Sagrika Goods & Services Pvt. Ltd., Kolkata V. ITO, Ward - 7(3), Kolkata, Kolkata

ITA 1278/KOL/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 5642 (ITAT-KOLKATA)
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2010
• Appeal Filed By: Assessee
• Bench Allotted: SMC
• Assessment Year: 2005-2006
• Appeal Filed On: 21-06-2010
• Court: TRIBUNAL
• Department Lawyers: R K PAUL
• Keywords: Services rendered outside India; Rule 8D; Set aside
• Section: 14A

Judgement Text

, SMC , , IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH : KOLKATA () BEFORE . . . . . . . . , , , , , ) [BEFORE HONBLE SRI D. K. TYAGI, JM) ! ! ! ! / I.T.A NO. 1278 /KOL/2010 '#$ '#$ '#$ '#$ %&' %&' %&' %&'/ // / ASSESSMENT YEAR : 2005-06 SAGRIKA GOODS & SERVICES PVT. LTD. -VS- INCOME-TA X OFFICER, WD-7(3), KOLKATA. (PA NO.AAGCS 4930A) ()* / APPELLANT ) (+)*/ RESPONDENT ) FOR THE APPELLANT : SRI RAVI TULSIYAN FOR THE RESPONDENT SRI R. K. PAUL , / ORDER THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE ORDER OF THE LD. CIT(A), KOLKATA DATED 31.03.2010 FOR ASSESSMENT YEAR 2005-0 6 ON THE FOLLOWING GROUNDS : 1(A) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE LD. CIT(A) WAS UNJUSTIFIED AND WRONG IN DIRECTING THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE UNDER SECTION 14(A) OF THE I. T. ACT AS PER THE CALCULATION OF RULE 8D WHICH CAME INTO FORCE FACE ONLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09 WHEREAS THE SUBJECT APPEAL IS FOR THE ASSESSMENT YEAR 2005-06. (B) THAT THE CIT(A) WAS UNJUSTIFIED IN PASSING THE ORDERS FOR DISALLOWANCE FOR THE AMOUNT UNDER SECTION 14(A) THOUGH THERE IS NO EXPENSES INC URRED BY THE COMPANY AND ERRED IN NOT FOLLOWING THE JUDGMENT IN THE CASE OF CIT VS. UNITE D COLLERIES PVT. LTD. 1994 ITR 203/857 OF CALCUTTA HIGH COURT). 2. THAT THE LD. CIT(A) WAS WRONG IN CONFIRMING THE DISALLOWANCES OF RS.75,505/- UNDER SECTION 94(7) OF THE INCOME TAX ACT THOUGH THIS PRO VISION WAS NOT APPLICABLE AS THE MUTUAL FUND UNITS WAS ACQUIRED BEYOND 3 MONTHS FROM RECORD DATE AS STATED BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER ITSELF. 3. THE LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMING T HE DISALLOWANCE OF CERTAIN EXPENSES INCURRED ON ACCOUNT OF CALCULATING THE CAPITAL GAIN AS THE EXPENSES INCURRED ARE TO BE TAKEN AS COST OF INVESTMENTS AND THE CAPITAL GAIN TO BE A RRIVED ACCORDINGLY. DEMAT CHARGES, BROKERAGE AND PORTFOLIO CHARGES AGGR EGATING TO RS.1,18,484.93. 2. GROUND NO. 1 RELATES TO RESTRICTING THE DISALLOW ANCE U/S. 14A OF THE I. T. ACT AS PER THE CALCULATION OF RULE 8D. BRIEFLY STATED FACTS O F THE CASE ARE THAT DURING THE COURSE OF VERIFICATION OF BOOKS OF ACCOUNTS, THE ASSESSING OF FICER OBSERVED THAT DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE COMPANY HAD EARNED DIVID END INCOME, PROFIT ON SALE/PURCHASE OF MUTUAL FUND UNITS, SHARES AND SALE OF COMPUTER. TH E COMPANY DEBITED EXPENSES UNDER 2 VARIOUS HEADS INCLUDING ELECTRICAL EXPENSES BUT COU LD NOT BIFURCATE THE SAME IN RELATION TO INCOME NOT INCLUDED IN TOTAL INCOME I.E. DIVIDEND I NCOME IN THE LIGHT OF SECTION 14A OF THE ACT. ON BEING ASKED TO EXPLAIN, THE ASSESSEE STATED THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING INVESTMENT IN SHARES, SECUR ITIES, MUTUAL FUNDS ETC. THE COMPANY ALSO DERIVED INCOME DURING THE YEAR FROM DIVIDEND IN CO URSE OF CARRYING ITS BUSINESS ACTIVITIES THE COMPANY INCURRED EXPENDITURE ON VARIOUS ADMINIS TRATIVE HEADS INCLUDING SALARY ELECTRICITY, TELEPHONE, STAFF WELFARE ETC. HE ALS O STATED THAT DIVIDEND INCOME IS INCIDENTAL TO THE INVESTMENT BUSINESS WHICH THE COMPANY HAS BEEN CARRYING. CERTAIN SHARES/UNITS WERE HELD AS INVESTMENT FROM EARLIER YEARS AND DIVIDEND ACCRUED ON THE SAME. THE EXPENSES INCURRED ARE STATUTORILY REQUIRED TO MAINTAIN AND K EEP THE COMPANY ITS ACCOUNTS AND COMPLIANCES OF VARIOUS LEGAL FORMALITIES AND WILL H AVE TO BE INCURRED IN THE SAME MANNER EVEN IF THERE IS NO DIVIDEND INCOME OR EXEMPTED INC OME. ON PERUSAL OF THE REPLY OF THE ASSESSEE AND ON PERUSAL OF THE ACCOUNTS, THE ASSESS ING OFFICER HELD THAT THE ASSESSEE FAILED TO BIFURCATE THE EXPENDITURE CLAIMED IN THE LIGHT O F SECTION 14A OF THE ACT AND HAVE APPLIED PRO RATA BASIS THE EXPENSES CLAIMED AND DISALLOWED A SUM OF RS.1,30,724/-IN THE LIGHT OF SECTION 14A OF THE I. T. ACT. IN APPEAL, THE LD. C IT(A) DIRECTED THE ASSESSING OFFICER TO APPLY RULE 8D OF THE INCOME TAX RULES ON THIS ISSUE AND WORK OUT THE QUANTUM OF DISALLOWANCE. AGGRIEVED BY THE SAID ORDER, NOW THE ASSESSEE IS IN APPEAL BEFORE US. 3. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFORE THE LOWER AUTHORITIES FURTHER SUBMITTED THAT THE ASSESSEE COMPANY IS A PRIVATE LTD COMPANY ENGAGED I N THE BUSINESS OF SHARES & SECURITIES, MUTUAL FUND AND ALSO CARRYING TRADING ACTIVITIES. IN COURSE OF ASSESSMENT THE A.O DISALLOWED CERTAIN EXPENSES U/S.14(A) AGAINST THE DIVIDEND INCOME RECEIVED BY THE COMPANY. THE ASSESSEE FILED APPEAL BEFORE CIT (APPE AL) VIII, CAL AND SUBMITTED THAT THE DIVIDEND INCOME IS NOT A REGULAR INCOME AND IS INCIDENTAL TO THE VESTMENT BUSINESS CARRIED OUT BY IT. THE ASSESSEE ALSO EXPLAINED THAT NO SPECIFIC EXPENDITURES HAVE BEEN INCURRED TO EARN THE DIVIDEND AND DISALLOWANCE IS U NCALLED FOR. THE ASSESSEE ALSO SUBMITTED THAT IN CASE CIT VS UNITED COLLIERIES PVT. LTD (199 3) 203 ITR 857 (CAL) AND IN CASE OF ITO VS AP FINANCIAL CORPORATION (1984) 8 ITD 473 IT HAS BEEN HELD THAT THE EXPENDITURE TOWARDS THE DIVIDEND CANNOT BE DISALLOWED IF ACTUALLY THERE WAS NO EXPENSES. THE LD CIT (APPEAL) DID NOT APPRECIATE THESE FACTS AND THOUGH DID NOT A GREE WITH A.OS DISALLOWANCE OF 3 PROPORTIONATE EXPENSES BUT DIRECT THAT THE RULE 8D SHOULD BE APPLIED AND THE EXPENSES DISALLOWANCE SHOULD BE RESTRICTED TO THE AMOUNT CAL CULATED UNDER RULE 8D. THE LD. CIT(A) ALSO DID NOT APPRECIATE THAT RULE 8D WAS APPLICABLE ONLY FROM 24.03.2008 AND THE RELEVANT ASSESSMENT YEAR UNDER APPEAL IS MUCH EARLIER TO THI S. HE, THEREFORE, SUBMITTED THAT THE LD. CIT(A) WAS WRONG IN NOT GIVING THE RELIEF BY DELETI NG THE DISALLOWANCE OF EXPENSES MADE BY THE ASSESSING OFFICER U/S. 14A OF THE ACT AND PRAYE D BEFORE THE BENCH TO SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND DELETE THE DISALLOWANC E OF EXPENSES MADE BY THE ASSESSING OFFICER U/S. 14A OF THE ACT. 4. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE R OF THE LD. CIT(A). 5. HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL A VAILABLE ON RECORD AND THE DECISIONS RELIED ON BY THE LD. AUTHORISED REPRESENT ATIVE OF THE ASSESSEE CITED SUPRA. WE FIND THAT ON THE ISSUE OF DISALLOWANCE U/S. 14A, THIS BENCH OF THE TRIBUNAL HAS BEEN TAKING A CONSISTENT VIEW THAT THIS DISALLOWANC E SHOULD BE RESTRICTED TO 1% OF DIVIDEND INCOME. FOLLOWING THE SAME, IN THIS APPEA L ALSO WE HOLD THAT THE DISALLOWANCE U/S 14A FOR EARNING EXEMPT DIVIDEND IN COME SHOULD BE RESTRICTED TO 1% OF DIVIDEND INCOME. THE ASSESSING OFFICER IS ACCOR DINGLY DIRECTED TO DO SO AND WORK OUT THE QUANTUM OF DISALLOWANCE. THIS GROUND OF AP PEAL OF THE ASSESSEE IS ALLOWED AS DIRECTED ABOVE. 6. GROUND NO. 2 RELATES TO CONFIRMING THE DISALLOW ANCES OF RS.75,505/- U/S. 94(7) OF THE I. T. ACT. FACTS OF THE CASE AS OBSERVED BY THE AS SESSING OFFICER ARE THAT THE TOTAL LOSS OF RS.1,03,842.17 ON TRANSFER OF MF AS CLAIMED BY THE ASSESSEE ATTRACTS THE PROVISION OF SEC. 94(7) OF THE I. T. ACT BECAUSE THE FUNDS WERE ACQUI RED WITHIN 3 MONTHS FROM THE RECORD DATE OF DIVIDEND AND THE ORIGINAL UNITS WERE TRANSFERRED WITHIN 9 MONTHS FROM THE RECORD DATE AND SUFFERED LOSS. DURING THE COURSE OF HEARING, ASSESS EE WAS ASKED TO SHOW CAUSE AS TO WHY THE PROVISION OF SEC. 94(7) SHOULD NOT BE APPLICABLE FO R THE ABOVE LOSS. NO SATISFACTORY REPLY WAS GIVEN. HENCE, THE ABOVE LOSS OF RS.1,03,842.17 WAS IGNORED AS PER THE PROVISION OF SECTION 94(7) OF THE I. T. ACT AND THE SAME WAS ADD ED TO THE TOTAL INCOME OF THE ASSESSEE. IN APPEAL, THE LD. CIT(A) CONFIRMED THIS ACTION OF THE ASSESSING OFFICER. AGGRIEVED BY THE SAID ORDER, NOW THE ASSESSEE IS IN APPEAL BEFORE US . 7. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE SUBMITTED THE FOLLOWING : 4 THE BRIEF FACTS RELATING TO THIS ISSUE ARE THAT TH E ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF TRADING IN SHARES, SECUR ITIES AND UNITS OF MUTUAL FUND IN ADDITION TO COMPUTERS. DURING THE RELEVANT ASSESSMENT YEAR , THE ASSESSEE PURCHASED UNITS OF MUTUAL FUND WHICH INCLUDE FRANKLINE INDIA PRIMA FUND, REL IANCE VISION, DSP MERRILL LYNCH OPPORT, FUND, PRUDENTIAL ICICI POWER FUND AND OTHE RS. THE ASSESSEE SOLD THE SAID UNITS DURING THE RELEVANT ASSESSMENT YEAR ITSELF AND SUFF ERED LOSS OF RS.12485.68 ON TRANSFER OF DSP MERRILL LYNCH OPPORT. FUND, LOSS OF RS.13,851/ - ON TRANSFER OF PRU. ICICI POWER FUND AND AGAIN LOSS OF RS.77,505/- WHICH WAS RESTRI CTED TO DIVIDEND INCOME, OUT OF LOSS OF RS.85,135.14 FOR TRANSFER OF PRU. ICICI POWER FUND. THE LOSS INCURRED ON SALE OF SUCH UNITS WAS SET OFF AGAINST THE PROFITS ON SALE OF OTHER UN ITS OF MUTUAL FUNDS. THE ASSESSEE ALSO RECEIVED DIVIDEND INCOME ON THE AFORESAID UNITS, WH ICH WAS CLAIMED EXEMPT U/S. 10(34) OF THE ACT. IN THIS CONNECTION, THE RELEVANT DATE OF PURCHASE, DATE OF RECEIPT OF DIVIDEND AND DATE OF REDEMPTION OF UNITS ARE REPRODUCED BELOW IN THE FOLLOWING CHART : PARTICULARS PURCHASE DATE PURCHASE PRICE UNITS PURCHASED DIVIDEND DATE RE-INVESTED DIVIDEND AMOUNT SALE DATE UNITS SOLD SALE PRICE GAIN/L OSS DSP MERRILL LYNCH OPPOR FUND 12/12/2003 994,098.44 59455.647 @ 16.72/UNIT 19/01/2004 178,366.00 13/04/2004 59349.16 @16.51/U NIT 981,612.73 - 12,485 .68 PRU. ICICI POWER (D) 23/07/2003 100,000.00 7067.1378 @ 14.15/UNIT 25/07/2003 14,134.28 19/04/2004 7067.1378 @ 12.19 86,148.40 - 13,851 .59 PRU.ICICI POWER (D) 11/07/2003 300,000.00 16565.4335 @ 18.11/UNIT 24/10/2003 26/12/2003 77,505.49 94,805.82 19/04/2004 17626.321 @ 12.19 214,864.85 - 85,135 .14 DURING THE YEAR UNDER APPEAL, THE ASSESEE EARNED DI VIDEND INCOME BUT DUE TO THE EFFECT OF THE ABOVE TRANSACTIONS THERE WAS A CAPITAL LOSS OF RS.1,03,842.17 (12485.68 +13851 +77505.49). THE ASSESSING OFFICER, HOWEVER, DISAL LOWED THE SAID LOSS WHICH WAS INCURRED ON SALE OF AFORESAID UNITS ALLEGING THAT THE SAID T RANSACTIONS ARE HIT BY THE PROVISIONS OF SECTION 94(7) OF THE INCOME TAX ACT, 1961. ON FURT HER APPEAL, THE LD. CIT(A) CONFIRMED THE AFORESAID ADDITION ALLEGING THAT ALTHOUGH THE ASSE SSEE DISPUTED THE AOS CLAIM BUT HAS NOT BEEN ABLE TO BRING ON RECORD ANY EVIDENCE IN SUPPOR T OF THE SAME. HOWEVER, BEFORE GOING INTO DETAILED DISCUSSION, ATT ENTION IS INVITED TO THE PROVISIONS OF SECTION 94(7) OF THE ACT AS IT STOOD AFTER THE AMEN DMENT W.E.F LST APRIL, 2005 WHICH READS AS FOLLOWS : (7) WHERE (A) ANY PERSON BUYS OR ACQUIRES ANY SECURITIES OR U NIT WITHIN A PERIOD OF THREE MONTHS PRIROR TO THE RECORD DATE; **(B) SUCH PERSON SELLS OR TRANSFERS (I) SUCH SECURITIES WITHIN A PERIOD OF THREE MONTHS AFTER SUCH DATE, OR (II) SUCH UNIT WITHIN A PERIOD OF NINE MONTHS AFTER SUCH DATE; (C) THE DIVIDEND OR INCOME ON SUCH SECURITIES OR UN IT RECEIVED OR RECEIVABLE BY SUCH PERSON IS EXEMPT, 5 THEN, THE LOSS, F ANY, ARISING TO HIM ON ACCOUNT OF SUCH PURCHASE AND SALE OF SECURITIES OR UNIT, TO THE EXTENT SUCH LOSS DOES NOT EXCEED THE A MOUNT OF DIVIDEND OR INCOME RECEIVED OR RECEIVABLE ON SUCH SECURITIES OR UNIT, SHALL BE IGN ORED FOR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX. IN VIEW OF THE FOREGOING, IT IS SUBMITTED THAT THE PROVISIONS OF SEC.94(7) ARE NOT APPLICABLE TO THE ASSESSEE IN RESPECT OF LOSS OF RS.77,505/- (BEI NG RESTRICTED TO DIVIDEND INCOME) FOR TRANSFER OF UNITS OF PRU. ICICI POWER FUND AS THE F OLLOWING THREE CONDITIONS ARE CUMULATIVELY REQUIRED TO BE SATISFIED BY THE ASSESS EE IN ORDER TO FALL WITHIN THE PURVIEW OF SEC.94(7) OF THE IT ACT, WHICH ARE NARRATED AS UNDE R : (I) THE SHARES/UNITS MUST BE PURCHASED WITHIN A PER IOD OF THREE MONTHS PRIOR TO THE RECORD DATE; AND (II) A) THE SHARES MUST BE SOLD WITHIN A PERIOD OF THREE MONTHS AFTER SUCH DATE; OR B) THE UNITS MUST BE SOLD WITHIN A PERIOD OF NIN E MONTHS AFTER SUCH DATE; AND (III) THE DIVIDEND INCOME EARNED FROM SUCH SECURITI ES/UNITS SHOULD BE EXEMPT FROM TAX. IN THE INSTANT CASE, IN CASE OF PURCHASE AND SALE O F UNITS OF DSP MERRILL LYNCH : THE DATE OF PURCHASE WAS 12 TH DECEMBER, 2003. THE RECORD DATE FOR DECLARATION OF DIVIDEND WAS 1 9 TH JANUARY, 2004. THEREFORE, THE 1 ST CONDITION I.E., PURCHASE OF THE UNITS WITHIN A PER IOD OF 3 MONTHS PRIOR TO THE RECORD DATE FOR DECLARATION OF DIVIDEND WAS SAT ISFIED. THESE WERE SOLD ON 13 TH APRIL, 2004. THEREFORE, THE 2ND CONDITION VIZ, THAT THESE UNIT S SHOULD BE SOLD WITHIN A PERIOD OF 9 MONTHS FROM THE RECORD DATE IS ALSO SATISFIED AND HENCE, T HE PROVISIONS OF SEC.94(7) IS ATTRACTED IN CASE OF LOSS SUFFERED FROM TRANSFER OF UNITS OF DSP MERRILL LYNCH. AS FAR AS THE PURCHASE AND SALE OF UNITS OF PRUDENT IAL ICICI POWER FUND ARE CONCERNED IN ONE CASE, THE DATE OF PURCHASE WAS 23RD JULY, 2003 AND THE RECORD DATE FOR DECLARATION OF DIVIDEND WAS 25 TH JULY, 2003 WHICH MEANS THAT THE 1 ST CONDITION I.E., PURCHASE OF UNITS WITHIN 3 MONTHS PRIOR TO THE RECORD DATE IS SATISFIED. THESE UNITS WERE SOLD ON 19 TH APRIL, 2004 WITHIN 9 MONTHS FROM THE RECORD DATE AND, THEREFORE, THE SECOND CONDITION IS ALSO SATISFIED. HENCE, THE PROVISIONS OF SEC. 94(7 ) OF THE I. T. ACT ARE APPLICABLE IN RESPECT OF TRANS FER OF THESE UNITS OF PRU. ICICI POWER FUND. HOWEVER, IN RESPECT OF ANOTHER SET OF UNITS OF PRUD ENTIAL ICICI POWER FUND: THE DATE OF PURCHASE WAS 11TH JULY, 2003. THE RECORD DATE FOR DECLARATION OF DIVIDEND WAS 24T H OCTOBER, 2003. THEREFORE, THE 1 ST CONDITION I.E. PURCHASE OF THE UNITS WITHIN A PERI OD OF 3 MONTHS PRIOR TO THE RECORD DATE IS NOT SATISFIED. THIS ITSELF SHOWS THA T THE PROVISIONS OF SECTION 94(7) OF THE ACT ARC NO T APPLICABLE IN RESPECT OF TRANSFER OF SUCH UNITS. AG AIN, THESE UNITS WERE SOLD ON 19TH APRIL, 2004 WHICH MEANS THAT THE 2 CONDITION VIZ, THAT THESE U NITS SHOULD BE SOLD WITHIN A PERIOD OF 9 MONTHS FROM THE RECORD DATE IS SATISFIED. HOWEVER, ALTHOUG H THE SECOND CONDITION IS SATISFIED, THE CAPITAL 6 LOSS INCURRED BY THE ASSESSEE ON REDEMPTION OF AFOR EMENTIONED UNITS OF PRU. ICICI POWER FUND IS NOT LIABLE FOR DISALLOWANCE UNDER SEC.94(7) IN VIEW OF THE FACT THAT THE FIRST CONDITION IS NOT FULFIL LED. ON THE CONTRARY, THE AO WAS OF THE OPINION THAT IN CASE OF PURCHASE AND SALE OF ALL THE AFOREMENTIONED UNITS, THE PROVISIONS OF SEC.94(7) W ILL APPLY. ACCORDING TO HIM, THE PROVISIONS OF SEC. 94(7) WILL APPLY EVEN IF ANY ONE OF THE CONDITIONS IS SATISFIED AND THAT IT WAS NOT NECESSARY THAT AL L THE THREE CONDITIONS HAVE TO BE SATISFIED. ACCORDIN GLY, THE AO HELD THAT THIS WAS A CASE OF DIVIDEND STRIPPING AND MANAGED FOR CREATION OF SHORT-TERM LO SSES ONLY FOR ADJUSTMENT OF LOSSES AGAINST THE OTHER TAXABLE PROFIT, WHICH IS SOUGHT TO BE PROHIBI TED BY THE PROVISIONS OF SEC.94(7) OF THE ACT. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILE D AN APPEAL BEFORE THE LD. CIT(A) WHO ALSO CONFIRMED THE SAID ADDITION. IN THIS CONNECTION, IT MAY BE RELEVANT TO NOTE HERE THAT WHILE MAKING AFORESAID ADDITION, THE ASSESSING OFFICER COMPLETELY BRUSHED ASIDE CIRCULA R NO. 14 OF 2001 ISSUED BY THE CBDT EXPLAINING THE PROVISIONS OF FINANCE ACT, 200L AND THE REASONS FOR INCORPORATING THE RELEVANT PORTIONS OF THE SAID CIRCULAR IS REPRO DUCED HEREUNDER FOR THE SAKE OF READY REFERENCE. 56. MEASURES TO CURB CREATION OF SHORT-TERM LOSSE S BY CERTAIN TRANSACTIONS IN SECURITIES AND UNITS. 56.1. UNDER THE EXISTING PROVISIONS CONTAINED IN SE CTION 94, WHETHER THE OWNER OF ANY SECURITIES ENTERS INTO TRANSACTIONS OF SALE AND RE- PURCHASE OF THOSE SECURITIES WHICH RESULT THE INTEREST OR DIVIDEND IN RESPECT OF SUCH SECURIT IES BEING RECEIVED BY A PERSON OTHER THAN SUCH OWNER, THE TRANSACTIONS ARE TO BE IGNORED AND THE INTEREST OR DIVIDEND FROM SUCH SECURITIES IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME OF THE OWNER. 56.2. THE EXISTING PROVISIONS DID NOT COVER A CASE WHERE A PERSON BUYS SECURITIES (INCLUDING UNITS OF A MUTUAL FUND) SHORTLY BEFORE T HE RECORD DATE FIXED FOR DECLARATION OF DIVIDENDS, AND SELLS THE SAME SHORTLY AFTER THE REC ORD DATE. SINCE THE CUM-DIVIDEND PRICE OR WHICH THE SECURITIES ARE PURCHASED WOULD NORMALLY BE HIGHER THAN THE EX-DIVIDEND PRICE AT WHICH THEY ARE SOLD. SUCH TRANSACTION WOULD RESUL T IN A LOSS WHICH COULD BE SET OFF AGAINST OTHER INCOME OF THE YEAR. AT THE SAME TIME, THE DIV IDENDS RECEIVED WOULD BE EXEMPT FROM TAX UNDER SECTION 10(33). THE NET RESULT WOULD BE THE CREATION OF A TAX LOSS, WITHOUT ANY ACTUAL OUTGOINGS. 56.3. WITH A VIEW TO CURB THE CREATION OF SUCH SHOR T-TERM LOSSES, THE ACT HAS INSERTED A NEW SUB-SECTION (7) IN THE SECTION TO PROVIDE THAT WHER E ANY PERSON BUYS OR ACQUIRES SECURITIES OR UNITS WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE FIXED FOR DECLARATION OF DIVIDEND OR DISTRIBUTION OF INCOME IN RESPECT OF TH E SECURITIES OR UNITS, AND SELLS OR TRANSFERS THE SAME WITHIN A PERIOD OF THREE MONTHS AFTER SUCH RECORD DATE, AND THE DIVIDEND OR INCOME RECEIVED OF RECEIVABLE IS EXEMPT, THEN, THE LOSS, I F ANY, ARISING FROM SUCH PURCHASE OR SALE SHALL BE IGNORED TO THE EXTENT SUCH LOSS DOES NOT E XCEED THE AMOUNT OF SUCH DIVIDEND OR INTEREST, IN THE COMPUTATION OF THE INCOME CHARGEAB LE TO TAX OF SUCH PERSON. AS IS CLEARLY EVIDENT, THE AFORESAID CIRCULAR USES THE WORD AND AND NOT OR. IN VIEW OF THE SAME, THE INTENTION OF THE BOARD WAS VERY CLEAR THA T ALL THE CONDITIONS PRESCRIBED IN SEC.94(7) OF THE ACT ARE TO BE CUMULATIVELY SATISFI ED. 7 IN THE INSTANT CASE, THE CONDITIONS OF THREE MONTHS BEFORE AND NINE MONTHS AFTER THE RECORD DATE FOR PURCHASE AND SALE RESPECTIVELY HAVE NOT BE EN SATISFIED IN RESPECT OF AFOREMENTIONED UNITS OF PRU-ICICI POWER FUND CUMULATIVELY. IN THIS REGARD, PERUSAL OF THE STATEMENTS OF DEMAT ACCOUNT OF THE ASSESSEE AS MAINTAINED IN CIII BANK, COPIES OF WHICH WERE ALREADY ENCLOSED DURING THE COURSE OF ASSESSMENT, CONFIRMS THE PURCHASE DATE, RECORD DATE AND REDEMPTION DATE OF THE SAID UNITS OF MUTUAL FUND. THEREFORE, THE ALLEGATION OF THE LD. CIT(A) THAT THE ASSESSEE HAS FAILED TO BRING ON RECORD ANY EVIDENCE IN SUPPORT OF ITS CLAIM IS ALSO NOT CORRECT. EXAMINATION OF THESE STATEMENTS CLEARL Y SHOWS THAT PURCHASE OF THESE UNITS WERE MADE MORE THAN THREE MONTHS BEFORE THE RECORD DATE. THIS GOES TO PROVE THAT THE FIRST CONDITION FOR ATTRACTING THE PROVISIONS OF SEC.94(7 ) IS NOT SATISFIED IN THIS CASE. NOW THE ONLY QUESTION WHICH HAS TO BE CONSIDERED IN THIS CONNECTION IS WHETHER CLAUSES (A), (B) AND (C) OF SEC.94(7) NEEDS TO BE SATISFIED CUM ULATIVELY OR NOT. FOR THIS, A GLANCE MAY BE HAD AT THE LANGUAGE USED IN OTHER PORTIONS OF THE I NCOME TAX ACT, 1961, WHERE SUCH REQUIREMENT FOR SATISFYING ONE OF THE MANY CONDITI ONS OR ALL CONDITIONS CUMULATIVELY IS LAID DOWN. AS FOR EXAMPLE, WHERE THE LEGISLATURE DESIRE D THAT ALL CONDITIONS ARE TO BE SATISFIED CUMULATIVELY, THE LANGUAGE USED IN PROVISIONS OF S EC.80-O (FOR INSTANCE), WHERE THE CONDITIONS OF RECEIPT OF INCOME IN CONVERTIBLE FORE IGN EXCHANGE AND SUCH INCOME SHOULD BE FOR SERVICES RENDERED OUTSIDE INDIA ARE CUMULATIVEL Y REQUIRED TO BE SATISFIED. A PLAIN READING OF THE PROVISION OF SEC.94(7) OF THE ACT SH OWS THAT IT HAS NEITHER USED THE EXPRESSION OR NOR THE EXPRESSION AND. UNDER SUCH CIRCUMSTA NCES, ONE SHOULD CONSTRUCT THE PROVISIONS OF SEC.94(7) IN SUCH A MANNER SO AS TO P LACE LEAST RESTRICTION ON AN INDIVIDUALS I.E. ASSESSEES RIGHTS. THEREFORE, IN VIEW OF ABO VE, IT IS SUBMITTED THAT ALL THE CONDITIONS LAID DOWN IN CLAUSES (A), (B) AND (C) HAVE TO BE SA TISFIED BEFORE THE SAID PROVISIONS CAN BE APPLIED IN RESPECT OF TRANSFER OF AFOREMENTIONED UN ITS OF PRU. ICICI POWER FUND. IN THIS CONNECTION, RELIANCE IS PLACED ON THE JUDGM ENT OF THE HONBLE ITAT DELHI IN THE CASE OF INCOME TAX OFFICER VS. SHAMBHU MERCANTILE LTD. R EPORTED IN (2008) 116 TTJ 784, WHEREIN IT WAS HELD AS FOLLOWS : FOR APPLICATION OF SUB-SECTION (7) OF SEC. 94, ALL THE THREE CONDITIONS MENTIONED IN CLS. (A), (B) AND (C) THEREOF MUST BE CUMULATIVELY SATISFIED; CONDITIONS OF THREE MONTHS BEFORE AND AFTER RECORD DATE FOR PURCHASE AND SALE RESPECTIVELY OF UNITS HAVING NOT BEEN SATISFIED CUMULATIVELY IN ALL THE TRANSACTIONS , LOSS INCURRED IN THOSE TRANSACTIONS COULD NOT BE DISALLOWED BY INVOKING SUB-S. (7) OF S EC. 94. IN LIGHT OF THE AFORESAID JUDGMENT, IT CAN BE SAFEL Y CONCLUDED THAT THE ABSENCE OF WORD OR AT THE END OF CLAUSES (A) AND (B) DOES NOT PROVIDE FOR THE INTERPRETATION THAT SUB-SECTION (7) OF SEC. 94 APPLIES, WHERE TRANSACTIONS SATISFY AT L EAST ONE CONDITION. RATHER, SIMPLE READING OF THE CLAUSES EVEN WITHOUT THE EXPRESSION AND CA N LEAD ONLY TO ONE CONDITION THAT ALL THE THREE CONDITIONS CUMULATIVELY ARE REQUIRED TO BE SA TISFIED BEFORE INVOKING SEC.94(7). FURTHER, THE USE OF WORDS AS SUCH PERSON, SUCH U NIT, SUCH DATE, SUCH SECURITIES OR UNITS IN CLAUSES (B) AND (C) OF SEC. 94(7), ALSO INDICAT ES THAT THE THREE CLAUSES HAVE TO BE READ TOGETHER. THUS, THEY ADVOCATE FOR CUMULATIVE APPLIC ATION OF CONDITIONS AND NOT OTHERWISE. THIS INTERPRETATION IS FURTHER APPROVED BY CIRCULAR NO.14 OF 2001, WHICH EXPLAINS THE FINANCE ACT, 2001 ISSUED BY CBDT. IN THE SAID CIRCU LAR, IT IS NOTICEABLE THAT IN PARA 56.3, IT USES THE WORD AND AT COUPLE OF PLACES THEREBY PRO VIDING FOR CUMULATIVE APPLICATION OF ALL THE THREE CONDITIONS. THUS, THE VIEW OF THE CBDT IS ALSO THAT ALL THE CONDITIONS PRESCRIBED IN SEC. 94(7) ARE TO BE CUMULATIVELY SATISFIED AND NOT OTHERWISE. 8 THEREFORE, IN VIEW OF THE ABOVE, IT IS SUBMITTED TH AT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE CIT ON ACCOUNT OF THE CLAIM OF NON-APPLICABILITY OF THE PROVISIONS OF SEC. 94(7) OF THE ACT IN RESPECT OF T RANSFER OF AFOREMENTIONED UNITS OF PRU. ICICI POWER FUND ON THE ALLEGED GROUND THAT EACH OF THE CONDITIONS LAID DOWN IN SEC. 94(7) IS INDEPENDENT AND IF AN ASSESSEE SATISFIES ANY ONE OF THE CONDITIONS, THEN HE SHOULD BE HELD TO BE COVERED WITHIN THE MISCHIEF OF THE LAW, IS BA D IN LAW AND UNCALLED FOR. 8. THE LD. D.R. ON THE OTHER HAND, RELIED ON THE OR DERS OF THE LOWER AUTHORITIES. 9. I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL AVAILABLE ON RECORD AND ALSO THE CASE LAWS CITED BY THE LD. COUNSEL FOR THE ASSESSEE. I FIND THAT DURING THE YEAR UNDER APPEAL, THE ASSESSEE PURCHASED AND SOLD UNITS OF SOME MUTUAL FUNDS AND SUFFERED LOSS OF RS.12,485.68 ON TRANSFER OF DSP MERRILL LYNCH OP PORT. FUND, LOSS OF RS.13,851/- ON TRANSFER OF PRU. ICICI POWER FUND AND AGAIN LOSS OF RS.77,505.49 WHICH WAS RESTRICTED TO DIVIDEND INCOME, OUT OF LOSS OF RS.85,135.14 FOR TR ANSFER OF PRU. ICICI POWER FUND. THE ASSESSEE ALSO RECEIVED DIVIDEND INCOME ON THESE UNI TS WHICH WAS CLAIMED EXEMPT U/S. 10(34) OF THE ACT. HOWEVER, THE ASSESSING OFFICER ALLOWED THIS LOSS OF RS.1,03,842.17 (RS.12,485.68/- + RS.13,851/- + RS/77,505.49) ON TH E GROUND THAT THESE TRANSACTIONS ARE HIT BY THE PROVISION OF SECTION 94(7) OF THE I. T. ACT. THIS ACTION OF THE ASSESSING OFFICER STANDS CONFIRMED BY THE LD. CIT(A). BEFORE ME, THE ASSESEE HAS ONLY CHALLENGED THE DISALLOWANCE OF LOSS OF RS.77,505.49 IN RESPECT OF TRANSFER OF UNITS OF PRU. ICICI POWER FUND ON THE GROUND THAT ALL THE THREE CONDITIONS AS LAID DOWN IN SECTION 94(7) ARE NOT SATISFIED IN THIS TRANSACTION. THE RELEVANT DATES OF PURCHASE AND SALE OF UNITS AND DATE OF RECEIPT OF DIVIDEND ARE NOT IN DISPUTE. IN RESPECT OF PRU. ICICI POWER FUND THE UNITS WERE PURCHASED ON 11.7.2003 AND DATE OF DIVIDEND WAS 24. 10.2003 AND 26.12.2003, THEREFORE, THE FIRST CONDITION AS LAID DOWN IN CLAUSE (A) OF SEC. 94(7) THAT THE UNITS BE PURCHASED OR ACQUIRED WITHIN A PERIOD OF THREE MONTHS PRIOR TO T HE RECORD DATE IS NOT SATISFIED. THEREFORE, FOLLOWING THE RATIO AS LAID DOWN IN THE JUDGMENT OF THE HONBLE ITAT, DELHI BENCH IN THE CASE OF INCOME TAX OFFICER VS. SHAMBHU MERCANTILE L TD. REPORTED IN (2008) 116 TTJ 784, WHEREIN IT WAS HELD THAT FOR APPLICATION OF SUB-SEC TION 7 OF SECTION 94 ALL THE THREE CONDITIONS MENTIONED IN CLAUSES (A), (B) AND (C) THEREOF MUST BE CUMULATIVELY SATISFIED, I HOLD THAT THE PROVISIONS OF SECTION 94(7) ARE NOT ATTRACTED IN RE SPECT OF THIS TRANSACTION AND, THEREFORE, THE AUTHORITIES BELOW ARE NOT JUSTIFIED TO DISALLOW TH E CLAIM OF THE ASSESSEE IN RESPECT OF LOSS 9 SUFFERED BY HIM ON SALE OF UNITS OF PRU. ICICI POWE R FUND AS NO CONTRARY DECISION WAS CITED BY THE LD. DR. THIS GROUND OF APPEAL OF THE ASSESSE E IS, THEREFORE, ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED 7. ORDER IS PRONOUNCED IN THE OPEN COURT ON 24.9.10 SD/- . . , (D. K. TYAGI) JUDICIAL MEMBER ( - - - -) )) ) DATED : 24TH SEPTEMBER, 2010 %./ '#01 '2% JD.(SR.P.S.) , 3 +''4 54&6- COPY OF THE ORDER FORWARDED TO: 1 . )* / APPELLANT M/S. SAGRIKA GOODS & SERVICES PVT. LTD. , 107/1, PARK STREET, 5 TH FLOOR, KOLKATA-16. 2 +)* / RESPONDENT , ITO, WD-7(3), KOLKATA. . 3 . ',# / THE CIT, 4 . ',# ( )/ THE CIT(A), KOLKATA 5 . %=' +'# / DR, KOLKATA BENCHES, KOLKATA 4 +'/ TRUE COPY , ,#>/ BY ORDER , ? 1 / DEPUTY REGISTRAR .