The DCIT, Central Circle-1(3), Ahmedabad V. Arth Stock Broking Pvt.Ltd., Ahmedabad

ITSSA 780/AHD/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 3079 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 30-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 30-10-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 02-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B K S PANDYA
• Keywords: Business income; Earning of tax free income
• Section: 153A; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD B BENCH BEFORE: SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 DY. C.I.T., CENTRAL CIRCLE-1(3) AHMEDABAD APPELLANT VS. ARTH STOCK BROKING PVT. LTD. 804, ABHIJIT, MITHKHALI CIRCLE, NAVRANGPURA, AHMEDABAD PAN-AACCA6246L RESPONDENT DEPARTMENT BY : SHRI B.K.S. PANDYA, SR. D.R. ASSESSEE BY : WRITTEN SUBMISSIONS DATE OF HEARING : 30.10.2012 DATE OF PRONOUNCEMENT : 30.10.2012 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER THIS IS REVENUES APPEAL AGAINST THE ORDER OF LD. C IT(A)-1, AHMEDABAD DATED 15.09.2010. 2. THE ONLY EFFECTIVE GROUND TAKEN BY THE REVENUE I S AS UNDER:- THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DI RECTING THE A.O. TO ALLOW BUSINESS LOSS OF RS.3068352/- AS AGAINST R S.384595/- ALLOWED BY THE A.O. ON ACCOUNT OF SALE AND PURCHASE OF UNITS OF MUTUAL FUND. 3. DURING THE ASSESSMENT PROCEEDINGS THE A.O. FOUND THAT ASSESSEE HAS SHOWN BUSINESS LOSS ON SALE OF UNITS OF MUTUAL FUND S OUT OF WHICH LOSS OF RS.26,83,757/- WAS DISALLOWED BY TREATING THE SAME AS DIRECTLY ATTRIBUTABLE TO I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 2 THE EXPENDITURE INCURRED FOR PURCHASE OF TAX FREE D IVIDEND BY APPLYING PROVISION OF SECTION 14A OF THE ACT. 4. BEFORE LD. CIT(A) ASSESSEE RELIED ON THE FOLLOWI NG WRITTEN SUBMISSIONS:- '1.1 DURING THE YEAR THE APPELLANT HAS PURCHASED AN D SOLD UNITS OF THE FOLLOWING MUTUAL FUND: SR NO. NAME PURCHASE PRICE SALE PRICE LOSS I KOT HARI PIONEER MUTUAL FUND 1160462131 9745924.27 -1858697.04 2- SUN F&C VALUE FUND 6079136.69 4869480371 -1209655.98 TOTAL LOSS -3068353.02 THE APPELLANT HAS ALSO EARNED DIVIDEND OF RS. 26,83 ,758/- ON UNITS OF THE ABOVE MUTUAL FUND. 1.2 THE UNITS OF BOTH THE MUTUAL FUNDS WERE PURC HASED BY TAKING LOAN FROM IL&FS LTD AND INVESTSMART INDIA LT D AND HAVE PAID INTEREST OF RS.13,02 7/- ON SUCH LOAN TAKEN. 1.3 THE APPELLANT HAS CLAIMED LOSS INCURRED ON PURCHASE / SALE OF UNITS OF MUTUAL FUND BUSINESS LOSS AND DIVI DEND INCOME FROM MUTUAL FUND AS EXEMPTED INCOME U/S 10(33). 1.4 THE ABOVE TRANSACTION OF THE APPELLANT IS B ASICALLY CONSIDERED AS DIVIDEND STRIPING TRANSACTION FOR WHI CH THE SPECIFIC PROVISIONS HAVE BEEN INTRODUCED IN THE INCOME TAX A CT, 1961 W.E.F. A.Y. 2002-03 ONLY, AND ACCORDINGLY FROM A.Y. 2002-2003 IF CERTAIN CONDITIONS ARE NOT SATISFIED THAN THE LO SS INCURRED ON ANY SUCH DIVIDEND STRIPPING TRANSACTION IS F& LIE I GNORED TO THE EXTENT OF THE TAX FREE DIVIDEND RECEIVED FROM SUCK TRANSACTION: AND ACCORDINGLY FOR ANY SUCH TRANSACTION ENTERED IN TO UP TO A.Y. 2001-02 TH& LOSS INCURRED &N SUCH TRANSACTION IS TO BE CONSIDERED AS BUSINESS LOSS AND TO BE ALLOWED AS SU CH WITHOUT TAKING INTO CONSIDERED AS BUSINESS LOSS AND TO BE A LLOWED AS SUCH WITHOUT TAKING INTO CONSIDERATION THE DIVIDEND INCOME RECEIVED FROM SUCH TRANSACTION. I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 3 1.5 THE LEARNED A. O HAS NOT ACCEPTED THE DECISI ON OF THE LEARNED CIT (A) ON THE GROUND THAT AS THE APPELLANT COMPANY HAS NOT CLAIMED DIVIDEND AS EXEMPT INCOME IN ORIGIN AL RETURN AND THE SAME IS CLAIMED AS EXEMPT IN RETURN OF INCO ME IN RESPONSE TO NOTICE U/S. 153A OF THE ACT THE ISSUE I S REQUIRED TO BE DECIDED BY HIM EVEN THOUGH THE LEARNED CIT (A) H AS DECIDED THE SAME EARLIER. 1.6 THE LEARNED A.O. HAS NOT ACCEPTED THE SUBMIS SION MADE BY THE APPELLANT AND HAS ALSO NOT DEALT WITH THE DE CISIONS RELIED UPON BY THE APPELLANT AND INSTEAD RELIED UPON THE D ECISION OF HON'BLE SUPREME COURT IN THE CASE OF MADRAS INDUSTR IAL INVESTMENT CORPORATION 225 ITR 802 (SC) AND CONCLUD ED THAT 'THEREFORE IT IS HELD THAT PURCHASE AND SALE OF UNI TS OF MUTUAL FUNDS HAVE BEEN CARRIED OUT WITH PRE-DETERMINED MOT IVE OF EARNING TAX FREE DIVIDEND AND TO GET THE RESULTANT LOSS SET OFF AGAINST OTHER BUSINESS INCOME. SUCH DUBIOUS METHODS OF TAX AVOIDANCE ARE NOT PERMISSIBLE UNDER THE LAW. MOREOV ER, THE ASSESSEE HAS SHOWN THE ACTIVITY OF PURCHASE AND SAL E OF UNITS OFMUTUAL FUNDS AS. BUSINESS TRANSACTION. THEREFORE, IN VIEW OF PROVISIONS OF SECTION 14A OF THE ACT, ANY EXPENDITU RE PERTAINING TO THE EXEMPTED INCOME IS NOT ALLOWABLE AS SET OFF AGAINST OTHER TAXABLE INCOME. IN THE PRESENT CASE, THE LOSS HAS B EEN WORKED OUT ONLY BECAUSE OF HIGHER EXPENDITURE ON PURCHASES OF MUTUAL FUND. THUS, THE RESULTANT LOSS WHICH IS ALSO AN EXP ENDITURE IN THE CIRCUMSTANCES OF THE CASE AS ALSO IN VIEW OF THE RA TIO LAID DOWN BY HON 'BLE SUPREME COURT IN THE CASE OF MADRAS IND USTRIAL INVESTMENT CORPORATION LTD. (SUPRA), IS NOT ALLOWAB LE TO THE EXTENT OF EXEMPTED DIVIDEND IS NOT ALLOWABLE. ' 5. AFTER TAKING INTO CONSIDERATION THESE SUBMISSION S OF THE ASSESSEE LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERV ING AS UNDER:- 'IMPACT OF SECTION 94(7) THE NEXT POINT WHICH AROSE FOR DETERMINATION WAS WH ETHER THE 'LOSS' PERTAINING TO EXEMPT INCOME WAS DEDUCTIBLE A GAINST THE CHARGEABLE INCOME. THE REAL OBJECTION OF THE DEPART MENT APPEARED TO BE THAT THE ASSESSEE WAS GETTING TAX-FR EE DIVIDEND AND AT THE SAME TIME, IT WAS CLAIMING LOSS ON THE S ALE OF THE UNITS; AND THAT THE ASSESSEE HAD PURPOSELY AND IN A PLANNED MANNER ENTERED INTO A PRE-MEDITATED TRANSACTION OF BUYING AND SELLING UNITS YIELDING EXEMPT DIVIDENDS WITH FULL K NOWLEDGE ABOUT THE FALL IN THE NAV AFTER THE RECORD DATE AND THE PAYMENT OF TAX-FREE DIVIDEND AND, THEREFORE, LOSS ON SALE W AS NOT GENUINE. THERE WAS NO MERIT IN THE ARGUMENTS OF THE DEPARTMENT. THE LEAD MATTER COVERED ASSESSMENT YEAR S BEFORE I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 4 INSERTION OF SECTION 94(7) VIDE THE FINANCE ACT, 20 01 WITH EFFECT FROM 01.04.2002. WITH REGARD TO SUCH CASES, IT WAS ESTABLISHED THAT THERE WAS A 'SALE' AND THE SALE PRICE WAS RECE IVED BY THE ASSESSEE, AND THAT THE ASSESSEE DID RECEIVED DIVIDE ND. THE FACT THAT THE DIVIDEND RECEIVED WAS TAX-FREE WAS THE POS ITION RECOGNIZED US. 10(33). THE ASSESSEE HAD MADE USE OF THE SAID PROVISION OF THE ACT. SUCH USE CANNOT BE CALLED AS 'ABUSE OF LAW'. EVEN ASSUMING THAT THE TRANSACTION WAS PRE-PLANNED, THERE WAS NOTHING TO IMPEACH THE GENUINENESS OF THE TRANSACTI ON. WITH REGARD TO THE RULING IN MCDOWELL & CO: LTD. VS. CTO [1985] 154 ITR 148/22 TAXMAN 11 (SC), IT MAY BE STATED THAT IN THE LATER DECISION OF THE SUPREME COURT IN UNION OF INDIA VS. AZADI BACHAO ANDOLAN [2003] 263 ITR 706/132TAXMAN 373 IT HAS BEEN HELD THAT A CITIZEN IS FREE TO CARRY ON ITS BU SINESS WITHIN THE FOUR CORNERS OF THE LAW. THAT MERE TAX PLANNING, WI THOUT ANY MOTIVE TO EVADE TAXES THROUGH COLOURABLE DEVICES, I S NOT FROWNED UPON EVEN BY THE JUDGEMENT OF THE SUPREME C OURT IN MCDOWELL & CO. LTD.'S CASE (SUPRA). HENCE, IN THE C ASES ARISING BEFORE 01.04.2002, LOSSES PERTAINING TO EXEMPTED IN COME COULD NOT BE DISALLOWED. HOWEVER, AFTER 01.04.2002, SUCH LOSSES TO THE EXTENT OF DIVIDEND RECEIVED BY THE ASSESSEE COU LD BE IGNORED BY THE ASSESSING OFFICER IN VIEW OF SECTION 94(7). THE OBJECT, OF SECTION 94(7) IS TO CURB THE SHORT-TERM LOSSES.. APPLYING SECTION 94(7) IN A CASE FOR THE ASSESSMENT YEAR(S) FALLING AFTER 01.04.2002, THE LOSS TO BE IGNORED WO ULD BE ONLY TO THE EXTENT OF THE DIVIDEND RECEIVED AND NOT THE ENT IRE LOSS. IN OTHER WORDS, LOSSES OVER AND ABOVE THE AMOUNT OF TH E DIVIDEND RECEIVED WOULD STILL BE ALLOWED FROM WHICH IT FOLLO WS THAT THE PARLIAMENT HAS NOT TREATED THE DIVIDEND STRIPPING T RANSACTIONS AS SHAM OR BOGUS. IT HAS NOT TREATED THE ENTIRE LOSS A S FICTITIOUS OR ONLY A FISCAL LOSS. AFTER 01.04.2002, FOSSES OVER A ND ABOVE THE DIVIDEND RECEIVED WILL NOT BE IGNORED U/S.94(7). IF THE ARGUMENT OF THE DEPARTMENT WAS TO BE ACCEPTED, IT WOULD MEAN THAT BEFORE 01.04.2003, THE ENTIRE LOSS WOULD BE DISALLO WED AS NOT GENUINE BUT, AFTER 01.04.2002, A PART OF IF WOULD B E ALLOWABLE U/S.94(7)' WHICH IS INSERTED TO CURB TAX AVOIDANCE, BY CERTAIN TYPES OF TRANSACTIONS IN SECURITIES. THERE IS ONE MORE WAY OF ANSWERING THIS POINT. SECTIONS 14A AND 94(7) WERE SIMULTANEOUSLY INSERTED BY THE SAME FINANCE ACT, 20 01. SECTION 14A WAS INSERTED WITH EFFECT FROM 01.04.2002. THE R EASON IS OBVIOUS, THE PARLIAMENT REALIZED THAT SEVERAL PUBLI C SECTOR UNDERTAKING AND PUBLIC SECTOR ENTERPRISES HAD INVES TED HUGE AMOUNTS OVER LAST COUPLE OF YEARS IN THE IMPUGNED D IVIDEND STRIPPING TRANSACTIONS SO ALSO DECLARATION OF DIVID ENDS BY MUTUAL FUND ARE BEING VETTED AND REGULATED BY THE SEBI FOR LAST COULD OF YEARS. IF SECTION 94(7) WOULD HAVE BEEN BROUGHT INT O EFFECT FROM 01.04.1962, AS IN THE CASE OF SECTION 14A, IT WOULD HAVE I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 5 RESULTED IN REVERSAL OF LARGE NUMBER OF TRANSACTION S. THIS COULD BE ONE REASON WHY THE PARLIAMENT INTENDED TO GIVE E FFECT TO SECTION 94(7) ONLY WITH EFFECT FROM 01.04.2002. HOW EVER,, THIS LAST REASONING HAS NOTHING TO DO WITH THE INTERPRET ATIONS GIVEN TO SECTION 14A AND 94(7). (PARAS 19 AND 20). RECONCILIATION OF SECTIONS 14 AND 94(7) THE NEXT QUESTION WAS ABOUT RECONCILIATION OF SECTI ONS 14A AND 94(7). THE TWO OPERATE IN DIFFERENT FIELDS. SECTION S 14A DEALS WITH DISALLOWANCE OF EXPENDITURE INCURRED IN EARNIN G TAX-FREE INCOME AGAINST THE PROFITS OF THE ACCOUNTING YEAR U /S.30 TO 37. ON THE OTHER HAND, SECTION 94(7) REFERS TO DISALLOW ANCE OF THE LOSS ON THE ACQUISITION OF AN ASSET WHICH SITUATION IS NOT THERE IN CASES FALLING U/S.14A. U/S.94(7), THE DIVIDEND GOES TO REDUCE THE LOSS. IT APPLIES TO CASES WHERE THE LOSS IS MOR E THAN THE DIVIDEND. SECTION 14A APPLIES TO CASES WHERE THE AS SESSEE INCURS EXPENDITURE TO EARN TAX FREE INCOME BUT WHER E THERE IS NO ACQUISITION OF ASSET. IN CASES FALLING U/S.94(7), T HERE IS ACQUISITION OF AN ASSET AND EXISTENCE OF THE LOSS W HICH ARISES AT A POINT OF TIME SUBSEQUENT TO THE PURCHASE OF UNITS AND RECEIPTS OF EXEMPT INCOME. IT OCCURS ONLY WHEN THE SALES TAK ES PLACE. SECTION 14A COMES IN WHEN THERE IS CLAIM FOR DEDUCT ION OF AN EXPENDITURE WHEREAS SECTION 94(7) COMES IN WHEN THE RE IS CLAIM FOR ALLOWANCE FOR THE BUSINESS LOSS. ONE MUST KEEP IN MIND THE CONCEPTUAL DIFFERENCE BETWEEN LOSS, EXPENDITURE, CO ST OF ACQUISITION, ETC., WHILE INTERPRETING THE SCHEME OF THE ACT. [PARA 21].' 6. SINCE LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSE E BY RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT V S. WALFORT SHARE & STOCK BROKERS PVT. LTD. (192 TAXMAN 211 (SC), WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A) AND THE SAME IS HEREBY UPHELD. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30.10.2012 SD/- SD/- (T.R. MEENA) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER TRUE COPY I.T.(SS)A. NO.780/AHD/2010 A.Y. 2001-02 6 N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE BY ORDER AR,ITAT,AHMEDABAD