Tax Insights
from India Tax & Regulatory Services
Share allotted in IPOs are not
“purchased” within Explanation to
section 73; gain/loss on sale of such
shares cannot be deemed to be
speculative business thereunder
August 18, 2016
In brief
In a recent decision, the Gujarat High Court (HC), reversing the order of a Special Bench of the
Income-tax Appellate Tribunal (Tribunal), held that allotment of shares pursuant to an application in
public issue did not amount to “purchase” under Explanation to section 73 of the Income-tax Act,
1961 (the Act). The HC accepted the taxpayer’s contention that there was a “vital” difference between
“creation” and “transfer” of shares, and hence, allotment of shares in IPO did not amount to
purchase. Concomitantly, the HC held that the sale of such shares did not amount to speculative
business under the said Explanation.
In detail
confirmed the treatment of
loss as speculation loss.
Facts
 The taxpayer1 was a dealer in
chemicals as well as in
shares. The taxpayer applied
for shares in public issues
(IPOs) of certain companies
and was allotted shares that
it eventually sold, and in the
process, suffered loss.
 The taxpayer treated the loss
on the sale of such shares as
business loss.
 The tax officer treated this
loss as speculation loss,
applying the Explanation to
section 73 of the Act.
 The Commissioner of
Income-tax (Appeals)
1
TS-440-HC-2016 (Gujarat)
 On appeal to the Tribunal,
the matter was referred to a
Special Bench, which held
that the loss on account of
trading in shares was a
speculative loss.
Issues before the High
Court
 On facts, and in the
circumstances of the case,
was getting the shares by
allotment on application in
public issue a purchase
within the meaning of the
word, “purchase” under
Explanation to section 73 of
the Act?
 On facts, and in the
circumstances of the case,
was the Tribunal right in law
in holding that the sale of
such shares amounted to
speculation business under
the said Explanation?
Taxpayer’s contentions
The taxpayer relied on a
Supreme Court decision2
contending that there was a
vital difference between the
“creation” and “transfer” of
shares, and that allotment of
shares was not purchase.
The taxpayer contended that
even if literally interpreted,
the provision would not apply
because allotment in public
issue of shares was not
purchase, as it was well
2
Khoday Distilleries Ltd. v. CIT
[2008] 307 ITR 312(SC)
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Tax Insights
established that a company
could not trade in its own shares.
 Even if the provision was
capable of two interpretations,
the one in favour of the
taxpayer must be adopted.
Revenue’s contentions
 The Revenue contended that
the language of the Explanation
to section 73 of the Act must be
borne in mind more
particularly when there was no
reason to resort to external aids
of construction.
 The taxpayer’s business was
purchase and sale of shares,
and how the shares came into
existence was irrelevant. The
activity should have been
looked into, and not the
transaction.
 The taxpayer’s business was
purchase of shares, and
therefore, the loss had been
rightly considered to be a
speculative loss.
 The Tribunal held that the
acquisition of shares by
allotment on application in
public issue and eventual sale
thereof would constitute a
speculative business.
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High Court ruling
 The HC relied on the Supreme
Court’s judgment in the case of
Khoday Distilleries Ltd.2 ,
wherein, as mentioned earlier,
it had been held that there was
a vital difference between the
“creation” and “transfer” of
shares.
 The words, “allotment of share”
had been used to indicate the
creation of shares by
appropriation out of the
unappropriated share capital,
to a particular person.
 Whichever rule of
interpretation was followed,
literal, object wise or purposive,
the taxpayer’s transactions
could not imaginably be
deemed to be a speculative
business.
 As the allotment of shares could
not be termed as purchase, the
taxpayer could not be said to be
carrying on a speculative
business to the extent to which
the business consisted of the
purchase and sale of such
shares. Thus, it would not be
covered under Explanation to
section 73 of the Act.
 The Tribunal was wrong in
holding that getting allotment
of shares in a public issue was a
“purchase” as used under
Explanation to section 73, and
in holding that the sale of such
shares became a speculation
business thereunder.
The takeaways
The HC has categorically
distinguished allotment of shares
by a company and purchase of
shares from existing shareholders.
This decision provides some
guidance that an issue of shares
may not result in direct/ indirect
transfer under section 2(47) of the
Act for the purpose of taxability
under the head, ‘capital gain’.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact:
Tax & Regulatory Services –
Mergers and Acquisitions
Gautam Mehra, Mumbai
+91-22 6689 1154
[email protected]
Hiten Kotak, Mumbai
+91-22 6689 1255
[email protected]
Page 2
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