TMI Blog2005 (7) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act, 1961 can be interpreted as retrospective in operation and if so, its effect ? 2. The facts of the case relevant to the questions referred to us, briefly, are that the assessee-company filed return of income for assessment year 2001-02 disclosing total income at ₹ 57,31,610 on 29th October, 2001. The Assessing Officer completed assessment under section 143(3) on 31-3-2003 at total income of ₹ 2,58,46,553. During the year the assessee was a member of Mumbai Stock Exchange and traded shares on own account as well as on behalf of its clients. In addition, the assessee purchased on 18-12-2000 and sold on 21-12-2000 units of Sun F C Mutual Fund. The learned CIT(A) has enumerated the assessee s claim of loss on this transaction in tabular form in para 2 of the impugned order in the following manner :- Particulars Purchase Sale Gain/Loss Dividend amount Date Amount Date Amount Units of Sun F C Mutual 18-12-2000 10,00,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee knew beforehand that the net result of the transaction would be a financial loss or outflow. The only gain was tax free dividend. The details of other share transactions furnished by the assessee did not conform to this pattern. In this transaction what was given back to the assessee was assessee s own investment or capital only which was returned to him in the form of dividend and redemption amount. 4. According to the learned Assessing Officer the transaction under consideration had no motive to earn profit. In open end scheme, it was but natural that NAV shall be reduced by the amount of dividend outflow. Looking to the extremely short period for which funds were parked by the assessee, it was crystal clear that the mutual fund had not invested the money deposited by the assessee and dividend had been paid out to the assessee from out of the purchase price of the units. The assessee knew beforehand that it would receive dividend out of its own funds and thereafter the difference in purchase and sale price of units would be a certain loss. The assessee intended to gain because it would reduce such loss from its other taxable income, while the dividend would be claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3). The entire transaction is taking place in a pre-ordained manner and it is nothing but a fiscal nullity. Relying upon the judgment of Hon ble Supreme Court in the case of CIT v. India Discount Co. Ltd. [1970] 75 ITR 191, the learned Assessing Officer held that dividend received in respect of shares purchased on cum-dividend basis would reduce the cost of acquisition in the hands of the purchaser. Following the ratio of the aforesaid Supreme Court judgment, the learned Assessing Officer calculated the loss arising to the assessee in the following manner : Purchase price of share-cum-dividend 10,00,00,000 Less : Dividend declared ₹ 2,01,14,942 Incentive received from MF 16,73,563 2,17,88,505 7,82,11,495 Less : Sale price of Units ₹ 9,71,26,436 Less : Dividend received ₹ 2,01,14,942 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lord Denning, who propounded that the motive behind the transaction should also be considered while deciding particular transaction. Learned CIT(A) then referred to another judgment of House of Lords in the case of Finsbury Securities Ltd. v. Bishop (Inspector of Taxes) [1966] 43 TC 5911. In that judgment Lord Morris of Borth-Y-Gest, who had held the transactions as trading transaction in the case of J.P. Harrison (Watford) Ltd. (supra) held different view of the matter. He held that the transactions were no more than devices which were planned and contrived to effect the avowed purpose of tax avoidance. He further held that the arrangements under consideration could not be regarded as within the trade of share-dealing.The view of Lord Morris was endorsed fully by other law lords. Thus, there was visible shift in the thinking of House of Lords. Thereafter another path breaking judgment came in the form of Lupton v. F.A. A.B. Ltd. 47 TC 580 (HL). The case of Lupton marked a water shed in tax avoidance cases. Their Lordships noted the earlier judgments in the cases of Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC) and Finsbury Securities L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-4-2002 only required a careful thought. Merely because the amendment had not been given retrospective effect by the Legislature, the principles laid down by Hon ble Supreme Court and House of Lords could not be thrown to the winds and colourable transactions could not be given legal sanctity or approval in a similar situation. The learned CIT(A) referred to the judgment of House of Lords in the case of Lupton (supra). In that case forward stripping had been banned by the Finance Act, 1960, but the House of Lords did not think that the subsequent amendment should prejudice or cloud the process of thinking and the objectivity. The transaction had to be viewed as it was, i.e., the colourable device. 10. The learned CIT(Appeals) proceeded to examine the nature of the transaction. The purpose of the transaction was to have double benefit of not only the tax free income but also reduction of incidence of tax on the assessee s other income chargeable to tax. The mutual fund played the role of facilitator of the scheme of tax avoidance. These mutual funds advertised in the newspapers the record date and the amount of dividend to be declared. Subscribers, financiers, brokers came alive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was no more business as pickle was not candy. Reference was made to the judgment of Hon ble Gujarat High Court in the case of CIT v. Motilal Hirabhai Spg. Wvg. Co. Ltd. [1978] 113 ITR 173; of Supreme Court in the case of Senairam Doongarmall v. CIT [1961] 42 ITR 392 ; of Supreme Court in the case of Barandra Prasad Ray v. ITO [1981] 129 ITR 295 ; of Supreme Court again in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 and of Bombay High Court in the case of Provident Investment Co. Ltd. v. CIT 6 ITC 21 in support of the proposition that an activity undertaken without profit motive could not be considered to be business activity. According to the learned CIT(Appeals), the loss claimed must be one which directly sprung from the business of the assessee. In the case of the assessee in question, the loss incurred had not even remotest connection with the business of the assessee, nor it was incidental thereto. Furthermore, another essential feature of business was that there should be a continuous course of activity. That too was missing in the case of the assessee. Hence even though the transaction was not a sham or illusory transaction, the fis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial and without intention of making a profit. 16. The learned Assessing Officer further found that the face value of the units of Chola Mutual Fund as originally offered on 6-10-1997 was ₹ 10. As on 31-3-1999 the unit had NAV of ₹ 11.42 and as on 31-3-2000, it had NAV of ₹ 13.28. There was, thus, only marginal appreciation in Net Asset Value of the unit over the years. It was surprising that on 24-3-2000, the mutual fund distributed dividend of ₹ 4 per unit to investors whosoever applied. In other words, the mutual funds simply distributed the invest- ment amount received from the applicants as dividend, thus, parting with exempted income at a pre-determined price. 17. On these facts, the learned Assessing Officer issued show-cause notice to the assessee to explain why the trading loss that was not part of the normal business activity in view of the extraordinary circumstances of purchase and sale, should not be disallowed. The arguments of the assessee and the reasoning of the learned Assessing Officer thereupon are more or less the same as enumerated by us in relation to assessment order for assessment year 2001-02 and for brevity not repeated her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the case of Fifty-Fifty Finance Management Consultants (P.) Ltd. v. Asstt. CIT [2004] 141 Taxman 1 and IT Appeal No. 58 (Mum.) of 1997 in the case of Mahindra Sintered Products Ltd. At any rate the whole issue stood concluded by the judgment of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra). The learned counsel pointed out that in this case the Assessing Officer made the assessments prior to the judgment of the Hon ble Supreme Court and the impugned orders of the learned CIT(A) were made after one month of the judgment of Hon ble Supreme Court but without noticing the judgment. Thus, the impugned orders were passed without having the benefit of and without following and complying with the judgment of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra). 21. The learned counsel for the assessee argued that it was not disputed by lower authorities that the transactions entered into by the assessee were perfectly in accordance with law. The main basis of the department s argument was that there was no commercial purpose involved in the transaction and, therefore, the loss should be ignored. It was held that the motive or intention of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven H.M. (Inspector of Taxes) v. Westmoreland Investments Ltd. [2001] 1 All ER 865 (HL), as noted by the Supreme Court in Azadi Bachao Andolan s case (supra) at pages 756 and 757 of 263 ITR. The ITAT Special Bench had also accepted that the English courts have taken a different view in Mid East Portfolio Management Ltd. v. Dy. CIT [2003] 87 ITD 537 (Mum.) (SB), paragraph 29. The transactions with the mutual funds were genuine transactions and could not be regarded as a sham, subterfuge or a colourable device as the transactions had actually taken place with an actual flow of funds. It had been consistently held in India and England that motives with which a transaction was entered into were irrelevant and could not in that way effect the legality of the transaction. Even where it was intended to avoid tax, the intention was irrelevant - one had only to see whether on the facts of a case the charge of tax was attracted. 22. The learned counsel argued that in the case of Azadi Bachao Andolan (supra) the principles laid down in the case of IRC v. Duke of Westminster [1936] 19 TC 4905 (HL) and in India in the case of CIT v. A. Raman Co. [1968] 67 ITR 11 (SC) had been emphasized an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4] 83 TTJ (Mum.) 8436 and by ITAT, Ahmedabad Bench in the case of Dy. CIT v. Cadila Laboratories Ltd. [2004] 83 TTJ (Ahd.) 7587, wherein on similar facts loss claimed by those assessees were allowed as deduction. 24. The learned counsel argued that the provisions of section 94(7) introduced w.e.f. 1-4-2002 could not be said to be clarificatory for the simple reason that a legislative time limit of 3 months had been provided by the amendment. It could not be said that the time limit of three months was clarificatory in nature. There was nothing particular about the period of 3 months, except that the Legislature chose to lay down the time limit of 3 months. It could be two months or even six months, as the subsequent amendments showed. It would, therefore, be thoroughly incorrect to say that the provision clarified the existing legal position. The learned counsel further argued that wherever the intention of the Legialture was to give retrospective effect to an amendment, it was explicitly stated. For example, insertion of the provisions of section 90(2) by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1972; insertion of section 14A by the Finance Act, 2001 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al object was to obtain a rebate of tax on the dividend was irrelevant. 26. The learned counsel for the assessee pointed out that CIT(Appeals) had not followed the aforesaid observations but had relied upon certain observations from the minority dissenting orders of Lord Reid and Lord Denning. It was obvious that the majority view had to be followed and not that of minority. Further, the CIT(A) had made it appear as if in the other decisions in Finsubry Securities Ltd. v. Bishop (Inspector of Taxes [1966] 43 TC 5911 (HL) and Lupton v. F.A. A.B. Ltd. 47 TC 580 (HL), a contrary view was taken. But that was not correct. The Court distinguished the decision of the Privy Council on facts because the nature of the transactions were different. For example, in Finsbury Securities Ltd. s case (supra) the vendors future interests were safeguarded and they were entitled to have all the benefits that would have resulted from their shareholding had there been no scheme. The purchasers were also required to hold the shares for the period covered by the scheme and were not at liberty to deal with the shares in the way they pleased. In fact at page 626-7, Lord Morris of Borth-Y-Gest (who had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s High Court had referred to with approval the decision in Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC). The CIT(A) had quoted extracts from the aforementioned English decisions. If at all those decisions were helpful they supported the assessee s case and not that of the revenue. Further, those decisions were concerned with legal provisions that were completely different from Indian law. As laid down in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 (SC), 320 it was neither desirable nor permissible to pick out a word or sentence from a judgment, divorced from the context of the question under consideration and treat it to be the complete law. A judgment must be read as a whole in the light of the questions that were before the court as a decision of a court took its colour from the questions involved in the case in which it was rendered. 30. Following interveners requested for being allowed to make their submissions during the course of consideration of the issues by us :- 1 . Shri S.C. Kapadia, Shri Y.P. Trivedi Ms. Usha Dalal . ITA No. 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness transaction. As to the judgment of Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra) the same had been delivered on very different facts. Excise duty always belonged to the manufacturer but in the case of McDowell Co. Ltd. (supra), a third party was being made to pay excise duty. It was, therefore, clear that the transactions were in the nature of device. Shri K. Shivaram, the learned Advocate appeared for intervener Nos. 3 and 4. He pointed out that his assessees, unlike the assessee in appeal before us, were not businessmen. He argued that not every one incurred trading loss on purchase and sale of units of a mutual fund. His clients had claimed the loss arising as capital loss. He emphasized that there was nothing illegal committed by the assessees. There was nothing on record to question or doubt genuineness of the transactions. In such situation, the assessee could not be held to have employed a colourable device. Appearing for intervener No. 5, Shri Dilip Sheth emphasized that his assessee was a businessman. For taking any business decision, his assessee had always to consider the overall position, including tax implications of the transaction. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d . The learned counsel pointed out that the expression dividend having been defined in the Act by section 2(22) had to be given the same meaning. Section 2(22) comprised of 5 clauses to indicate what was included in dividend and it also comprised of six clauses to indicate what was not included in the term dividend . In all these clauses of inclusion as well as exclusion, the reference was to company . Only a distribution made by a company could qualify to be considered as dividend. The expression company as defined in section 2(17) of the Act, did not include an open ended mutual fund. Provisions of section 8 of the Act dealing with dividend income did not refer to an income declared or distributed or paid by a mutual fund. Section 10(33) employed the expression income received in respect of the units of a mutual fund. Section 10(23D) also employed expression income of mutual fund . The learned special counsel argued that the provisions of section 56(2)(i) would not, therefore, apply to an income received from a mutual fund in relation to any units of a mutual fund held by an assessee. For that reason the provisions of section 94(7) mentioned both the dividend or inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits of a company with reference to its subscribed share capital in accordance with the provisions of Companies Act; whereas MFs distribute income from its equalization reserve comprising profits and premium charged on sale of units as per SEBI regulations. 35. The learned special counsel explained the mechanics of distribution of the so-called dividend by an MF in the following manner :- The MF gives advance publicity of the amount of dividend which it will distribute on the Record Date . For instance, in the assessee s case for the assessment year 2000-01 wide publicity was given by the Cholamandalam MF that it would pay ₹ 4 per unit on March 24, 2000. Advertisements to this effect were prominently published in newspapers. Copy of such an advertisement dated 8th March, 2000 in Times of India is specifically brought to the notice of the Hon ble Bench. From 20th March onwards the cash collection on sale of units MF started swelling due to surge of inflow of money from the quick-in-quick-out investors. By 24th March, 2000 the size of Fund swelled to many times the size of the original fund lying invested in equity. Thus, possibility of any sudden downward movemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date Amount Date Amount Date Amount Units of Chola M/Fund (Paid by cheque No. 191935) 24-3-2000 8,00,00,000 29-3-2000 Less 27-3-2000 23,76,778 5,90,55,207.75 (1,85,68,014.25) 1,82,12,862.84 Incentive 7,76,23,222 38. The learned counsel for the revenue argued that dividend of ₹ 4 was not accounted for by the assessee in the trading account on the ground that dividend was chargeable to tax under the head Income from other sources . Such argument was entirely untenable because income from Cholamandalam Mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977] 107 ITR 182 and Bombay High Court in the case of Mahindra Sintered Products Ltd. v. CIT [1989] 177 ITR 111 2. He argued that in the case of Best Co. (P.) Ltd. (supra), the Hon ble Supreme Court had laid down that difficulty in apportionment cannot be ground for rejecting the claim of either assessee or revenue and that apportionment should be made on a reasonable basis. In the case of Continental Construc- tion Ltd. (supra), Hon ble Supreme Court observed that receipts and expenses have always been considered apportionable. In view of the above legal position, the business loss arising to the assessee should be computed after crediting the trading account by the income from the mutual fund. That would also be in conformity with the guidelines issued by the Institute of Chartered Accountants in Accounting Standard 13, which read as under:- Interest, dividends and rentals receivables in connection with an investment are generally regarded as income, being the return on the investment. However, in some circumstances, such inflows represent recovery of cost and do not form part of income. For example, when unpaid interest has accrued before the acquisition of an interest be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dend. It was because the NAV remained immune to the movement in sensex for a brief while because colossal amount of money entered and exit in the mutual fund, allowing quick-in-quick-out traders/investors to have their date with the fund without being affected by any possible impact on account of the movement of sensex. 40. The learned special counsel for the revenue argued that it was quite clear that the only commercial reason for purchase of units of mutual fund by the assessee before us was to earn tax-free dividend and to recover the balance amount it invested as soon as possible after the record date. In such situation, the expenditure reflected by the cum-dividend and ex-dividend NAV represented the expenditure having a direct nexus with tax-free income and it had to be disallowed under section 14A of the Act. Thus, the assessee was not correct in law in claiming the entire cost of purchase of units against the sale proceeds of units. 41. The learned counsel referred to the assessee s overdraft account with Global Trust Bank and pointed out that the assessee purchased on 24-3-2000 the units of Chola MF by drawing cheque on Global Trust Bank for the sum of ₹ 8 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 94(7) immunize them from the effects of section 14A. The learned special counsel argued that as the provisions of section 94(7) have not been given retrospective effect, the doctrine of special provision taking over the general provision would not apply in the assessment years before us as well as in the cases of shorter period of holding in the subsequent assessment years. 43. The ld. counsel further argued that the assessee might object to the plea based on section 14A on the ground that no such issue had been raised by the Assessing Officer or the learned CIT(Appeals). The plea taken by the revenue was purely legal one which could be decided on the basis of material already available on record. The subject-matter of appeal before the Special Bench was whether the assessee s claim of loss had been correctly disallowed. The Assessing Officer may have disallowed the claim on a different ground but that did not mean that the revenue could not contend that the order of the Assessing Officer was justified because of applicability of a specific provision in the Act. The revenue as respondent, could take up a new plea with a view to defend the order of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of dividend pay out. The assessee sold all the units purchased on 24th March, 2000 on 27th March, 2000. The learned CIT, DR argued that all that the assessee did was to make a payment to Chola MF for the purpose that the same would be refunded after deducting certain charges to the assessee under two separate nomenclatures. The assessee converted his own cash into two different amounts viz., sale proceeds of units and income received from units. By this transaction nothing material really happened, except that by payment of certain remuneration to the mutual fund the assessee got a document whereby he could convert his own money into tax-free income and at the same time claim equivalent of such tax-free income plus charges paid to the mutual fund as a business loss against the assessee s other business income chargeable to tax. These were the transactions patently to avoid tax with the complicity of the mutual fund. The manner in which the mutual fund promised to the whole world payment of 40% tax-free dividend irrespective of the quantum of investment and period of investment clearly proved that from the very beginning the intention of the mutual fund was nothing more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxpayer depends on the concept of a provision as used in the concerned statute; If the relevant concept has necessarily to be construed in the commercial sense due to the reason that it has been used as such in the statute and the allowance sought does not conform to the commercial concept of the provisions; The scheme is liable to be treated as a negation of the provisions of the statute and therefore, nugatory. For this proposition the learned CIT (DR) relied upon the following : Macniven HM (Inspector of Taxes) v. Westmoreland Investments Ltd. [2002] 255 ITR 612 (HL), M.V. Valliappan v. ITO [1988] 170 ITR 238 1 (Mad.), Banyan Berry v. CIT [1996] 222 ITR 8312 (Guj.), Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 3 (SC) 47. The learned CIT, DR argued that in the charging sections of Income- tax Act, 1961, the expression loss had not been mentioned anywhere. It was regarded as a part of income chargeable to tax. If in the process of making an income chargeable to tax any loss occurred, the same would also fall within the provisions of the Act relating to computation of income chargeable to tax. There was otherwise no independent provision for comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction and the fact as to whether the transaction was merely a device or contrivance. Apart from English courts, the Hon ble Apex Court and various other High Courts in India had since beginning in a plethora of judgments enshrined the significance of substance of the transaction and the question whether the transaction was natural or artificial. In support of the contentions, the learned CIT, DR divided the case laws into three categories. In the first category fell the court pronouncements prior to the judgment of Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra). The learned CIT, DR mentioned the following judgments :- 1.Jiyajeerao Cotton Mills Ltd. v. CIT [1958] 34 ITR 888 (SC); 2.H.S. Captain v. CIT [1959] 36 ITR 84 (Bom.); 3.Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC); 4.G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC); 5.CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC); 6.CIT v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692 (SC); 7.CIT v. A. Raman Co. [1968] 67 ITR 11 (SC); 8.CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Guj.) - approved by Supreme Court in CIT v. Vadilal Lallubhai [1972] 86 ITR 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra). For several decades before that, Hon ble Supreme Court and various High Courts in India were applying the very same principle on their own and sometimes on relying on English cases also. On reading the judgment of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra), this aspect was quite clear. The question before us was whether the entirely non-commercial transactions could be regarded within the trade of share dealing merely because the transactions were clothed in the trappings of a trade transaction. The judgment of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra) did not say that it was the trapping and not the substance that mattered. There was also no force in the contention of the learned counsel for the assessee that after the judgment of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra), a transaction can be disregarded only if expressly prohibited in the statute. The principles of interpretation of a statute dictated that a term in the statute should be understood as used in the statute. It was, therefore, not essential to provide in the statute that colourable devices or transactions shorn of substance should be disreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l position is that tax is imposed by reference to a commercial concept, then to have regard to the business substance of the matter is not to ignore the legal position but to give effect to it. The learned CIT, DR argued that dividend was a commercial concept and, therefore, having regard to the business substance of the matter was not to ignore the legal position but to give effect to it. 56. The learned CIT, DR thereafter referred to the passage from American Jurisprudence (1973) 2nd edition volume 71 , cited with approval at pages 760 and 761 of 263 ITR in the judgment of Azadi Bachao Andolan (supra). The learned CIT, DR argued that the passage clearly showed that while taxpayer had right to resort to a legal method available to him to compute tax liability in manner most beneficial to the taxpayer, he was not entitled to resort to a device for the purpose of avoiding taxation that may amount to a discreditable evasion of the taxing laws . The learned CIT, DR, thus, vehemently argued that as far as the two principles viz., Duke of Westminster principle and Ramsay principle were concerned, the judgment in the case of Azadi Bachao Andolan (supra) could not be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003] l Harish Krishna Bhatt ( 91 ITD 311 ) (Ahd.) 59. The learned CIT, DR referred to the judgments in the case of CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507 1 (Guj.); Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC); Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR 234 (SC); Hindusthan Cellulose Paper Mills Ltd. v. CIT [1963] 50 ITR 303 (Cal.) and G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC) and argued that whether there was a business loss was a question to be decided on the basis of all the facts and circumstances of the case and the relevant legal principles. A transaction did not become business transaction merely because the purpose ostensibly purported to do business. The learned CIT, DR also placed considerable reliance on the judgment of Hon ble Calcutta High Court in the case of David Mitchell v. CIT [1956] 30 ITR 701 and argued that deprivation of oneself of a properly by a voluntary act was not loss sustained. One did not sustain a loss unless the loss was caused to or forced upon one by the exigencies of transaction in the course of which one did everything possible to prevent that loss. Thereafter reference was made to the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 94(7) the loss claimed on the particular facts of the assessee before us was to be allowed as loss and not treated in any other manner. He argued that the normal principle of interpretation was to hold that an amendment did not disturb the earlier position. There could be many reasons for an amendment, for instance the amendment may be brought by way of abundant caution; it may be brought to create a legal fiction; it may be brought to substitute burden of proof. The purpose of amendment by way of section 94(7) was to remove the burden of proof of colourable device from the shoulders of the department. It could not, therefore, be said that the department cannot argue on the basis of colourable device during the period prior to the introduction of the provisions of section 94(7). The learned CIT, DR pointed out that the provisions of section 68 of the Income-tax Act, 1961 introduced in the statute a legal position that had been identified and formulated in the judgments of Hon ble Supreme Court several decades earlier. The learned CIT, DR argued that the provisions of section 94(7), therefore, did not mean that the same principle was not available for application without l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss and result in a profit. As far as the stock market was concerned, it was a common knowledge that fluctuation of 5 to 10% even during a short period was a normal phenomenon. During the course of arguments, the learned DR had handed over a newspaper report. The last paragraph of the report showed that a person could become aware of a proposed income distribution three months in advance and could buy units at any time during that period in order to earn tax-free income. The same Chola Opportunities Fund had a NAV of ₹ 12.35 on 5-4-2000; ₹ 13.74 on 11-4-2000; ₹ 18.30 on 24-2-2000 and ₹ 10.92 on 24-4-2000. These showed that there were steep fluctuations in the NAV and the chance of a profit and loss was always present even if the unit was held for a very short period. Secondly, the majority decision in the judgment of Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC) fully supported the case of the assessee that the transaction was a business loss even though it might have been motivated by tax consideration. Thirdly, in determining whether there was a profit or not, one had to have regard to the overall transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddressed us on the question as to whether any cost should be imputed to the earning of the dividend. He referred to the re-constructed trading account furnished to us in the paper book filed by the department. He argued that the submissions of revenue in that respect were directly contrary to the law laid down by the Supreme Court in Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541 1, wherein it was held that as interest accrues on certain specific days, the purchaser is assessable on the whole amount of interest received by him on the due date and he is not entitled to any deduction from the purchase price in respect of the interest taken into account while determining such price. The same principle of law had been laid down in Wigmore (Inspector of Taxes) v. Thomas Summerson Sons Ltd. [1926] 9 TC 577 at page 581; IR v. John 9 TC 582 and CIR v. Pilcher [1949] 31 TC 314 (CA), referred to by the Hon ble Supreme Court in the case of Vijaya Bank Ltd. (supra). The learned counsel pointed out that for banks securities were stock-in-trade and, therefore, the words capital outlay used in Vijaya Bank Ltd. s case (supra) was only to denote an outlay to acquire an asset. 67. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 38 also, wherein the learned CIT(Appeals) had held that the source from which the payment was made had no bearing on the question. 69. The learned counsel thereafter addressed us on the question whether the loss can be ignored? He argued that law provided that dividend was exempt from tax. The arguments of the revenue were aimed at defeating the legal provision to make the dividend income chargeable to tax. The learned counsel argued that in a bilateral transaction, if the law characterized a transaction as dividend in the hands of one party, then it could not be given a different character in the hands of the other party. Suppose the dividend stripping transaction had been done in shares, i.e., the shares had been bought on the eve of the dividend record date and sold after the record date. The company would have been liable to pay DDT @ 12.5% on the dividend. A purchaser of shares-cum-dividend (who sells it ex-dividend) would collect the dividend tax-free subject to the 12.5% paid by the company. He would benefit to the extent of 21.5% as his marginal rate may be 33%. When the law treats the amount paid as dividend or income distributed and imposes fiscal consequences on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70. The learned counsel referred to the provisions of section 94(7). He argued that the sub-section was inserted with the object of discouraging bond washing or dividend stripping transactions. When the Legislature had enacted a certain anti-avoidance provision, then it was not open to the courts to devise their own formula. One had to simply apply the provisions of the statute, if applicable, and determine the tax effect of the transaction. This principle clearly emerged from the judgment of Hon ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7062 (SC) at page 747 where it was held that if it was desired that benefits should be limited, provision was made in the treaty e.g., India-USA treaty. 71. The learned counsel argued that the whole dispute was because dividend was exempt from levy of tax. Assuming that dividend income was chargeable to tax, the revenue would have argued that the dividend was a revenue receipt and it was fully chargeable to tax without any deduction for cost derived from the purchase price of the asset. Revenue would have then argued that the loss suffered on redemption was a capital loss that could not be set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Amendment) Act, 1984. 73. The learned counsel addressed us on the reliance placed by the department on the judgment of Hon ble Supreme Court in the case of CIT v. India Discount Co. Ltd. [1970] 75 ITR 191. He argued that the department had placed wrong interpretation on the judgment. In the case before the Supreme Court the assessee had agreed to buy the shares with the arrear dividends that had been declared long ago. The price paid by the assessee was for the shares and the right to receive the already declared dividends. On the facts of that case two distinct assets already in existence were acquired, viz., shares and arrear dividends. In the appeals before us only one asset, i.e., units of mutual fund had been acquired. There was only right to participate in future income distribution. There was no dividend already declared. In the case before Hon ble Supreme Court the dividend was income of the vendor and not that of the assessee. Accordingly the Supreme Court held that the dividends in the hands of the assessee were a capital asset. That was a case of purchase of the right to collect unpaid dividends. For that reason the principle in India Discount case could not be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 10 was not to be taken into computation of income chargeable to tax in any order of assessment under the provisions of the Act. There was no question of disallowance of any expenditure in relation to such income when there was no claim of the assessee seeking deduction of an expenditure. When an assessee bought a unit it was not an expenditure but an investment. The assessee had not claimed deduction of any expenditure relating to the income from mutual fund units. The learned counsel referred to the judgment of Hon ble Supreme Court in Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 5411 and argued that cost could not be artificially apportioned. He also referred to the argument of the DR relating to matching principle and argued that matching principle would apply, if the two items were of the same type. In the case of the assessee the revenue was attempting not matching but splitting of the cost between two unmatchables. Reference was made to the judgment of Hon ble Bombay High Court in the case of CIT v. Smt. T.P. Sidhwa [1982] 133 ITR 840 2 and the learned counsel argued that as a first step it was necessary to classify the head of income. The income from Mutual Fund u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of Mutual Funds. The assessee s case was squarely covered by the judgment in the case of Azadi Bachao Andolan (supra) that laid down that merely because of tax incidence or motive to save tax, the transaction could not be disregarded or called colourable device. 78. The learned counsel argued that in the case of Azadi Bachao Andolan (supra) the test of legal result had been laid down. In the case of the assessee there was nothing to suggest that legal effect of the transaction had not been achieved. The assessee purchased the units, the assessee received the dividend and finally the assessee sold the units. There was nothing to suggest that legal effect of any of these transactions had not been achieved. It could not, therefore, be said that the assessee had employed any colourable device. After the judgment in the case of Azadi Bachao Andolan (supra) the legal position was quite clear. It was the legal effect that was required to be seen and not what the assessee s alleged motive was. 79. The learned counsel for the assessee contended that the provisions of section 14A could not be applied in relation to the two appeals before us in view of the following proviso to secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the argument that the purchase price of the unit was indivisible. Hon ble Rajasthan High Court in their judgment in 242 ITR 250 (sic ) held that it would not be permissible to bifurcate an indivisible cost. If it were divisible then even under the old law the cost of dividend could be disallowed. Provisions of section 14A were brought on the statute book to counter precisely that difficulty. Thereafter the argument that the purchase price was indivisible was not good any more. The provisions of section 14A employed the expression in relation to which was much wider than the expression for the purpose of . The question, therefore, was whether or not a part of the purchase price paid by the assessee in the present appeals, was an expenditure incurred in relation to income declared by the mutual fund. 81. The learned counsel for the revenue argued that proviso to section 14A only barred the Assessing Officer from reopening an assessment that had become final either under section 147 or under section 154 of the Act. The retrospection of section 14A did not, therefore, affect the cases where no proceedings were pending. Apart from the fact that it was settled law that final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest. Hence that judgment had no application on the facts of the case in the present appeals. In the case of mutual fund no right to income vested in the investor at any time before the expiry of record date. Provisions of law could not be interpreted on the basis of the facts of a particular assessee. If dividends were taxable, would the department give deduction of cost to all assessees? As dividend, in the eyes of law, was income that did not accrue till such time it was declared, the assessee did not purchase two assets and there was only one asset. That asset gave the assessee several rights which were not restricted to dividend only. Apart from right to dividend the assessee also got right to vote right to bonus shares, right to get surplus on liquidation. Would revenue apportion the cost against all such rights and in what manner it could be done? As to the provisions of section 94(7), CBDT Circular No. 14 of 2001 in paragraph 56 at pages 108-109 of 252 ITR (St.) was clear, that the existing provisions did not cover a case where a person bought securities (including units of a mutual fund) shortly before the record date fixed for declaration of dividend and sold the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of the assessee s income chargeable to tax. The point is well taken. Under the provisions of section 4(1) of the Act charge of income tax is in respect of the total income of the previous year of every person . Total income has been defined under the provisions of section 2(45) in the following words:- total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act; Under the provisions of section 5 total income is subject to the provisions of the Act. The provisions of sections 14 to 59 in Chapter IV of the Act are the provisions relating to Computation of total income . Neither the basis of charge in Chapter II nor the provisions in Chapter IV make any reference to the loss incurred or arisen to an assessee. Provisions of Set off, or carry forward and set off comprised in sections 70 to 80 in Chapter VI lay down the treatment to be given where the net result of the computation under any source or head is a loss. It, therefore, clearly follows that it is only a loss resultant to the computation of income under the provisions of Income-tax Act that can be set off against the assessee s income chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge that fluctuation even during a very short period was a normal phenomenon in the stock market. The learned counsel has argued also that the transaction does not cease to be a business transaction even though it may have been motivated by tax consideration. He argues that the tax consideration is as much a business or commercial consideration as any other kind of consideration. 87. We find the English decisions in the cases of J.P. Harrison (Watford) Ltd. (supra), Finsbury Securities Ltd. (supra) and Lupton (supra ) to be of considerable interest and importance on the question before us. In the case of Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC) in 1952-53 the respondent company sustained in carrying out its mercantile business a loss which was available to the carried forward under section 341 of the Income-tax Act, 1952. In 1953 it added to its objects that of dealing in shares, and then bought for 16,900 Pounds all the issued shares in C. Ltd., which had ceased trading but had funds available for distribution as dividends. In January, 1954, C. Ltd. declared a net dividend of 15,901 Pounds 19s. 3d. which the respondent company receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is not trade, what is it? He said, It is dividend stripping and nothing else . He further said,: My Lords, you have indeed here a question of law, if you please to treat it as such. The contention comes to this: You should split the dividend-stripping transaction into two parts. You should look only at one-half of the transaction and turn a blind eye to the other half. You are to look at the purchase and sale of shares, but not at the repayment of tax. And when you look at the purchase and sale of shares you are not to have regard to the motive behind it. You must disregard the fact that it is done with a view to create a trading loss, and you must treat it as a normal transaction in share dealing. My Lords, I do not believe there is any rule of law which requires the commissioners to disregard the object of the transaction or its result. There are occasions when a reasonable man may turn a blind eye to the facts, but this is not one of them. To my mind, the Commissioners were entitled to see these people as they really are, prospectors digging for wealth in the subterranean passages of the Revenue, searching for tax repayments. They are not simple traders dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No doubt if it is established that a transaction is entered into with the evident intention of making a profit, that may be a strong indication that the company was trading. But the corollary by no means follows that the absence of an intention to make a profit or the intention to make a loss negatives trading. 88. The learned CIT(Appeals) in the impugned order and the learned CIT, DR in his detailed arguments during the course of hearing before us have argued that it is the minority view in the case of J.P. Harrison (Watford) Ltd. (supra), that was followed in the subsequent cases of Finsbury Securities Ltd. v. Bishop (Inspector of Taxes) [1966] 43 Tax Cases 5911 (HL) and Lupton v. F.A. A.B. Ltd. 47 Tax Cases 580 (HL). It has, therefore, been argued on behalf of the revenue that we should following the judgments hold that the transactions under consideration before us are not business transactions at all and, therefore, the loss arising therefrom does not qualify to be set off against the other income chargeable to tax of the assessee. We find that in the case of Finsbury Securities Ltd. (supra), the earlier judgment in the case of J.P. Harrison (Watford) Ltd. (supra) has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the above transactions. On appeal, the Crown contended (1) that the shares in question were capital assets and not stock-in-trade, and (2) that, if they were stock-in-trade, the dividends received must be taken into account in determining whether there was a loss, and if this were done no loss was shown. The Special Commissioners rejected the Crown s first contention but accepted the second and disallowed the claim. In view of the decision of the House of Lords in F.S. Securities Ltd. v. IRC 41 TC 666, [1964] 1 WLR 742, the Crown did not pursue its other contention in the High Court. 89. In the case of Finsbury Securities Ltd. (supra) the Crown sought to answer the question that was raised in J.P. Harrison (Watford) Ltd. s case (supra), If not trading, what is it? There was no answer available to the question in that case, but in the case of Finsbury Securities Ltd. (supra) the answer was that it is investment or more akin to investment than to trade. However, the court of appeal did not agree. Following J.P. Harisson (Watford) Ltd. s case (supra), it was held that the transactions were properly to be regarded as trading transactions. The Crown having appealed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made different by the circumstance that the motive that inspired it was plain for all to see. In that case the vendors of the shares had no further concern once they had sold. The essence of the arrangements now being reviewed was that the future interests of the vendors were being safeguarded. Under the devised scheme they were to have all the benefits that would have resulted from their shareholdings had there been no scheme. In addition, they were to be saved from the full extent of the exactions which taxation imposes. Here also the scheme involved a factor which was entirely absent in the Harrison case. In that case the purchasers could have done what they wished with the shares. Here, on the other hand, it seems to me that it was of the essence of the scheme that the company should continue to hold the shares during the periods covered by the particular set of transactions. It is clear and not seriously disputed that the company could not have sold the preferred shares during the current of the agreement without committing a basic breach of it. The company had to retain the shares so that year by year there would be diminutions in the value of the shares and so that year by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 1960 bought for some Pounds 700,000 the issued share capital of an investment company with a trading sub-subsidiary. The vendor undertook that the revenue profits of the investment company s immediate subsidiary were then sufficient to declare a dividend of Pounds 800,000 net and that the respondent company would be entitled to recover from the Inland Revenue the tax deducted from any dividends paid to it by the investment company out of that dividend; they further undertook if the company failed to recover any such tax to pay the difference between half the tax recovered and Pounds 200,000, and the company undertook to proceed with a repayment claim with due diligence. The vendors deposited Pounds 200,000 with a stakeholder as security for their undertakings, to hold for three years on trust to release to the vendors that sum or half the tax recovered by the company. The company did not sell the shares after payment of the relevant dividend, but on a revaluation of the investment company s assets the transaction showed a loss of Pounds 182,980 after taking account of the net dividends received but not of the claim of repayment of tax or compensation in lieu. The company appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions has acquired a certain emotive force, but if it is used its meaning must be examined. It has been suggested that the J.P. Harrison (Watford) Ltd. s case (supra) decided that a transaction can be a trading transaction even though it is a pure dividend-stripping transaction entered into with the sole object of making a fiscal profit without any view to a commercial profit. Analysis will show that such a suggestion is ill-founded and mis-leading. The word transaction generally suggests some arrangement between two or more persons. In the Harrison case there was a purchase of shares from a seller of them. That was a trading transaction. Later there was a sale of the shares to a new purchaser. That was a trading transaction. In between there had been the declaration and receipt of a dividend. But there was no arrangement whatsoever under which the sellers to Harrisons of the shares or the purchasers from them of the shares were concerned as to whether Harrisons would or would not later make some claim which under the law as it then stood they might be able to make. There was therefore, no dividend-stripping transaction in the J.P. Harrison (Watford) Ltd. s case (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of producing a fiscal benefit, may not suffice to deprive the transaction of its trading status. The question is whether viewed as a whole, the transaction is one which can fairly be regarded as a trading transaction. If it is, then it will not be denatured merely because it was entered into with motives of reaping a fiscal advantage. Neither fiscal elements nor fiscal motives will prevent what in substance is a trading transaction from ranking as such. On the other hand, if the greater part of the transaction is explicable only on fiscal grounds, the mere presence of elements of trading will not suffice to translate the transaction into the realms of trading. In particular, if what is erected is predominantly an artificial structure, remote from trading and fashioned so as to secure a tax advantage, the mere presence in that structure of certain elements which by themselves could fairly be described as trading will not cast the cloak of trade over the whole structure. 91. We find the legal position spelt out by the trilogy of the judgments in the cases of Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC); Finsbury Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mutual funds advertised in the newspapers the record date and the amount of dividend to be declared. Subscribers, financiers, brokers came alive instantly within hours and subscriptions running into crores of rupees were made. There were ever ready and ever willing financiers to finance the transaction to be entered into by dividend-strippers. The brokers who were paid handsomely were appointed by the mutual funds. The learned CIT(A), therefore, holds that in the case of the assessee the vendors of the units were interested parties to have the benefit resulting from the scheme. In the J.P. Harrison (Watford) Ltd. s case (supra) there was nothing to suggest that the vendor knew of the intention or stood to derive any benefit from the dividend-stripping. In the present case mutual funds were consciously marketing tax mitigation scheme. The learned CIT, D.R. has also argued that in the case before us purchase and sale of units was a mere pretence. The sole objective was only to produce an artificial loss and not to acquire or dispose of the units of the mutual fund. The learned CIT, D.R. also emphasized that mutual funds joined hands with dividend-strippers in their organized loot o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-exempt dividend, but as held by their Lordships in all the three cases of J.P. Harrison (Watford) Ltd. (supra), Finsbury Securities Ltd. (supra) and Lupton (supra ), where the taxpayer embarked upon an adventure which has all the characteristics of trading, his purpose or object alone cannot prevail on what he in fact does. Unlike the transactions in Finsbury and Lupton, the acts of the assessee are unequivocal. There was no arrangement whatsoever under which the mutual funds were concerned as to whether the assessee would or would not later make some claim, which under the law, as it then stood, the assessee might be able to make. In other words the shape and character of the transaction did not undergo such change that it may no longer be regarded a trading transaction. There is no artificial structure remote from trading and fashioned so as to secure a tax advantage. It is, therefore, difficult to regard the transactions under consideration by us to be other than trading transactions, even though the transactions were entered into by the assessee with the motive of reaping a fiscal advantage which is there for all to see. 93. We find the case of the assessee before us on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor can it be tested merely by ascertaining the difference between the purchase price (or, it may be, the manufacturing cost) of an article and the selling price of that article. For a dealer may seek his profit, if a profit is essential, otherwise than by an enhanced price upon a resale, as by a declaration of dividend, a repayment upon a reduction of capital or upon a liquidation of the company whose shares he has bought. 94. We shall now turn to the other judgments relied upon on behalf of the revenue to advance their argument that the assessee s claim of set off of loss should be rejected as the transactions in question are not business transactions at all. These judgments are Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC); David Mitchell v. CIT [1956] 30 ITR 701 (Cal.); Hindusthan Cellulose Paper Mills Ltd. v. CIT [1963] 50 ITR 303 (Cal.); G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC); CIT v. Motilal Hirabhai Spg. Wvg. Co. Ltd. [1978] 113 ITR 173 (Guj.) and CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507 1 (Guj.). We find that these judgments have been decided upon their own facts and the issues arising therein are vastly different from the issue be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been manufactured by the assessee during that period. On these facts Hon ble Supreme Court held that the tending of his gardens to preserve the plants was not a continuation of the business of the assessee which had come to an end for the time being, as there was no activity with the object of earning profit. In this context Hon ble Supreme Court held, ordinarily profit motive is a normal incident of business activity . Here again facts of the case are very different. 98. In the case of Sole Trustee, Lok Shikshana Trust (supra), a trust was founded with the object to educate the people of India in general and of Karnataka in particular. The trust carried on a business of printing and the question was whether the income of the trust, which at the relevant time was publishing newspapers and journals, was exempt from tax under section 11. Hon ble Supreme Court held that the publication of newspapers and journals involved the carrying on of an activity for profit and the income of the trust was, therefore, not exempt from tax. Here again the Hon ble Supreme Court held that profit motive is a normal incident of business activity. It is needless to say that the facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmative, what is the net result of the computation? 102. To put it simply, the question is whether the net result of the computation for assessment year 2000-01 is a loss of ₹ 1,85,68,014 as claimed by the assessee or loss of ₹ 27,31,929 computed by the learned Assessing Officer in the assessment order. We should point out here that there appears to be an error in the working by the Assessing Officer in the assessment order for assessment year 2000-01, in as much as he has omitted to take into consideration the sum of ₹ 23,76,778 received by the assessee by way of incentive. At any rate, the reason for the huge difference between the loss as claimed by the assessee and the loss as worked out by the Assessing Officer lies in the fact that while according to the assessee, the dividend income of ₹ 1,82,12,863 is not liable to be reduced from the purchase cost of units of Chola Mutual Fund or in other words to be reduced from the loss incurred on sale of those units, according to the revenue the correct amount of loss can be arrived at only after further reducing the difference between sale consideration of the units and purchase consideration of the units b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a mutual fund. We, therefore, see force in the contention of the learned special counsel for the revenue that income from units of a mutual fund is not covered by the provisions of section 56(2)(i) of the Act. It, therefore, follows that in the case of an assessee holding units of a mutual fund as his stock-in-trade, income distributed by the Mutual Fund would be chargeable to tax under the head Profits and gains of business or profession . At the same time we are of the view that this difference in the head of income does not have any material bearing on the question of the net result of the computation of assessee s income on sale of the units of Chola Mutual Fund for assessment year 2000-01 and units of Sun F C Mutual Fund for assessment year 2001-02. We say so because dividend declared by these mutual funds represent only return on investment and do not amount to either the recovery of purchase cost of the units or realization of sale consideration of the units. This aspect is clear from Accounting Standard 13 issued by the Institute of Chartered Accountants of India and heavily relied upon by both the special counsel for the revenue as well as the learned CIT, DR. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d earned in a case where the shares are held as stock-in-trade would represent business profits and if the provisions of section 56(2)(i) were not there the same would be chargeable to tax under the head Profits and gains of business or profession . These judgments nowhere indicate that dividend income would be considered as recovery of cost or reduced expenditure on purchase in the computation of income of the businessman holding shares as a dealer. The other judgments viz., CIT v. Best Co. (P.) Ltd. [1966] 60 ITR 11 (SC); Continental Construction Ltd. v. CIT [1992] 195 ITR 811 (SC); CIT v. Dunlop Rubber Co. (I) Ltd. [1977] 107 ITR 182 (Cal.) and Mahindra Sintered Products Ltd. v. CIT [1989] 177 ITR 111 2 (Bom.) are on the question of difficulty in apportionment and it is held that such difficulties cannot be ground for rejecting the claim of either assessee or revenue. These judgments have nothing to support the proposition that income declared by a mutual fund should be treated as recovery of the cost of acquisition of the units of mutual fund or the purchase cost of units should in part be ascribed to or adjusted against the income declared by the mutual fund. 105. The ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traded in a stock exchange based on several factors impacting demand and supply for the stock, the units of a mutual fund are traded on the NAV of the mutual fund. When the amount of dividend declared by a company in respect of its equity shares becomes known or reasonably well anticipated, the factum and quantum of dividend is factored in by the market in the price of equity share around that time. The price of the unit of a mutual fund depends on its NAV and not the amount of dividend announced/declared. We, therefore, do not see as to how the amount of dividend announced by the mutual fund affected the price at which the assessee purchased the units. It is another matter that assessee s sale price was affected because of the out-flow of dividend distributed by the mutual funds resulting into considerable lowering of NAV. Thus, as far as the purchase price paid by the assessee is concerned, it cannot be said that the assessee paid higher price because the units were pregnant with the amount of dividend announced by the mutual fund. At that point of time the assessee would have paid the same price for those units, had there been no announcement of dividend by mutual funds. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receive income of ₹ 4 per unit on the very same day and sale proceeds of ₹ 12.97 per unit after two days. The transaction was undertaken by the assessee with full knowledge of the trading results thus ensuing. On these facts a part of the expenditure was directly related to the earning of the income from the mutual fund. There was a direct nexus between the cost of purchase of units and the immediate receipt of income. In other words the composite expenditure on purchase of units was relatable not only to the sale proceeds of units but also to the receipt of income distributed by mutual fund. According to the learned special counsel for the revenue, the cost incurred by the assessee for earning income was best represented by the difference between closing NAV cum-dividend and opening NAV ex-dividend. Similar trend could be seen in respect of Sun F C value fund in the other assessment year. It is argued on behalf of the revenue that irrespective of traditional or conservative method of accounting the provisions of section 14A of the Act super-impose an obligation for bifurcation or apportionment of the purchase price of the units between the sale consideration and the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II, the provisions of section 14A have been inserted in Chapter IV only. The import of the words income which does not form part of the total income under this Act unmistakably takes us to Chapter III titled as Incomes which do not form part of total income . One may as well read the provisions of section 14A in the following manner:- For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income excluded from total income under the provisions of Chapter III of the Act. It does not appear correct to say that provisions of section 14A impinge on the provisions of section 10(33). These provisions operate in relation to the expenditure an assessee claims in the computation of his income chargeable to tax. Such expenditure if found to have been incurred in relation to income exempt under Chapter III shall be disallowed by virtue of the provisions of section 14A. In the instant case the assessee has claimed expenditure on purchase of the units of Chola Mutual Fund and Sun F C Fund against subsequent sale of those units. Those sale proceeds are income chargeable to tax u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may have severe unwanted repercussions. To illustrate, in all cases interest is earned, interest income would not be charged to tax at least until such time the entire principal amount lent or deposited on interest is recouped. Or in any case full amount of interest cannot be subjected to tax and certain part of principal amount would have to be estimated as representing cost of earning interest income. The department has never made assessments on that basis, nor is there any indication of department s intention to do so henceforth. Rental income is assessed under the head Income from house property without giving any deduction in relation to cost of acquisition of immovable property to be apportioned as cost of rental income. We do not understand as to why the matters should suddenly change course for the reason only that certain kinds of returns from investment are exempt under the provisions of Chapter III. There is also the question as to how many times cost of acquisition can be attributed. In the case of the assessee units of mutual funds were sold soon after receipt of dividend. There may be cases of the assessees retaining their units of mutual fund on long term basis. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal problem, if any, in the retrospected provisions of section 14A. This brings us very close to the third question and we would deal with this aspect while deciding upon the third question. 112. Before parting from the second question we wish to clarify that we have not dealt with the incentive amounting to ₹ 23,76,778 of assessment year 2000-01 and ₹ 16,73,563 of assessment year 2001-02 because no arguments in respect of these two amounts are contained in the orders of authorities below nor any arguments have been addressed to us during the course of hearing. Our observations and findings in this order, therefore, do not pertain to those two amounts. THIRD QUESTION : Is the assessee disentitled to set off loss from these transactions against his other income chargeable to tax? 113. The contentions of the revenue on this third question are broadly based on the arguments (a) in revenue matters substance should prevail over form, and (b) rule against tax avoidance devices should be invoked. According to the learned counsel for the assessee, in view of the judgment of the Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra), the contentions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord of discretion for the golden and straight mete wand of the law. 115. Substance principle could not, however, be given a quite burial. In IRC v. Wesleyan General Assurance Society [1948] 30 TC 11 (HL), Viscount Simon said, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan, if it is really an annuity, does not assist the tax payer any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is the real character of the payment, not what the parties call it. In the case of Pott s Executors v. IRC [1951] 32 TC 211, form was instated. In that case Lord Macdermott said, ....It was said for the Crown that it was no straining of language, where A paid a sum to B at C s request and for C s benefit, to say that A had paid C. I cannot agree. The person paid is B and no one else, and the consideration that the payment is advantageous to C seems to me beside the point, as far as concerns the construction of the material words. In Saunders (Inspector of Taxes) v. Pilcher [1949] 2 All ER 1097, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax to the prejudice of other taxpayers, or to Parliamentary congestion or most likely to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting approach which the parties themselves may have negated, should be a denial rather than an affirmation of the true judicial process. In each case the facts must be established; and a legal analysis made; legislation cannot be required or even be desirable to enable the court to arrive at a conclusion which corresponds with the parties own intentions. 116. Like Duke of Westminster s case (supra) or Westminster principle Ramsay principle also could not entrench itself completely in judicial thinking. In Craven (Inspector of Taxes) v. White (Stephen) [1988] 3 All ER 4952 it was held, The test of whether a series of transactions which contained a tax saving step was nevertheless liable to tax was whether the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. This cannot be called a principle of construction except in the sense of some paramount provision subject to which everything else must be read, like section 2(2) of the European Communities Act, 1972. But the courts have no constitutional authority to impose such an overlay upon the tax legislation and, as I hope to demonstrate, they have not attempted to do so. In his speech Lord Hoffmann further said : My Lords, I venture to suggest that some of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster s case arises out of an ambiguity in Lord Tomlin s statement that the courts cannot ignore the legal position and have regard to the substance of the matter . If the legal position is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business substance of the matter is not to igno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be brought into British India after it was taken by the borrower outside the taxable territory. Hon ble Supreme Court held, But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade, for example, the court has power to disregard the corporate entity if it is used for tax evasion or circumvent tax obligation. In the case of CIT v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692 , Hon ble Supreme Court referred to the judgments of House of Lords in the case of Secretary of State in Council of India (supra); Duke of Westminster (supra ) and Wesleyan General Assurance Society (supra) as well the judgment of Privy Council in the case of Bank of Chettinad Ltd. (supra). Hon ble Supreme Court held, In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng recitals in documents, it was for that party to establish the truth of those recitals. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. In the case of CIT v. Panipat Wollen General Mills Co. Ltd. [1976] 103 ITR 66, Hon ble Supreme Court declared the law in the following words :- It is well settled that the court in order to construe an agreement has to look to the substance or the essence of it rather than to its form. A party cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction. 120. In the case of Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307, Hon ble Supreme Court held, It is true that one could not place over-reliance on the form which the parties give to their agreement or on the label which they attach to the payment due from one to the other. One must have regard to the substance of the matter and, if necessary, tear the veil in order to see whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its judgment in the case of McDowell Co. Ltd. (supra) on April 17, 1985, another bench of Hon ble Supreme Court comprising of P.N. Bhagwati C.J., R.S. Pathak A.N. Sen JJ, in their judgment in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 5091 on September 27, 1985 approved the similar approach without noticing McDowell Co. Ltd. s case (supra). In the penultimate paragraph of the judgment Hon ble Supreme Court directed :- If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 3 as well as McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 4 (SC). Hon ble Gujarat High Court held that adopt a device and avoid payment of tax cannot be accorded approval of judicial process. Hon ble Madras High Court in the case of M.V. Valliappan v. ITO [1988] 170 ITR 238 5 struck a note of caution. Hon ble High Court closely examined Ramsay triology of English cases as well as judgment of Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra). Reference was also made to a host of other judgments. The Hon ble Madras High Court observed : We have gone carefully through the judgment in McDowell s case [1985] 154 ITR 148 (SC). That decision cannot, in our view be read as laying down that every attempt at tax planning is illegitimate and must be ignored or that every transaction or arrangement which is perfectly permissible under law which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Having regard to the new approach adopted by the English Courts in the matter of considering the legitimacy of a scheme of tax planning which has been now adopted by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment in the case of Juggilal Kamlapat ( supra); McDowell Co. Ltd. (supra); Arvind Narottam (supra) and various other judgments. The Hon ble Supreme Court reiterated : While it is true . . . . it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg v. IRC [1971] 47 TC 240 (HL) that one must find out the true nature of the transaction. It is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law. In the case of Smt. Nayantara G. Agrawal v. CIT [1994] 207 ITR 639 (Bom.), the assessee entered into partnership with a company. The assessee brought her land valued at ₹ 10 lakhs as her share of capital contribution in partnership. The company did not bring in any capital. No business of sale and purchase of land was conducted by the firm. Assessee retired from the firm within three months of its formation. Firm was dissolved. Land was retained by the company and assessee received ₹ 10 lakhs worth of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground that treating those as deliberate would result in tax liability in future. In the case of Bhagat Construction Co. (P.) Ltd. v. CIT [2001] 250 ITR 2911 (Delhi), the assessee, a private limited company, received an amount on account of disputed claims and dues in respect of its erstwhile business. The aforesaid contracts were with the Hindustan Steelworks Construction Co. Ltd. The actionable claims against HSCL were transferred to BPL for a sum of ₹ 50,000 under an instrument of transfer dated December 14, 1981. BPL in turn transferred the aforesaid actionable claims to another company DRB which thereafter assigned the claims by way of gift to MEL. In 1992, a substantial sum was determined payable to MEL in respect of actionable claims and this sum was brought to charge under section 28(iv) in the hands of the assessee. The Tribunal found that colourable devices were adopted, that the transactions entered into by the different concerns were not genuine and the income belonged to the assessee. Hon ble Delhi High Court found from the Tribunal order that the inferences were from factual aspects and in order. In the judgment Hon ble Delhi High Court described a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of firm on lease and paid compensation to four brothers for not engaging in similar business. Following the judgment of Hon ble Supreme Court in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702, Hon ble Madras High Court held that corporate veil should be pierced on the facts of that case. In the case of Mathuram Agrawal v. State of Madhya Pradesh [1999] 8 SCC 667, Hon ble Supreme Court found section 127A(2) Proviso of Madhya Pradesh Municipalities Act, 1961 contrary to the charging section. The Hon ble Supreme Court referred to the judgment of Privy Council in the Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 (PC); IRC v. Duke of Westminster [1936] AC 12 (HL) and Russel (Inspector of Taxes) v. Scott [1948] 2 All ER 1 and held that in a taxing statute it is not possible to assume any intention or governing purpose beyond what is stated in plain language. 129. During the course of hearing before us considerable arguments were made from both sides deriving support from the judgment of Hon ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7063 . We have, therefore, very carefully perused the entire judgment and more so the discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Privy Council in Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 and Mathuram Agrawal v. State of Madhya Pradesh [1999] 8 SCC 667 (SC). As to the right understanding of the judgment of Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra), the Hon ble judges found that the same has been correctly explained in the case of M.V. Valliappan v. ITO [1988] 170 ITR 238 2 (Mad.) and in the judgment of the Hon ble Gujarat High Court in the case of Banyan Berry v. CIT [1996] 222 ITR 831 3. 130. Hon ble Judges in Azadi Bachao Andolan s case (supra) note that while Chinnappa Reddy J. took the view that W.T. Ramsay Ltd. s case (supra) was an authoritative rejection of the principle in the Duke of Westminster s case (supra) as explained by Lord Hoffmann in Macniven s case (supra). In the Ramsay case [1982] AC 300 both Lord Wilberforce and Lord Fraser of Tullybelton, who gave the other principal speech, were careful to stress that the House was not departing from the principle in IRC v. Duke of Westminster [1936] AC 1; [1935] All ER Rep. 259. There has nevertheless been a good deal of discussion about how the two cases are to be reconciled. In the case of Craven (Inspecto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect to it. Hon ble judges in Azadi Bachao Andolan s case (supra), therefore, find themselves unable to agree with the view that Duke of Westminster s case (supra) was dead or that its ghost had been exorcised in England. As to the correct meaning of the judgment of Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra), their lordships have approved Hon ble Madras High Court in M.V. Valliappan v. ITO [1988] 170 ITR 238 1 and Gujarat High Court in Banyan Berry v. CIT [1996] 222 ITR 831 2. In the former case Hon ble Madras High Court concluded : the decision in McDowell [1985] 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. The Hon ble judges are inclined to agree with this view. In the case of Banyan Berry ( supra), Hon be Gujarat High Court at page 850 of 222 ITR referred to McDowell Co. Ltd. s case (supra) in the following manner: The court nowhere said that every action or inaction on the part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l pronouncements in India after the Supreme Court judgment in the case of Azadi Bachao Andolan (supra) in the case of CIT v. George Williamson (Assam) Ltd. [2004] 265 ITR 6262 (Gauhati) the assessee sold certain plant and machinery and took it back on lease from the respective buyer. The assessee claimed lease rent paid for plant machinery. On these facts the revenue applied the dictum laid down in McDowell Co. Ltd. s case (supra). Hon ble High Court following Azadi Bachao Andolan s case (supra) held that every attempt at tax planning cannot be ignored and that the right of the taxpayer to arrange his affairs was still thereafter McDowell Co. In the case of Avasarala Automation Ltd. v. Jt. CIT [2004] 266 ITR 178 3, the Hon ble Karnataka High Court found that there was no registration of sale, no identification of machinery. The transaction was entered into so that lessor could claim 100 per cent depreciation. On such facts, Hon ble High Court held that application of ratio in McDowell Co. Ltd. s case (supra) was justified. In the case of Industrial Development Corpn. of Orissa Ltd. v. CIT [2004] 268 ITR 130 4 (Ori.) there was purchase and lease back of assets. Hon ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction, and (ii) what is the legitimacy of the tax avoidance device in a given case. The issues arising in relation to these two aspects may often overlap but that is not always the case. It would, therefore, be important to keep the distinction between the two aspects in view. It is seen that as early as in 1903 in the case of Secretary of State in Council of India v. Scobic [1903] 4 TC 618 (HL) it was held that in revenue matters, what is material is the substance of the transaction and not the form. In many judgments thereafter it has been held that both form and substance must be considered. In the case of Duke of Westminster v. IRC [1936] 19 TC 490 1 (HL) it was held that the legal position cannot be ignored in the name of the substance of the matter. In the case of Macniven (supra), Lord Hoffmann says : If the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business substance of the matter is not to ignore the legal position but to give effect to it. 134. It, therefore, follows that where the issue is a commercial concept it is the business substance of the matter that should be considered. The nomenclature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und issued advertisement in the prominent newspapers that it would pay ₹ 4 per unit on March 24, 2000. On or about 24-3-2000 the size of the mutual fund swelled to many times the size of the original fund lying invested in equity due to surge of inflow of money from the quick-in-quick-out investors. The possibility of any sudden slump in the equity market was easily cushioned by this surge of inflow of money many times more than the total equity investments of the mutual fund. Both the learned special counsel for the revenue as well as the learned CIT, DR argued that what the assessee received by way of so-called dividend or income of mutual fund was assessee s own money. The learned special counsel pointed out that during the financial year 1999-2000 Chola Mutual Fund distributed income of ₹ 290 crores as against its annual net income of ₹ 15 lakhs only. The learned CIT, DR laid emphasis that it was a or pre-planned or pre-ordained scheme. According to him, by the transactions of the assessee with Chola Mutual Fund or Sun F C Mutual Fund nothing material really happened, except that by certain payment of remuneration to the mutual funds, the assessee got a docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was not sufficient and the dividend distributed by the Mutual Fund was drawn from the past reserves of the mutual funds, it cannot be said that the assessee received back his own money converted into income distribution. There is nothing on record to suggest the precise source from which income payments were made to the assessee before us in the two assessment years. We have already seen that normal principles of accounting require that the purchase price of an income generating invest- ment be adjusted on the encashment of investment and not against the income from investment. After all the assessee did not acquire a wasting asset but an asset which could in all probability appreciate in value over the period of time. We, therefore, do not see the scope for application of the provisions of section 14A on the basis of any special facts of the case. As to the Ramsay or McDowell principle the same does not apply at all. We have seen that facts of the case of the assessee fall in the category of J.P. Harrison (Watford) Ltd. s case (supra) and they do not fall in the category of the facts of Finsuburry Securities Ltd. s case (supra) and Lupton s case (supra). There is also consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may secure the double advantage of exemption under section 10(33) as well as set off of loss on sale of mutual fund units against his income from any other transaction or source. He is permitted to do so after holding mutual fund units for the prescribed period which was initially three months and increased to 6 months and 9 months subsequently. Section 94(7) has nothing in it to attribute or, as the case may, disattribute any cost or expenditure against any income declared or distributed by mutual fund. Section 14A, on the other hand, concerns itself with cost/expenditure in relation to an income exempt under Chapter III. No such expenditure should be allowed while computing income under the provisions of Chapter IV and if claimed by the assessee the same should be disallowed on the strength of the provisions of section 14A. Apparently, if the provisions of section 14A apply, there is nothing in section 94(7) to prevent that application. In other words, if we hold that the cost should be apportioned to the income in cases where mutual fund units are purchased with a view to secure double advantage of exemption as well as adjustment of loss, it would apply even to the cases covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue are negated by CBDT Circular No. 14 of 2001, 252 ITR (St.) 108. Paragraphs 56.2 56.3 of the circular read as under:- 56.2 The existing provisions did not cover a case where a person buys securities (including units of a mutual fund) shortly before the record date fixed for declaration of dividends, and sell the same shortly after the record date. Since the cum-dividend price at which the securities are purchased would normally be the higher than the ex-dividend price at which they are sold, such transactions would result in a loss which could be set off against other income of the year. At the same time, the dividends 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 short-term losses, the Act has inserted a new sub-section (7) in the section to provide that where 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 the securities or units, and sells or transfers the same within a period of three months afte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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