The interpretation of the term 'purchase' under Explanation to Section 73 and its application to the allotment of shares in a Public Issue.

K.S. Jhaveri, J.

1. Being aggrieved and dissatisfied with the impugned judgment and order dated 24.03.2006 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as ITAT) in ITA No. 2358/Ahd/2004 for the assessment year 2001-02, the assessee has preferred Tax Appeal No. 957 of 2006 for consideration of the following substantial question of law:

(i) Whether on the facts and in circumstances of the case, getting the shares by allotment on application in Public Issue is purchase within the meaning of the word 'purchase' under Explanation to Section 73?

(ii) Whether on the facts and in circumstances of the case, the Tribunal was right in law in holding that the sale of such shares becomes the speculation business under the said Explanation?

1.1 Similarly, being aggrieved and dissatisfied with the impugned judgment and order dated 08.06.2007 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'A' (hereinafter referred to as ITAT) in ITA No. 388/Ahd/2007 for the assessment year 2001-02, the assessee has preferred Tax Appeal No. 1644 of 2008 for consideration of the following substantial question of law:

Whether the Appellate Tribunal is right in law and on facts in reversing the order of the CIT(A) and thereby canceling the penalty levied under Section 271(1)(c)?

2. 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. On appeal before the ITAT, by impugned judgment and order, dismissed the appeal filed by the assessee.

2.1 So far as Tax Appeal No. 1644 of 2008 is concerned, 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. In appeal, the 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 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). On appeal before the ITAT, the 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.

2.2 Being aggrieved and dissatisfied with the impugned judgment and order passed by the ITAT, the assessee as well as revenue have preferred the present Tax Appeals for consideration of the aforesaid substantial question of law.

3. Mr. J.P. Shah, learned Counsel appearing with Mr. Manish Shah, learned advocate on behalf of the assessee has submitted that the Tribunal erred in holding that getting the shares by allotment on application in Public Issues of Public Limited Companies and eventually selling them is speculation business covered by Explanation to Section 73 of the Act. He has relied upon the decision of the Apex Court in the case of Shri Gopal Jalan and Co. vs. Calcutta Stock Exchange Association Ltd. reported in AIR 1964 SC 250 which quotes with approval Lord Greene M.R. In V.G.M. Holdings Ltd. 1942 1 Ch 235; "it seems to me that the word 'purchase' cannot with propriety be applied to the legal transaction under which a person, by the machinery of application and allotment, becomes a shareholder in the company. He does not purchase anything when he does that......"

3.1 Mr. Shah has also relied upon a decision of the Apex Court in the case of Morgan Stanley Mutual Fund vs. Kartick Das with Dr. Arvind Gupta vs. Se