By TIOL News Service

AHMEDABAD, SEPT 05, 2016: THE issue is - Whether getting shares by allotment on application in public issue is to be construed as 'purchase' as per Explanation to Sec 73 and sale of such shares acquires hues of speculation business. NO is the answer.

Facts of the case

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. ITAT dismissed the appeal filed by the assessee.

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. 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 - 2006-TIOL-99-ITAT-AHM-SB 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). 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.

Having heard the parties, the Court held that,

++ the 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. As held in the decision in the case of Khoday Distilleries there is a vital difference between "creation" and "transfer" of shares. 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. 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;

++ 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;

++ ITAT 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.

(See 2016-TIOL-1976-HC-AHM-IT)