High Court Of Delhi
CIT vs. Shambhu Mercantile Ltd.
Section 70, 94(7)
Asst. Year 2004-05
Vikramajit Sen & Rajiv Shakdher, JJ.
IT Appeal No. 49 of 2009
10th February, 2009
Counsel appeared :
Sanjeev Sabharwal, for the Appellant : None, for the Respondent
ORDER
BY THE COURT :
This is an appeal preferred by the Revenue against the judgment dt. 29th Feb., 2008 passed by the Income-tax Appellate Tribunal (hereinafter referred to as the ‘Tribunal’) in ITA No. 2056/Del/2006 [reported as ITO vs. Shambhu Mercantile Ltd. (2008) 116 TTJ (Del) 784 : (2008) 9 DTR (Del) 617—Ed.] pertaining to asst. yr. 2004-05. The only issue which arose for consideration was whether the capital loss incurred by the assessee on redemption of units of mutual funds was liable for disallowance in view of the provisions of s. 94(7) of the IT Act, 1961 (hereinafter referred to as the ‘Act’).
1.1 In order to appreciate the issue which had arisen before the authorities below the following brief facts are required to be noted.
2. The assessee, which is a public limited company, is engaged in the business of sale/purchase and trade in stock/units and units of mutual fund. During the relevant assessment year the assessee purchased units of mutual funds which included funds such as Tata Index Fund Nifty Plan Option-A and IL & FS Index Fund Nifty Plan (in short ‘mutual funds’). The assessee undisputedly had received dividend income on the said units which were exempt under s. 10(34) of the Act. The assessee during the relevant year sold the said units. The loss which the assessee suffered on sale of said units was sought to be set off against profits on sale of said units in respect of said mutual funds. The assessee’s case was picked up for scrutiny and accordingly, notice under s. 143(2) of the Act was issued and served upon the assessee. During the course of scrutiny the AO raised queries with respect to the purchase and sale of the aforementioned units of mutual funds. After examining the details submitted by the representative of the assessee, the AO came to the conclusion that the assessee had indulged in a practice which is popularly known as ‘dividend stripping’ whereby a person purchases a cum-dividend unit in respect of which dividend receivable is exempt from income-tax. After dividend is received the purchaser sells the units at a price which is obviously less than the price at which the units had been purchased, since cost of purchase of units at the relevant (time) included the dividend receivable on the units. The resultant loss on sale of units is sought to be set off against other income. Resultantly unintended benefit flows to such a purchaser.
2.1 In the aforesaid circumstances the AO thus invoked the provisions of s. 94(7) of the Act which was introduced precisely for this purpose by the legislature, and disallowed the capital loss incurred by the assessee on redemption of the said units. The assessee being aggrieved by the order passed by the AO carried the matter in appeal to the Commissioner of Income-tax (Appeals) [hereinafter referred to as the ‘CIT(A’)]. Before the CIT(A), the assessee contended that the provisions of s. 94 (7) of the Act as it stood at the relevant time, that is, prior to its amendment w.e.f. 1st April, 2005 were not attracted to the instant case on account of the fact that the conditions prescribed in subs. (7), cls. (a) to (c) which were cumulative in nature, were not satisfied.
2.2 The CIT(A) agreed with the submission made by the assessee that the conditions prescribed in cls. (a) to (c) of sub-s. (7) of s. 94 were cumulative in nature, and since they were not fulfilled in respect of the transactions in issue the provisions of s. 94(7) of the Act could not have been invoked to disallow the capital loss incurred by the assessee. In reaching this conclusion the CIT(A) also took recourse to Circular No. 14 of 2001 of the Central Board of Direct Taxes (hereinafter referred to as the ‘CBDT’).
3. The Revenue being aggrieved by the order of the CIT(A) preferred an appeal to the Tribunal. The Tribunal by the impugned judgment sustained the view taken by the CIT(A). As a consequence of the impugned judgment the Revenue is in appeal before us.
4. We have heard the learned counsel for the Revenue Mr. Sanjeev Sabharwal. In the present case the facts are not disputed. The only question is whether the conditions laid down in sub-s. (7) cls. (a) to (c) of the Act have to be read cumulatively or, as contended by the Revenue, on a standalone basis. It is important to mention at this stage that s. 94(7) of the Act was inserted in the statute by virtue of the Finance Act, 2001 w.e.f. 1st April, 2002. In respect of transactions prior to the insertion of this section this Court in the case of CIT vs. Vikram Aditya & Associates (P) Ltd. (2006) 204 CTR (Del) 238 : (2006) 287 ITR 268 (Del) has sustained such like transactions. In the instant case we are concerned with the provisions of s. 94(7) of the Act as it stood prior to the amendment carried out by the Finance Act No. 2, 2004 w.e.f. 1st April, 2005. The relevant provision reads as follows : “Where (a) any person buys or acquires any securities or unit within a period of three months prior to the record date; (b) such person sells or transfers such securities or unit within a period of three months after such date; (c) the dividend or income on such securities or unit received or receivable by such person is exempt; then, the loss, if any, arising to him on account of such purchase and sale of securities or unit to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit; shall be ignored for the purposes of computing his income chargeable to tax.”
4.1 A plain reading of the provision indicates that the conditions are cumulative. The reason being that cls. (a) and (b) of sub-s. (7) of s. 94 provided for a statutory period both prior to and after the record date in respect of securities or units [as provided in cl. (c)] the dividend or income of which whether received or receivable is exempt under the Act. It is only in a case where a transaction has all three components as prescribed in cls. (a), (b) and (c) of sub-s. (7) of s. 94 and if a loss is occasioned on purchase and sale of such security or unit then to the extent such loss does not exceed the amount of dividend or income received or receivable it is to be ignored for the purposes of computing income of the assessee chargeable to tax. The position is best explained by a reference to the information pertaining to transactions in issue which is set out in a tabular form which finds mention in the impugned judgment. The same for the sake of convenience is extracted below :
4.2 A perusal of the Table would show that the assessee during the assessment year under consideration had bought and redeemed units of mutual funds of Tata Index Fund Nifty Plan Option-A and IL & FS Index Fund Nifty Plan. A perusal of information with respect to the transaction set out against serial No. 1 would show that the record date is 25th Nov., 2003 and the date of purchase is also 25th Nov., 2003 which is within the period of three months of the record date. The assessee received by way of dividend a sum of Rs. 29,84,774 on 25th Nov., 2003 and a further sum of Rs. 9,98,951 on 3rd March, 2004. However, the sale of the said units took place on 9th March, 2004 which was well beyond three months from the record date, that is, 25th Nov., 2003. In respect of transaction against serial No. 2 the record date was again 25th Nov., 2003. The assessee purchased the units on 25th Nov., 2003 on which date the assessee received a dividend of Rs. 44,84,662. The second dividend amounting to Rs. 14,94,887 was received on 3rd March, 2004. The units, however, were sold on 9th March, 2004. This transaction clearly reveals that while the purchase was within the statutory period of three months, the sale of the said units was once again beyond the statutory period of three months from the record date. Similarly, in the transaction against serial No. 3 the assessee purchased the units of IL & FS Index Fund Nifty Plan on 16th Dec.,2003 which was also the record date on which the assessee received a dividend of Rs. 1,18,35,408. The sale, however, was beyond the statutory period of three months from the record date, which was 17th March, 2004.
5. In the circumstances it is clear that the aforesaid transactions are outside the net of s. 94(7) of the Act. The record date is really the median line for the statutory period prescribed both for purchase and sale which is three months on either side of the record date. It is only when the transaction is in relation to a security or a unit in respect of which the dividend or income received is exempt and it is within statutory period as prescribed in cls. (a) and (b) of sub-s. (7) of s. 94 that the loss, if any, would stand disallowed to the extent of the dividend or income received or receivable on such securities or units in computing the assessee’s income chargeable to tax. We are of the view that the reasoning of the authorities below cannot be faulted.
No substantial question of law arises for our consideration. Resultantly the appeal is dismissed.
[Citation : 325 ITR 535]
