TaxTMI 
TaxTMI 
2010 (7) TMI 15
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.... 2009), Civil Appeal No. 4937 of 2010 (Arising out of SLP (C) No. 10213 of 2009), Civil Appeal No. 4939 of 2010 (Arising out of SLP (C) No. 20919 of 2009), Civil Appeal No. 4940 of 2010 (Arising out of SLP (C) No. 20916 of 2009), Civil Appeal No. 4941 of 2010 (Arising out of SLP (C) No. 24051 of 2009), Civil Appeal No. 4942 of 2010 (Arising out of SLP (C) No. 27741 of 2009), Civil Appeal No. 4943 of 2010 (Arising out of SLP (C) No. 15866 of 2009), Civil Appeal No. 4944 of 2010 (Arising out of SLP (C) No. 20282 of 2009), Civil Appeal No. 4945 of 2010 (Arising out of SLP (C) No. 34131 of 2009), Civil Appeal No. 4954 of 2010 (Arising out of SLP (C) No. 31781 of 2009), Civil Appeal No. 4946 of 2010 (Arising out of SLP (C) No. 1122 of 2010), Civil Appeal No. 4947 of 2010 (Arising out of SLP (C) No. 20853 of 2009), Civil Appeal No. 4948 of 2010 (Arising out of SLP (C) No. 30857 of 2009), Civil Appeal No. 4949 of 2010 (Arising out of SLP (C) No. 16501 of 2009), Civil Appeal No. 4951 of 2010 (Arising out of SLP (C) No. 17757 of 2010), CC 5709/2010, Civil Appeal No. 4950 of 2010 (Arising out of SLP (C) No. 17756 of 2010), CC 5726/2010, Civil Appeal No. 4952 of 2010 (Arising out of SLP (C) N....
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..... 13.23 per unit and collected an amount of Rs. 5,90,55,207.75. The assessee also received an incentive of Rs. 23,76,778/- in respect of the said transaction. Thus, the assessee thereby received back Rs. 7,96,44,847 (Rs. 1,82,12,862.80 + Rs. 5,90,55,207.75 + Rs. 23,76,778) against the initial payout of Rs. 8,00,00,000/-. For the income tax purposes, the assessee, in its return, claimed the dividend received of Rs. 1,82,12,862.80 as exempt from tax under Section 10(33) of the Income Tax Act, 1961 ("the Act" for short) and also claimed a set-off of Rs. 2,09,44,793 as loss incurred on the sale of the units thereby seeking to reduce its overall tax liability. 5. The AO in his assessment order dated 21.3.2003 accepted that the dividend income amounting to Rs. 1,82,12,862.80 was exempt under Section 10(33) of the Act. However, the AO disallowed the loss of Rs. 2,09,44,793 claimed by the assessee inter alia on the ground that a dividend stripping transaction was not a business transaction and since such a transaction was primarily for the purpose of tax avoidance, the loss so-called was an artificial loss created by a pre-designed set of transaction. Accordingly, the AO deducted the in....
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....f units which clearly represented the cost of the dividend, is the expenditure incurred for obtaining exempt income and if that is the case then Section 14A requires that such expenditure should be netted against the receipt of dividend. Before us, it was also submitted that in any event "loss" is a commercial concept under the Act, if a transaction is such that a "tax loss" is created or contrived without suffering any corresponding financial / commercial loss inasmuch as the money has in fact been recouped in some other form (such as dividend), then such a loss needs to be ignored for tax purposes, only to the extent that the loss has in fact been recouped in another form. This is because such a loss, not being a "commercial loss", was never intended to be allowed under the Act. As a corollary, it was submitted that introduction of Section 94(7) prospectively w.e.f. 1.4.2002 does not obliterate the aforementioned last submission since a prospective amendment, by its very definition, did not alter the existing law in respect of the past transactions. Moreover, Section 94(7) specifically adopts the above principle of tax avoidance and modifies it for the purpose of dealing with wha....
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...., the newspaper advertisements issued by the Mutual Fund in the present case as on March 8, March 18 and March 22 amounted to an offer by Mutual Fund to the target buyers, i.e., a buyer who wants to claim losses in the trade of shares and securities so as to set it off against his other income. The effect of the newspaper advertisements is to segregate the unit into two assets, namely, the asset of the tax free dividend and the ex-dividend unit which will have an NAV reduced by the amount of the dividend payout per unit. Since there are two assets which are sold to the buyer of the cum-dividend units, it follows that the difference between the purchase and sale price of the unit, is nothing but the expenditure incurred for purchasing the asset of tax free dividend. In this connection, reliance is placed on the Explanatory Memorandum accompanying the Finance Bill of 2001 reported in 248 ITR 195 (St.). 12. In conclusion, it was submitted before us that the tax free dividend income was really in essence a cost recovery mechanism which finds an independent support in Accounting Standard No. 13, i.e., to the effect that such a return should go to reduce the cost of acquisition as suc....
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.... upon the value of the underlying assets and not on the basis of the dividend payout. On interpretation of Sections 14A and 94(7) it was submitted that Section 14A deals with expenditure in relation to income whereas Section 94(7) deals with acquisition and sale of securities or units and provides for a consequence where the purchase and sale take place within a specified time period. Each provision operates in its own field. When Section 14A refers to disallowance of expenditure in relation to non-taxable income for computing the total income, what is meant is that such expenditure should be taken into account only for determining the quantum of the non-taxable income. This would result in the exempt dividend being reduced by the alleged expenditure. The only impact on the exempting provision of Section 10(33) for unit income is by Section 94(7) and one cannot interpret Section 14A as leading to the same conclusion as then Section 94(7) will be rendered nugatory. In other words, the two provisions operate in different time and space zones. In support of the above contention, the assessee (s) has relied on the Memorandum as well as Circular No. 14 which clearly states that losses r....
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.... 2002-03 the loss was Rs. 1,85,68,015 which exceeded the dividend of Rs. 1,82,12,862 and, therefore, the loss allowable applying Section 94(7) stood at Rs. 3,55,153. Therefore, in order to reconcile Section 14A with Section 94(7) it was suggested on behalf of the assessee(s) that Section 14A should be confined to a case where there is expenditure on earning tax free income but where there is no acquisition of an asset and Section 94(7) should be confined to a case where there is acquisition of an asset thereby indicating a distinction between a claim for deduction of an expenditure and a claim for allowance of a business loss. Section 14A deals with disallowance of expenditure per se and not with a disallowance of a loss which arises at a point of time subsequent to the purchase of units and the receipt of exempt income and occurring only when there is a sale of the purchased units. Section 14A is not concerned with a purchase and subsequent sale of an asset which is dealt with in Section 94(7) alone. In other words, Section 14A does not apply to the case of a claim for set off of a loss which is dealt with only in Section 94(7) and that too from assessment year 2002-03. Section 14....
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...., therefore, one need not go by the "two asset" theory. According to the learned SGI, Section 14A is not concerned with whether the assessee makes a profit or a loss. According to the learned SGI, application of Section 94(7) will not rule out Section 14A. It was submitted that both the provisions can apply simultaneously. In this connection, it was urged that in the first stage Section 14A can be applied to determine the expenditure to be excluded. After excluding such expenditure from the cost of purchase, what remains may be called as adjusted purchase cost. If units are bought and sold within 3/9 months period, then, the adjusted purchase cost must be deducted from the sale. If this leads to a profit then Section 94(7) will not apply. However, if there is a loss, such loss will have to be ignored to the extent of the dividend received. This was the suggested mode for reconciling Section 14A with Section 94(7) by the learned SGI, which according to the assessee(s) would result in double counting of the dividend amount of Rs. 1,82,12,862, one as dividend and the other as a loss. 15. In this batch of cases, we are required to decide three distinct points which are as follows: ....
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.... any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax. Circular No. 14 of 2001 56. Measures to curb creation of short-term losses by certain transactions in securities and units 56.1 Under the existing provisions contained in Section 94, where the owner of any securities enters into transactions of sale and repurchase of those securities which result in the interest or dividend in respect of such securities being received by a person other than such owner, the transactions are to be ignored and the interest or dividend from such securities is required to be included in the total income of the owner. 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 sells the same shortly after the record date. Since the cum-dividend price at which the securities are purchased would normally be higher than ....
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....thereby seeking to reduce its tax liability and gain tax advantage. 18. The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Sectio....
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.... which allowances are provided for (see Sections 30 to 37). Every pay-out is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an "expenditure incurred" in terms of Section 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an "expenditure" as it does not impact the Profit & Loss Account. Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the Profit & Loss Account. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in Section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated a....
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....cerned with the assessment years prior to insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. We are of the view that the AO had erred in disallowing the loss. In the case of Vijaya Bank v. Additional Commissioner of Income Tax (1991) 187 ITR 541, it was held by this Court that where the assessee buys securities at a price determined with reference to their actual value as well as interest accrued thereon till the date of purchase the entire price paid would be in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on those securities. 21. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases....
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.... Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, Section 14A was inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by SEBI for last couple of years. If Section 94(7) would have been brought into effect from 1.4.1962, as in the case of Section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to Section 94(7) only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to Sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why Section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002. 22. The next question w....