TMI Blog2006 (3) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the cost of acquisition of the capital asset. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A)-XI, Mumbai has erred in not accepting the contention of the Assessing Officer that the loss arising out of sale of the units is an expense incurred for earning the tax-free dividend." The effective ground taken by the assessee in his appeal is as under : "The learned CIT(A) erred in confirming the action of the Assessing Officer in treating the incentive of Rs. 24,14,007 received by the appellant against the investment as income from other sources instead of reducing the same from the cost of investment as claimed by the appellant in his return of income." 3. The assessee is a Psychiatrist attached to Jaslok Hospital, Mumbai. His main source of income is from profession. During the previous year relevant to the assessment year under appeal, on 19-1-2001, the assessee purchased 735551637 units of Unit-IV Kothari Pioneer Prima Plus for a sum of Rs. 12.6 crores. On bulk purchases of the units, the assessee had received incentive of Rs. 24,14,007 from M/s. SPA Capital Services Ltd. On 23-1-2001 the assessee redeemed the said units for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f acquisition. Any commission is paid or other expenses are incurred to acquire an asset, the same forms part of acquisition. Similarly, if any discount by whatever name called is received while acquiring such assets, it has to be taken into account for working out the cost of acquisition. The only test to be applied is whether such expenditure or discount is wholly and exclusively incurred in connection with the acquisition of the asset. In the present case the assessee had not provided any services nor had any business dealings, which might be responsible for the receipt of incentive. 4. The Assessing Officer did not accept the claim of the assessee. She has painstakingly discussed the issue at length, which are summarized as under : l The assessee is neither a broker nor speculator nor regular trader in stock market. l The assessee did not have the requisite funds and the funds had been borrowed from five persons, who had no surplus funds for advancing the loans to the assessee. l Though the assessee had obtained loans exceeding Rs. 20,000 no disclosure was made in the tax audit report to that extent. l The loans were repaid on receipt of redemption money of the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is in fact an expenditure incurred to earn income exempted under section 10(33) of the Act. In this connection, the Assessing Officer referred to the provisions of section 14A of the Act. l The depreciation in the value of units after declaration of dividend is nothing but part of the cost incurred. l The introduction of the amended provisions of section 94(7) is merely a reflection of the right of the Legislature to codify its disapproval of misuse of the provisions of law as they stood before the amendment. l In the alternative, the dividend received must be reduced from the cost of acquisition in order to commute the loss. l The loss arising on sale of the unit can only be calculated by setting off the dividend receipt from the cost of acquisition. In support, reliance was placed on the decision of Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 . Even the genuineness of the transaction is not disputed, it does not preclude her from denying the benefit as she can go behind the transactions to ascertain the real nature. l Relying on Supreme Court decision in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 the whole se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y arising out of the transactions of purchase and sale of units then the dividend receipts of the assessee must be reduced from the cost of acquisition before computing the loss which may be considered as legitimate. ( ii )In view of the above discussions, the loss of Rs. 1,94,09,995 (recomputed at Rs. 2,18,24,002 by reducing the cost of purchase from the sale price of the units) being claimed as short-term capital loss by the assessee is assessed as the cost of earning the dividend income of Rs. 1,83,88,791. As the dividend income has been claimed exempt under section 10(33) the associated expenses cannot be allowed and the amount of Rs. 2,18,24,002 is therefore disallowed. As this amount was treated by the assessee as short-term capital loss and was not debited to the accounts, no separate addition to income is however made at this stage subject to the discussion in the paras above." In the computation part of the total income the Assessing Officer has, inter alia , disallowed the loss on redemption of units of Rs. 1,94,09,995 and added the incentive of Rs. 24,14,007 as income from other sources. 6. The CIT(A) considered in detail all the issues dealt with by the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wallfort Shares Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB). The learned counsel therefore strongly pleaded that on merits the issue has to be decided in favour of the assessee in the light of the aforesaid order of the Special Bench. The learned Departmental Representative also agreed that the facts of the present case are identical to the facts in the case of Wallfort Shares Stock Brokers Ltd. ( supra ) and has also agreed that similar exercise made by the department has not been approved by the Special Bench of the Tribunal in the case mentioned above. 8. We have carefully considered the rival submissions and have gone through the record. We find that the identical exercise, on similar facts, of the department has been discussed by the Special Bench of the Tribunal and has come to the conclusion that : ( i )Mere knowledge of the mutual fund that its units might be purchased and redeemed by dividend strippers would not clothe mutual fund as a party to tax avoidance; ( ii ) it was difficult to regard transactions under consideration to be other than trading transactions, even though transactions were entered into by assessee with motive of reaping of fisc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her sources. It is against this direction of the CIT(A) that the assessee is in appeal before us. 10. We have heard the parties to the dispute and have gone through the record. The learned counsel for the assessee strongly argued that the issue is directly covered in favour of the assessee by the decision of the Supreme Court in the case of CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703 , a copy of which has been placed on our record. The assessee in the case before the Supreme Court was a State Government undertaking incorporated with the object of developing industries in the State of Uttar Pradesh. With that end in view, it financed industrial projects in the State in various manners. One such way of financing was that the assessee was underwriting certain public issues by such companies. The assessee was entitled to get some commission as well as brokerage. In the case where the shares were not subscribed by the public in toto , the assessee was obliged to subscribe for those shares at face value, but was also entitled for underwriting commission as well as brokerage as if the shares of the said company were subscribed by the public. The method adop ..... X X X X Extracts X X X X X X X X Extracts X X X X
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