of mutual funds whose units are not treated as shares, dealing in such units can be considered to be shares for the purpose of computation of capital gain. NO is the verdict.

Facts of the case

The assessee is a company. For the AY 2004-05, assessee offered its profit/loss from share trading as income from speculation for purpose of Section 73 and amounts received from mutual funds/bonds as business income. AO observed that till the A.Y. 2003-04, assessee had offered profit/loss as speculative business on its income from share trading as well those from mutual funds. This was revealed by the fact that for the year ending 31st March, 2003 the assessee had shown closing stock of shares at Rs.6.69 crores while the opening stock on 1st April, 2003 for the subject AY was shown as Rs.1.01 crores and the balance of Rs.5.67 crores was shown as opening stock of mutual funds/bonds. This was done by the assessee in view of the decision of SC in Apollo Tyres Ltd. vs. CIT 255 ITR 273 2002-TIOL-185-SC-IT-LB. However, AO held that the closing stock on the last day of the preceding assessment year should be the opening stock for the subject assessment year thus the bifurcation is not permissible. Consequently the activity of dealing in mutual funds/bonds was considered to be an activity of dealing of shares as speculation business by Assessment Order dated 30th December, 2010. This resulted in addition of Rs.4.95 crores. On appeal, CIT (A) allowed the assessee's appeal by following the decision of SC in Apollo Tyres Ltd. In the above decision, the SC held that business of buying and selling of units of Unit Trust of India would not amount to speculation business. Therefore, the addition made by the AO of Rs.4.95 crores was deleted. ON further appeal, Tribunal also placed reliance upon the decision of SC in Apollo Tryes Ltd. and dismissed the Revenue's appeal.

Held that,

++ on the basis of Section 32(3) of the Unit Trust of India Act, the Revenue contended that by virtue of the above definition the Unit Trust of India is a deemed company and income from units is also a deemed dividend. Therefore the contention on behalf of the Revenue was even the units have to be considered to be shares covered by Section 73. The Apex Court in Apollo Tyres negatived the above submission on behalf of the Revenue holding that the provisions of UTI Act creates a fiction to make Unit Trust of India a deemed company and the income received on its unit by an assessee to be deemed dividend. However the Court held that there is no deeming provisions for unit to be considered as share. Thus units are not shares. In the present facts also no specific provision has been pointed out to us which would deem the units in a mutual funds and/or bonds to be shares either for the purposes of the Act or for any other purposes. In that view of the matter, in our view, the decision of the Apex Court in Apollo Tyres Ltd. would cover the controversy arising for our consideration as units are not shares and therefore dealing in units cannot be considered to be shares. The decision of the Delhi HC in DLF Commercial Developers Limited relied upon by the Revenue dealt with derivative and not with regard to units of mutual funds. In the facts before the Delhi HC the underlying instruments were only shares. However, the mutual funds are invested in various types of securities and not limited only to shares in company as pointed out by the Revenue during the hearing by placing reliance upon an extract of SEBI Investor Education Programme. In the above view, the decision of the Delhi High Court in DLF Commercial Developers Limited would not apply to the facts of the present case. Therefore the issue stands concluded in favour of the assessee by the decision of this Court in Apollo Tyres Ltd. In the above view, the question as framed does not give rise to any substantial question of law. Thus, not entertained. Appeal dismissed.

(See 2016-TIOL-899-HC-MUM-IT)