The DCIT, Central Circle-2(4), Ahmedabad V. Shri Minesh Madhusudan Soni, Ahmedabad

ITA 2638/AHD/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0420 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-09-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 13-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MEHUL K PATEL
• Keywords: Business income; Bad and doubtful debts; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI P.K.BANSAL, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.2638/AHD/2007 ASSESSMENT YEAR: 2001-02 DATE OF HEARING:17.9.09 DRAFTED:19.10.09 DCIT, CENTRAL CIRCLE- 2(4), AHMEDABAD V/S . MINESH MADHUSUDAN SONI, BUNGALOW NO.-4, SWINAGAR SOCIETY, 132 FT. RING ROAD, SATELLITE, AHMEDABAD PAN NO.AKIPS9043B (APPELLANT) .. (RESPONDENT) ITA NO.2639/AHD/2007 ASSESSMENT YEAR: 2001-02 DCIT, CENTRAL CIRCLE- 2(4), AHMEDABAD V/S . MAHENDRA RATILAL SONI, 77/460, VIJAY NAGAR, NARANPURA, AHMEDABAD PAN NO.ACOPS3318K (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI MEHUL K PATEL, AR REVENUE BY:- SHRI ANIL KUMAR, CIT, DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE TWO APPEALS BY THE REVENUE ARE ARISING OUT O F THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-III, AHMEDABAD IN APPEAL NOS. CIT(A) - III/CC.2(4)/22,23/06-07 BOTH DATED 19-03-2007. THE ASSESSMENTS WERE FRAMED BY THE ACIT, CENTRAL CIRCLE-2(4), AHMEDABAD U/S.153A(B ) R.W.S. 143(3) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) VIDE HIS ORDERS DATED 21-03-2006 FOR THE ASSESSMENT YEAR 2001-02. ITA NO.2638-39/AHD./2007 A.Y. 2001-02 DCIT CC-2(4) ABD V MINESH M SONI & MAHENDRA R SONI PAGE 2 2. THE ONLY COMMON ISSUE IN THESE APPEALS OF DIFFER ENT ASSESSEE IS AS REGARDS TO THE ISSUE OF DIVIDENDS TP I.E. DISALLOWANCE OF L OSS IN SALE OF UNITS OF MUTUAL FUND AMOUNTING TO RS.19,41,646/- AND RS.5,14,820/-. 3. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE FAIRL Y STATED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAI NST THE REVENUE BY THE DECISION OF SPECIAL BENCH MUMBAI TRIBUNAL IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. V ITO (2005) 96 ITD 1 (MUM) (SB), WHEREIN THE TRIBUNAL H AS HELD:- 139. IN OUR OPINION, IF CANNOT BE ASSUMED THAT ONCE MUTUAL FUND UNITS ARE HELD FOR THE PRESCRIBED PERIOD, THE FALL IN NAV ON ACCOU NT OF INCOME PAY OUT WOULD BE NEUTRALIZED. IF, AS ARGUED BY THE LEANED SPECIAL CO UNSEL BEFORE US, THERE IS SURGE OF INFLOW OF MONEY FROM THE DIVIDEND-STRIPPERS SO M UCH SO THE SIZE OF THE MUTUAL FUND WOULD ON RECORD DATED SWELL TO MANY TIMES THE SIZE OF THE ORIGINAL FUND LYING INVESTED IN EQUITY THERE IS NO WAY THE E-DIVIDEND N AV RETURNING TO NAV ON RECORD DATE TILL SUCH TIME A SIZEABLE PORTION OF THE NEW O R OLD ,MONEY EXIT THE MUTUAL FUND AFTER TAKING A HIT ON ACCOUNT OF EX-DIVIDEND NAV. I N OTHER WORDS, THE PROVISIONS OF SECTION 94(7) DO NOT BLOCK DIVIDEND STRIPPERS. IT O NLY MAKE THEM SQUAT FOR A LONGER PERIOD. IT, THEREFORE, APPEARS TO US THAT PROVISION S OF SECTION 94(7) ARE GEARED TOWARDS QUICK-IN-OUT ASPECT AND NOT AGAINST CLAIM O F LOSS AGAINST THE ORDER INCOME OF THE TAXPAYER. THE SPECIAL BENCH FURTHER CONSIDERING THE INSTRUCT ION ISSUED BY CBDT FROM F. NO.178/32/2003-ITA 1 ON 23 RD FEBRUARY, 2004 AND CBDT CIRCULAR NO.14 OF 2001, REPORTED AT 252 ITR (ST) 108 DECIDED THE ISSUE AS U NDER (IN PARA-141& 142) :- ON CONSIDERATION WE DO NOT FIND ANY SUPPORT TO THE CASE OF THE REVENUE IN THE APPEALS BEFORE US FROM THE INSTRUCTIONS ABOVE QUOTE D. IT IS CLEARLY MENTIONED THAT ORDINARILY DISALLOWANCE OF LOSS IN SIMILAR CIR CUMSTANCES IN RESPECT OF ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2002-03 W OULD AMOUNT TO APPLYING THE PROVISIONS OF SECTION 94((7) ARE RETRO SPECTIVELY. THE BOARD, THEREFORE, CAUTIONS ITS OFFICERS THAT SUCH AN ASSES SMENT SHOULD BE MADE ONLY AFTER IN-DEPTH INVESTIGATION AND PROPER RECORDING A ND MARSHALLING OF ALL RELEVANT FACTS BECAUSE THE PROVISIONS OF SECTION 94 (7) ARE PROSPECTIVE ONLY. 142. IN VIEW OF THE DISCUSSION IN THE FOREGOING PAR AGRAPHS, WE FIND ANSWER TO THE THIRD QUESTION IN THE NEGATIVE, I.E. THE ASSESS EE IS NOT DISENTITLED TO HAVE THE LOSS ARISING FROM THESE TRANSACTIONS SET OFF AG AINST HIS INCOME FROM ANY OTHER TRANSACTIONS OR SOURCE. AND THE HONBLE BOMBAY HIGH COURT HAS AFFIRMED THE SPECIAL BENCH IN THE CASE OF IT V. WALLFORT SHARES & STOCK BROKERS P. LTD. (2009) 310 ITR 421 (BOM). ITA NO.2638-39/AHD./2007 A.Y. 2001-02 DCIT CC-2(4) ABD V MINESH M SONI & MAHENDRA R SONI PAGE 3 4. THE BRIEF FACTS IN THESE CASE ARE THAT THE ASSES SEE, AN INDIVIDUAL, FILED RETURN OF INCOME ON 02-08-2004 IN RESPONSE TO NOTICES(S) 1 53A, DECLARING INCOME OF RS.3,12,50 AND RS.2,18,520/- FOR ASSESSMENT YEAR 20 01-02 RESPECTIVELY. THE ASSESSEE IS PROPRIETOR OF SHIVAM ENTERPRISE AND PAR TNER IN SHREE VIKRAM JEWELLERS ALSO DEALS IN SHARES / SECURITIES. THE ASSESSEE HA D INVESTED IN MUTUAL FUND UNITS AS UNDER:- AY NAME OF MUTUAL FUND DT. OF PURCHASE AMT. OF PURCHASE DT. OF SALE AMT. OF SALE CLAIMED LOSS DIVIDEND RECEIVED 01- 02 KOTAK PIONEER M FUND 13/10/00 1,16,88,239 16/10/00 97,36,593 19,51,646 16,88,239 ON 16/10/00 THE AO WAS OF THE OPINION THAT THE ASSESSEE HAD DEL IBERATELY INVESTED IN MUTUAL FUND TO EARN DIVIDENDS, EXEMPTED U/S.10(33) OF THE ACT AND SOLD / REDEEMED THEM, SHORTLY AFTER OBTAINING THE BENEFITS OF TAX FREE DI VIDENDS, THEREBY CONTRIVING A LOSS, WHICH WAS SET OFF AGAINST OTHER INCOME. THE ASSESSI NG OFFICER FELT THAT THE DIVIDEND RECEIVED WAS A COST, SINCE PURCHASING UNITS-CUM-DIV IDEND, COST PAID IS INCLUSIVE OF DIVIDEND, WHEREAS THE SALE CONSIDERATION DOES NOT I NCLUDE DIVIDEND, SINCE THE SAME IS SOLD EX-DIVIDEND. THE AO ALSO CONSIDERED THE IMP UGNED TRANSACTIONS AS DEVOID OF COMMERCIAL PURPOSE AND AS A COLORABLE DEVICE TO AVO ID TAX. WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAI NST THE REVENUE AND ACCORDINGLY CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE VIDE PARA-16 OF HIS APPELLATE ORDER AS UNDER:- 16. THE CONTENTIONS / SUBMISSIONS OF THE APPELLANT , THE REASONING OF THE A.O. THE LEGAL POSITION OBTAINED THUS FAR ON THE ISSUE, ETC WERE CAREFULLY CONSIDERED. (A) THE APPELLANT HAS BEEN REGULARLY DEALING IN SHA RES / SECURITIES / MUTUAL FUND AND INCOME / LOSS, THEREFORM IS BEING RETURNED / ASSESSED UNDER THE HEAD BUSINESS INCOME. THE FACT THAT THE APPELLANT H AS, BY CONDUCT AND ACCEPTANCE OF IT, BY THE REVENUE, AND THE RATIO OF DECISION IN CASE OF CIT VS. REVASHANKER, 283 ITR 338 (QUOTED IN PARA 11(1) OF THIS ORDER, LEADS TO THE CONCLUSION THAT THE DEALINGS IN SHARES / SECURI TIES / MU9TUAL FUND WERE PART OF APPELLANTS BUSINESS. (B) THE PROVISIONS OF SECTION 94(7) ARE NOT APPLICA BLE IN RESPECT OF A.Y. 2000- 01 AND 2001-02 IN LIGHT OF JUDICIAL DECISIONS, THE BOARDS CIRCULAR AND FROM THE VERY PROVISION ITSELF. THE A.O HAS INVOKED SECT ION 14A BY TERMING / TREATING THE DIVIDEND RECEIVED AS A COST / EXPENDIT URE. HOWEVER, IN SIMILAR FACTS AND CIRCUMSTANCES THE SPECIAL BENCH OF ITAT, MUMBAI, VIDE ITS ITA NO.2638-39/AHD./2007 A.Y. 2001-02 DCIT CC-2(4) ABD V MINESH M SONI & MAHENDRA R SONI PAGE 4 COMPREHENSIVE DECISION DATED 15/07/2005 IN CASE OF WALLFORT SHARE & STOCK BROKERS LTD. REPORTED IN 96 ITD 1, HELD THAT PROVISIONS OF SECTION 14A DOES NOT IMPINGE ON THE PROVISIONS OF SECTION 1 0(33). THE DIVIDENDS RECEIVED COULD NOT BE ADJUSTED FOR ARRIVING AT THE NET RESULT OF THE COMPUTATION IN RELATION TO THE ASSESSEES TRANSACTI ONS OF PURCHASE AND SALE OF UNITS OF MUTUAL FUND. THE ITAT HELD IT IS BECAUSE THE HISTORICAL COST MEANS THE SUM OF THE EXPENDITURE DIRECTLY OR I NDIRECTLY INCURRED IN BRINGING AN ARTICLE TO ITS EXISTING CONDITION AND L OCATION. THIS MAY BE EXPRESSED SHORTLY AS ACQUISITION AND PRODUCTION CO ST. THAT COST CAN BE ADJUSTED ONLY BY THE REALIZED OR REALIZABLE VALUE A ND NOT BY PERIODS RETURNS, SUCH AS INTERESTS, DIVIDENDS, RENTALS AND OTHER RECEIVABLES ( PG 80 WALLFORT) . FURTHER THAT DIVIDEND AS A RETURN OF INVESTMENT IS NOT REGARDED, AS A RULE, RECOVERY OF PURCHASE PRICE. AS A COROLLA RY IT CANT BE REGARDED AS THE EROSION OF THE SALE PRICE. IN THE INSTANT CASE, NO EXPENDITURE WAS INCURRED BY THE ASSESSEE IN RESPECT OF INCOME FROM UNITS. (C) IN RESPECT OF THE LOGIC FOLLOWED BY THE A.O FOR TREATING THESE TRANSACTIONS AS COLOURABLE, THE SPECIAL BENCH OF ITAT IN THE AFO REMENTIONED JUDGMENT, DEALT AT LENGTH ON THIS ASPECT TO CONCLUDE THAT THE RE WAS NO SCHEME OR COLLUSION. THE TRANSACTIONS WERE IN ORDINARY COURS E, AT ARMS LENGTH. THE ITAT, FURTHER ELABORATED UPON THE THEME THAT PROVIS IONS OF SECTION 94(7) HAVING BEEN BROUGHT INTO STATUE BOOK W.E.F. 01/04/2 002 COULDNT BE APPLIED TO THE ASSESSMENT YEARS IN QUESTION TO DISA LLOW ASSESSEE CLAIM FOR LOSS. IN FACT, THESE PROVISIONS APPLICABLE PROSPECT IVELY, WERE GEARED TOWARDS QUICK IN QUICK-OUT ASPECT AND NOT AGAINST C LAIM OF LOSS AND ITS SET OFF, PER SE. THESE PROVISIONS WERE ONLY TO MAKE THE DIVIDEND STRIPPERS SQUAT FOR A LONGER PERIOD. (D) IT IS ALSO SEEN THAT THE RATIO OF DECISIONS REF ERRED TO BY THE A.O WAS NOT APPLICABLE IN THE FACTS OF CIRCUMSTANCES OF THE PRE SENT CASE./ THUS IN THE CASE OF CIT VS. S.C. KOTHARI, 82 ITR 974 (SC), WAS IN RESPECT OF EXPENSES OF ILLEGAL BUSINESS SET OFF OF LOSS OF SUCH BUSINES S. THE DECISION IN CASE OF LORDS DAIRY FARM, 27 ITR 700 (BOMBAY) WAS IN RESPEC T OF BAD DEBTS AND THE LOSS BY EMBEZZLEMENT BY EMPLOYEE. IN CASE OF NE W INDIA ASSURANCE, 71 ITR 761 (BOM) THE COURT EXPLAINED THAT LOSS IS N OT WHICH AN ASSESSEE EXPENDS OR DISBURSES AND EXPENDITURE IS WHAT GOES O UT. THE JUDGEMENT IN CASE OF CHENAB FOREST CO. 96 ITR 568 (J & K) IS IN RESPECT OF A CLAIM OF NON CAPITAL EXPENDITURE AND ITS DEDUCTIBILITY. THE ISSUE INVOLVED IN CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. 225 ITR 802, WA S WHETHER DISCOUNT ON BONDS IS AN EXPENDITURE OR NOT. THE DECISION OF THE HONBLE SUPREME COURT IN SAKARLAL BALABHAI, 86 ITR 2 (SC) IS IN RES PECT OF SECTION 44F UNDER THE 1992 ACT AND TO THE EFFECT THAT IT IS NOT PERMISSIBLE TO CONSTRUE ANY PROVISION BY READING INTO MORE WORDS THAN ITS C ONTENTS. IT HAS BEEN POINTED OUT THAT THE DECISION INCOME ASSESSEE OF BA NYAN AND BERRY, 222 ITR 831 (GUJ) ONLY REITERATED THAT LEGITIMATE TAX P LANNING IS PERMISSIBLE, JUST AS WAS HELD IN CASE OF M/S. PLAYWORLD ELECTRON ICS (P) LTD., 184 ITR 308 (SC). IN SHORT, THERE ARE NO DECISIONS, QUOTED BY THE A.O WHICH HAVE SIMILAR FACTS AND CAN COME TO HIS AID / SUPPORT HIS ACTION. ON THE OTHER HAND, AS POINTED OUT, THE DECISION OF 2005 OF THE S PECIAL BENCH OF ITAT, MUMBAI, IN CASE OF WALLFORT SHARES & STOCK BROKERS LT. (96 ITD 1) IS A DIRECT ONE, ON SIMILAR ISSUES AND FACTS. ITA NO.2638-39/AHD./2007 A.Y. 2001-02 DCIT CC-2(4) ABD V MINESH M SONI & MAHENDRA R SONI PAGE 5 IN LIGHT OF THE AFOREMENTIONED JUDICIAL DECISIONS A ND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT, IT IS HELD THAT THE ACTION OF THE A.O IN DISALLOWING THE LOSS IN PURCHASE / SALE OF UNITS CA NT BE UPHELD. THE RELATED GROUND OF APPEAL IS THEREFORE ALLOWED. RESPECTFULLY FOLLOWING THE SPECIAL BENCH MUMBAI TRI BUNAL IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. (SUPRA) AND WHEREIN THE HONBLE BOMBAY HIGH COURT HAS CONFIRMED THE VIEW OF THE SPECIAL BENCH OF MUMB AI TRIBUNAL. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) ALLOWING THE CLAIM OF TH E ASSESSEE. THIS COMMON ISSUE OF APPEALS OF REVENUE IS DISMISSED. 5. IN THE RESULT, REVENUES APPEALS ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 20/11/2009 SD/- SD/- (P.K.BANSAL) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED :20/11/2009 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-III, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD