TMI Blog2015 (4) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the impugned transaction was a transaction of dividend stripping and, therefore, it was alleged to be a colourable device. 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. The Supreme Court, in the above decision, further fortified this issue by stating that such a transaction was curbed by the introduction of Section 94 (7) in Finance Act, 2001 with effect from 1.4.02 relevant to the assessment year 2002-2003. In view of the abovesaid decision of the Supreme Court, the plea of the Department that the transaction would attract Section 14-A of the Act fails and, this Court holds that the assessee is entitled to claim the amount as business loss during the assessment year in question. - Appeals are allowed setting aside the order of the Tribunal - Decided in favour of assessee. - TCA Nos. 1174 & 1175 of 2007 - - - Dated:- 2-2-2015 - R. Sudhakar And R. Karuppia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w:- Assessee claims to have accepted a loan of ₹ 2 Cr. From M/s.Kotak Mahindra Finance Ltd., vide agreement dated 14.12.2000. Assessee filed a copy of the said loan agreement. The agreement is undated and is signed by assessee only. Assessee also executed a power of attorney in favour of M/s.Kotak Mahindra Finance Ltd., enabling the latter to bid/apply or subscribe mutual fund units, to pay monies due on bid/application, to make application for redemption, to receive dividend, to receive consideration consequent on sale. Record date for distribution of dividend in the case of Sun F C Mutual Fund was 18/12/2000. M/s.Kotak Mahindra Finance Ltd., purchased 11,49,425 units of Sun F C Mutual Fund on 18/12/2000 @ ₹ 17.40 for a total consideration of ₹ 2 Cr. M/s.Kotak Mahindra Finance Ltd., directly paid the purchase consideration to the Mutual Fund. Thus M/s.Kotak Mahindra Finance Ltd., purchased the units at cum-dividend price of ₹ 17.40. On the record date, dividend @ ₹ 3.50 per unit amounting to ₹ 40,22,988 was to be received by M/s.Kotak Mahindra Finance Ltd. The units were purchased with the dividend reinvestment option, hence the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 40,22,988 was received by the assessee though assessee was not involved in the transaction, it claimed to have received dividend of ₹ 40,22,988/-. Assessee also claimed the expenditure/loss of ₹ 43,57,163/- as being part of its trading operations. 3. Accordingly, the claim of expenditure/loss in the purchase and sale of units was disallowed by the assessing officer. Against the said order, the assessee preferred appeal to the CIT (Appeals), who dismissed the same confirming the order of the assessing officer, which on appeal to the Tribunal, was held against the assessee and, hence, the assessee/appellant is before this Court by filing the present appeal. 4. Learned counsel appearing for the assessee points out that in respect of the assessment year in question, i.e., 2001-2002, in the light of the new provisions as contained in Section 94 (7) of the Act, which was brought in by Finance Act, 2001 with effect from 1.4.02, the decision of the Supreme Court in the case of Commissioner of Income Tax - Vs - Walfort Share Stock Brokers P. Ltd. (2010 (326) ITR 1 (SC)), is squarely applicable. Learned counsel for the assessee relied on the abovesaid decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o curb dividend stripping, which is used as a colourable device. The said Section 94 (7) having come into effect from 1.4.2002, the same will be enforceable only from the assessment year 2002-2003 onwards. In the present case, the assessment year pertains to 2001-2002. Therefore, it is clear that Section 94 (7) would not be applicable to the case on hand, as the said Section itself has come into force only on 1.4.2002, i.e., and is not enforceable for the previous assessment year, viz., 2001-2002. 9. In the above backdrop, it is brought to the notice of the Court by the learned counsel for the appellant the decision of the Supreme Court in the case of Commissioner of Income Tax - Vs - Walfort Share Stock Brokers P. Ltd. (2010 (326) ITR 1 (SC)), wherein identical issue fell for consideration. In the said case, the Supreme Court while negativing the stand of the Department that the transaction in the said case would fall under Section 14-A, distinguished the stand of the Department, in bringing the case under Section 14-A holding that the loss in the sale of units could be disallowed on the ground that the impugned transaction was a transaction of dividend stripping and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed subject to certain allowances for deductions/ expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. 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 ph ..... X X X X Extracts X X X X X X X X Extracts X X X X
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