TaxTMI 
TaxTMI 
2010 (12) TMI 191
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.... a disallowance u/s 94(7). He assessed the total income at Rs. 8,94,16,743. The assessee carried the matter in appeal. The first appellate authority granted part relief. On the issues where the first appellate authority confirmed the action of the AO, the assessee has filed this appeal and on certain issues where the CIT(Appeals) granted relief to the assessee, the Revenue filed an appeal. 3. We have heard Shri Hiro Rai, learned counsel for the assessee and Shri Jitendra Yadav, the learned DR. Both parties have also furnished written submissions on the issue of disallowance of loss u/s 194(7). We have carefully considered the detailed submissions made by both the parties on all the issues. 4. On a careful consideration of the facts and circumstances of the case, a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows. 5. We first take the assessee's appeal. The grounds of appeal filed by the assessee read as under : (1.a) The Ld. CIT (A) erred in confirming the addition made u/s 40(a)(ia) of the Act by Ld. Addl. CIT - 4(1) of Rs. 37,11,088 for non-deduction of T.D.S. u/s 194J of the Act. (b) T....
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....the disallowance u/s 14A, at 3% of the dividend income. On appeal, the first appellate authority directed the AO to compute the disallowance in terms of Rule 8D. 9. In view of the decision of the jurisdictional High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom.) 1, it is held that Rule 8D can be applied prospectively and that prior to introduction of Rule 8D, the disallowance u/s 14A has to be worked out by the AO on some reasonable basis. The learned counsel for the assessee does not dispute the quantification of the disallowance made by the AO. Under these circumstances, we vacate the order of the CIT (Appeals) and sustain the disallowance made by the AO. 10. The last ground of appeal is on the disallowance made u/s 94(7). The learned counsel for the assessee Mr. Hiro Rai drew the attention of the Bench to the issue as discussed by the AO from pages 8 to 10 of his order and as discussed by the CIT (Appeals) at pages 11 to 15 of his order. He referred to the table at page 8 of the assessment order and submitted that the table gives the relevant details particularly the purchase dates, record dates and redemption dates. He pointed out that the ....
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....he value of investments, held by the mutual funds. These losses, as per the learned counsel, had nothing to do with the dividend declared last year and hence no disallowance is called for u/s 94(7) in this year. 14. The second proposition is that the AO has compared the current year's loss of Rs. 33,45,420, with last year's dividend of Rs. 71,41,420 and made a disallowance. He contends that the dividend of the previous year should first be set off against the loss incurred in the previous year for the reason that the loss was incurred in the previous year by way of fall in value of investments as on 31/3/2004, only for the reason that dividends were declared. He reiterated his point that during the current year the loss in value of shares was not on account of declaration of dividend but only on account of market forces. He contended that even if this logical way is not accepted, then, if there is more than one alternative, the alternative which places a lighter burden on the assessee, has to be adopted. For this proposition he placed reliance on the decision of Hon'ble Bombay High Court in the case of J.C. Thakkar v. CIT 27 ITR 658. He emphasized that, clear logic and the actua....
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....00, which was booked in the earlier year. 18. On the contention that the loss during the year has not occurred due to declaration of dividend but only due to operation of market forces, the learned DR submitted that the loss booked in the previous year was only a notional loss, arrived at by valuing the stock at net realizable value. He submitted that the notional loss cannot be taken into consideration while coming to a conclusion on disallowance u/s 94(7). 19. On the issue of adopting a method which places lighter burden on the assessee, the learned DR pointed out that the section is titled "Avoidance of tax by certain transactions in securities" and submitted that it is an anti avoidance measure and should be construed strictly. He distinguished the decision of the jurisdictional High court in the case of J.C. Thakkar, on the ground that the same does not relate to interpretation of anti-avoidance measure. He reiterated the contention that the three strages of the transaction have to be completed to get hit by the provisions of section 94(7) and the profit and loss is to be arrived at only at the point of sell. He contended that it would be factually incorrect to say that ....
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....eriod of three months prior to the record date; (b) such person sells or transfers- (i) such securities within a period of three months after such date; Or (ii) such unit within a period of nine months after such date; (c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if 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.] (Emphasis ours) The section was inserted by the Finance Act, 2001 with effect from 1-4-2002. The further amendment was made by Finance (No. 2) Act, 2004 with effect from 1-4-2005. Prior to the substitution, sub-clause (b) read as follows : "Such person sells or transfers such securities or units within a period of three months after such date." 25. From a reading of section 94(7) it is clear that it comes into play, only when all the three conditions are fulfilled, i.e. a) the assessee should buy securities or units within a period of three m....
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....disallowed u/s 94(7). 28. Coming to the second argument that the loss of the previous year should be first set off and then only the loss of the current year should be considered, we reiterate that as the event of sale/redemption has occurred in this year and as the loss on purchase and sale cannot be set-off during the A.Y. 2004-05 as section 94(7) is not trigged. The word 'then' in the section is important. The entire argument is based on the assumption that a certain disallowance could have been made in the previous year and subsequently only the unabsorbed amount should be adjusted in this year. Such argument cannot be accepted for the reason already stated. In such a situation the question of their being an alternative, which places a lesser burden on the assessee and the requirement that such alternative should be adopted, does not arise. In this case the wordings in the statute are unambiguous and clear and have to be applied as such. 29. Coming to the last argument that the amendment to the provisions of section 94(7) brought about by the Finance (No. 2) Bill 2004, should be applied prospectively, we find that the issue is covered against the assessee and in favour of....
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....the asstt. year. 2005-06. The CIT(A) was therefore justified in sustaining disallowance under s. 94(7) - L. Rejeshwar Pershad v. CIT (1986) 52 CTR (P. & H.) 305 applied; Krishna Mohan Agarwal v. CIT (2007) 295 ITR 190 (all.) and Karimtharuvi Tea Estate Ltd. v. State of Kerala (1966) 60 ITR 262 (SC) distinguished. In the light of the above decision, the stand taken by the assessee can not be accepted." Respectfully following the same, we dismiss this argument of the assessee. 30. The submissions of the assessee trying to distinguish the propositions laid down in the decision of Suri Sons (supra) is devoid of merit. 31. In the result, we uphold this finding of the CIT (Appeals) and dismiss ground No. 3 filed by the assessee. 32. We now take up the Revenue appeal. 33. Ground Nos. 1 to 7 are on the issue of disallowance u/s 40(a)(ia) of the Act on the ground that the assessee failed to deduct TDS on V-SAT charges and leaseline charges. This issue is covered in favour of the assessee by the decision in the case of Kotak Securities Ltd. and Angle Broking Ltd. (supra). Respectfully following the same, we dismiss ground Nos. 1 to 7. 34. Ground Nos. 8 to 12 are on the i....
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....ock at market price which is lower than the cost price means a provision for contingent anticipated loss is being made in the accounts because this loss is contingent upon sale of the stock during the next year at the same price. If stock is not sold in the next year and at the year end its value becomes equal to or more than its original cost, then again in the computation of closing stock for the next year, its value has to be taken at cost only. This is the only exception where the provision of contingent anticipated loss is allowed in the computation of total income. Moreover, if the stock is sold in the next year at a price higher than the price taken for the purpose of valuation of closing stock, the difference between the two prices are taken as income of the next year in the form of higher profit realized. It means, indirectly, the losses booked in the closing stock to the extent of higher profits realized are written back in the profit & loss account. 8.8 Hence, as per this view, once a provision for loss is booked by the assessee in the earlier year in its valuation of closing stock and such loss becomes disallowable because of the provisions of sec. 94(7) on account o....