TaxTMI 
TaxTMI 
2011 (3) TMI 21
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....peal: 3. At the time of admission of this appeal, a Division Bench of this Court formulated the following questions of law: "This appeal will be heard on the substantial question of law as to whether the Learned Tribunal was justified in upholding the findings of the Assessing Officer and whether the findings of the learned Tribunal were contrary to the materials on record and/or were based on no material and were therefore perverse. The appeal will also be heard on the further question as to whether the findings of the learned Tribunal that the unit transactions which took place in the present case were solely for reducing the assessee's tax liability and that the ratio of the McDowell's case apply to the present case are based on a misconstruction of the said decision." 4. The facts leading to the filing of this appeal may be summed up thus: (a) The assessee had purchased 35 lakh units of UTI from Peerless General Finance & Investment Co. Ltd. ("Peerless") on 29th May, 1989 at the rate of Rs.14.75 per unit for a total consideration of Rs.5,16,25,000/-. Those very units were sold back to Peerless on 31st July, 1989 at the rate of 13 per unit for the aggregate consideration o....
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....sing Officer, he came to the conclusion that the explanation furnished by the assessee regarding the loss incurred was vague and without substance. It was further observed that the fact remained that the assessee agreed to sell the units at a loss and thus, the loss was known right from the time when the purchases were made and therefore, the loss was a pre-determined loss. The Assessing Officer also was not satisfied about the assessee's explanation that it incurred the loss in expectation of high dividend from UTI. The Assessing Officer, thus, disallowed, inter alia, the loss incurred by the assessee in purchase and sale of the units amounting to Rs.63,84,000/-. (h) On an appeal being preferred, the assessee submitted before the CIT(A) that the loss on purchase and sale of share was a real loss and it was neither vague nor without substance, as alleged by the Assessing Officer. The assessee further contended that Unit Trust of India, being a Government of India Enterprise, there cannot be any kind of connivance between the UTI and the assessee and that the allegation of pre-determined loss in the sale of units was not correct because the dividend received by the assessee was no....
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....purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted income with the full knowledge about the guaranteed fall in the market value of the units and the payment of tax-free dividend, hence, disallowance of the loss. "In the lead case, we are concerned with the assessment years prior to insertion of section 94(7) vide the Finance Act, 2001 with effect from April 1, 2002. We are of the view that the Assessing Officer had erred in disallowing the loss. In the case of Vijaya Bank v. Addl. CIT [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. "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 buyin....
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....tment is to be accepted, it would mean that before April 1, 2002 the entire loss would be disallowed as not genuine but, after April 1, 2002, a part of it would be allowable under section 94(7) which cannot be the object of section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, section 14A was inserted with effect from April 1, 1962 whereas section 94(7) was inserted with effect from April 1, 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 April 1, 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 Parliament intended to give effect to section 94(7) only with effect from Apr....