TMI Blog2010 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure whereas Section 94(7) comes in when there is claim for allowance for the business loss. We may reiterate that one must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc. while interpreting the scheme of the Act. - Para 12 of Accounting Standard AS-13 has no application to the facts of the present cases where units are bought at the ruling NAV with a right to receive dividend as and when declared in future and did not carry any vested right to claim dividends which had already accrued prior to the purchase. - Decided in favor of assessee - revenue appeal dismissed - Civil Appeal No. 4927 of 2010, Civil Appeal No. 4949 of 2010 - - - Dated:- 6-7-2010 - S. H. KAPADIA, C.J.I. JUDGMENT Delay condoned. 2. Leave granted. 3. Whether the loss arising in the course of dividend stripping transaction taking place prior to 1.4.2002 was disallowable on the ground that such loss was artificial as the dividend stripping transaction was not a business transaction, is the question which arises for determination in this batch of Civil Appeals; the lead matter of which is C.I.T., Mumbai v. M/s. Walfort Share Stock Brokers P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice/ redemption value amounting to Rs. 5,90,55,207.75. (See page 77 of the SLP Paper Book) 7. Being aggrieved by the disallowance of the reduced loss of Rs. 1,82,12,862.80, the assessee filed an appeal before CIT(A) who by his order dated 12.12.2003 confirmed the order of the AO saying that the loss of Rs. 1,82,12,862.80 incurred by the assessee on the sale of units should be totally ignored and that the same should not be allowed to be set-off or carried forward. Thus, the Department disallowed the reduced loss of Rs. 1,82,12,862.80 which amount was equal to the dividend, on the units declared by the mutual fund, of Rs. 1,82,12,862.80. In other words, by the impugned orders passed by the AO, the Department sought to tax the dividend income of the assessee during the relevant assessment year of Rs. 1,82,12,862.80. 8. To complete the chronology of events, it may be stated that the assessee moved the tribunal against the order dated 12.12.2003. The disallowance stood deleted by the Special Bench of the Tribunal vide its impugned order dated 15.7.2005 by holding that the assessee was entitled to set-off the said loss from the impugned transactions against its other income cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to buy either the unit (ex-dividend) or the unit and the dividend (cum- dividend) or only the dividend. As far as the first two assets, there was no issue. If an assessee wanted to buy a unit after declaration of the dividend, then he can buy the ex-dividend unit as soon as possible after the record date so that he pays only for the NAV relatable to ex-dividend unit, after declaration of the dividend, without being affected by market fluctuations. Similarly, if an assessee wants to buy an asset consisting of the dividend and the unit, he can buy cum- dividend unit at any point of time after the declaration of the dividend but before the record date. According to the Department, the problem arises in cases where an assessee is desirous of buying only the dividend. In order to do so, he buys the cum-dividend unit, after declaration of dividend but as close as possible to the record date (so as to isolate himself from market fluctuations), whereby he becomes entitled to receive the dividend payout on the record date and immediately after the record date is able to sell the ex-dividend unit. Consequently, by a series of fiscal transactions, the assessee ends up buying the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as "dividend", in fact and in law, constitutes "return of investment" is fallacious for several reasons. Firstly, the question whether an amount is a "cost return" depends on the terms of the contract. Secondly, the argument of the Department runs counter to Section 94(7). That sub-section clearly accepts that payment by way of dividend is a revenue receipt but it is exempt from tax under Section 10(33). According to the assessee, if the argument of the Department is to be accepted that the amount represents "return of investment" then it would constitute a capital receipt and not a revenue receipt. Thirdly, if the dividend of Rs. 4 per unit is treated as "expenditure" covered by Section 14A and not as "dividend" as required by Section 94(7), it would mean that for the assessment years 2000- 01 and 2001-02 the assessee would be in a worse position because for the relevant assessment years based on the "fiscality principle" the entire loss of Rs. 1,85,68,015 would be disallowed whereas for the subsequent years after insertion of Section 94(7) w.e.f. 1.4.2002 only loss to the extent of the "dividend" amounting to Rs. 1,82,12,862 would stand disallowed leaving Rs. 3,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the inception of the Act, Section 94(7) seeks to reduce the quantum of the loss with reference to the dividend earned from the assessment year 2002-03. The two terms "expenditure" and "loss" are conceptually different. Section 94(7) is a provision to set at naught "avoidance of tax". If Sections 14A and 94(7) are applied to the same transaction, it will result in Section 94(7) being a "tax levying provision" and not an "avoidance of tax provision". The effect of accepting the submission of the Department is that in the present case the sum of Rs. 1,82,12,862 would have to be considered twice, once, by way of expenditure to earn the dividend income and the second time by way of ignoring the loss to the extent it does not exceed the dividend income of Rs. 1,82,12,862. According to the assessee (s), the embargo in Section 14A on the deductibility of expenditure applies where admittedly an expenditure has been incurred and a deduction is claimed specifically in respect thereof. In this connection, reliance was placed on the word "allowed" in the said Section. In the present case, the assessee (s) has not made any claim for deduction of Rs. 1,82,12,862 and, therefore, the questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect from the assessment year 2002-03. Thus, whereas Section 14A was designed to overcome the problem created by certain decisions of this Court in Rajasthan State Warehousing Corporation v. Commissioner of Income- Tax [242 ITR 450] and in the case of Commissioner of Income-Tax, Madras v. Indian Bank Limited [56 ITR 77], Section 94(7) had no such object. The two, therefore, operate in different fields and they have different objects and because the two provisions operated in two different fact situations Section 14A was made effective from assessment year 1962-63 whereas Section 94(7) is made effective from the assessment year 2002-03. Thus, the Parliament has treated both the sections as dealing with separate circumstances and, therefore, one must confine Section 14A to expenditure of the type referred to in Sections 30 to 43B of the Act which relates to expenditure which does not result in acquisition of an asset. It is clear that where the asset so acquired is sold and results in a loss Section 94(7) steps in. 14. According to the learned Solicitor General of India, Section 14A was inserted by Finance Act 2001 with effect from 1.4.1962. According to him, the fundamental pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reproduce hereinbelow Sections 10(33), 14A, 94(7) and the relevant paras of Circular No. 14 of 2001 issued by the CBDT: Section 10 - Incomes not included in total income In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- (33) any income by way of - (i) dividends referred to in section 115-O; or (ii) income received in respect of units from the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); or (iii) income received in respect of the units of a mutual fund specified under clause (23D): Provided that this clause shall not apply to any income arising from transfer of units of the Unit Trust of India or of a mutual fund, as the case may be. Section 14A - Expenditure incurred in relation to income not includible in total income For the purposes 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 which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or interest, in the computation of the income chargeable to tax of such person. 56.4 Definitions of the terms "record date" and "unit" have also been provided in the Explanation after sub-section (7) of section 94. 56.5 This amendment will take effect from 1st April, 2002, and will accordingly, apply in relation to the assessment year 2002-2003 and subsequent years. 16. The main issue involved in this batch of cases is - whether in dividend stripping transaction (alleged to be colourable device by the Department) the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act? According t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not "expenditure incurred" in terms of Section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of Section 14A. For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked. In our view, return of investment cannot be construed to mean "expenditure" and if it is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under Sections 30 to 37 of the Act and, therefore, Section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14A. 18. The next point which arises for determination is whether the "loss" pertaining to exempted income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law". Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell Co. Ltd. v. Commercial Tax Officer [154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [263 ITR 706(SC)] it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell Co. Ltd.'s case (supra). Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of Section 94(7). The object of Section 94(7) is to curb the short term losses. Applying Section 94(7) in a case for the assessment year(s) falling after 1.4.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, losses over and above the amount of the dividend received would still be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss. It applies to cases where the loss is more than the dividend. Section 14A applies to cases where the assessee incurs expenditure to earn tax free income but where there is no acquisition of an asset. In cases falling under Section 94(7), there is acquisition of an asset and existence of the loss which arises at a point of time subsequent to the purchase of units and receipt of exempt income. It occurs only when the sale takes place. Section 14A comes in when there is claim for deduction of an expenditure whereas Section 94(7) comes in when there is claim for allowance for the business loss. We may reiterate that one must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc. while interpreting the scheme of the Act. 22. Before concluding, one aspect concerning Para 12 of Accounting Standard AS-13 relied upon by the Revenue needs to be highlighted. Para 12 indicates that interest/ dividends received on investments are generally regarded as return on investment and not return of investment. It is only in certain circumstances where the purchase price includes the right to receive crystallized and accrued dividends/ interest, that have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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