Genuine transaction, even if entered with a motive to avoid tax, would not become colorable device so as to be disqualified
The taxpayer purchased certain units and upon receiving dividend thereon, it sold the same at a loss. The taxpayer claimed deduction in respect of dividends under section 80M and set-off of short-term capital loss against its income. The claim was disallowed by the tax authority on the ground that such transaction was not genuine but a device for tax avoidance.
The first appellate authority partially allowed the appeal of the taxpayer. On further appeal, the Tribunal, considering the Supreme Court ruling in McDowell and Co. Ltd. (154 ITR 148), held that though the transaction was genuine, it was not bona-fide as it was entered with the motive to reduce tax liability.
Hence, set-off of loss was not permissible. In further appeal to the High Court, the main contention of the tax authority, considering the ruling in McDowell (supra) was that if the transaction was entered with the intention of tax avoidance, it would constitute a colorable device, even if it is genuine. On the other hand, the main contention of the taxpayer, on the strength of a later Supreme Court ruling in Azadi Bachao Andolan (263
ITR 706) was that intention and motive is irrelevant.
Held, the larger bench decision in McDowel (supra) was explained later by the Court in smaller bench decision in Azadi Bachao (supra) wherein it was held that once the transaction is genuine, it would not become a colorable device merely because it has been entered with a motive to avoid tax, and consequently
earn any disqualification. Such transaction cannot be treated as dishonest, merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to national interest as per the perception of the tax authority. Thus, as the present transaction was genuine, as held by Tribunal, and the basic objective was to earn tax-free dividend and sell the units by suffering loss, it could not be said that the taxpayer used any colorable device. Further, as the smal er Bench of Supreme Court in Azadi Bachao (supra) had explained its earlier larger Bench ruling in McDowell (supra), the later ruling would be binding on the High Court. The issue was, therefore, answered in favor of the taxpayer.
Porrits & Spencer (Asia) Ltd. vs. CIT (ITA No. 10 of 2004)
Related Section Ss. 73, 80M; A/y 1991-92; in favor of taxpayer