TaxTMI 
TaxTMI 
2026 (3) TMI 887
X X X X Extracts X X X X
X X X X Extracts X X X X
....of unlisted shares of M/s. Acculife Healthcare Pvt. Ltd., amounting to approximately Rs. 749.98 crore, which were offset by short-term capital losses (STCL) of Rs. 380.74 crore from the sale of listed equity shares and equity-oriented mutual fund units. During the year, the appellant received dividends as follows: From domestic listed shares: Rs.4,70,66,872/- (Rs.10,00,000 claimed exempt u/s 10(34); Balance Rs. 4,60,66,872/- offered to tax @10% u/s 115BBDA, with tax paid of Rs. 46,06,687/- excluding surcharge and cess). From mutual fund units: Rs. 7,71,23,805/- (claimed exempt u/s 10(35)). 2.1. The appellant claimed STCL of Rs. 380,74,28,729/- from sale of listed shares and mutual fund units and set off against LTCG. The A.O. examined the transactions and found that a significant number satisfied the conditions under section 94(7) of the Act namely [i] purchase within 3 months before the record date and [ii] sale within 3 months (for shares) or 9 months (for units) after the record date. Consequently, the A.O. disregarded STCL to the extent of the dividends received, adding back Rs. 4,70,66,892/- for sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....34) up to Rs. 10 lakh, with excess taxed at 10% u/s 115BBDA (a special rate provision introduced by Finance Act, 2016). The appellant argues that section 94(7) applies only to the exempt portion (Rs. 10 lakh for shares), as the taxed portion under 115BBDA does not confer a "double benefit warranting disallowance. This interpretation is misconceived. The "double benefit" in dividend stripping arises not solely from exemption but from receiving dividend income (even if partially taxed) while claiming a loss set-off that reduces tax on other income. Even for the taxed portion under 115BBDA, the effective tax rate (10%) is lower than the normal capital gains tax rates (15% for STCG u/s 111A or 20% for LTCG). Allowing loss set-off would still enable avoidance, undermining the revenue's interest. The provision's use of "dividend or income" encompasses all amounts received, as held in analogous contexts by courts (e.g.. CIT v. Walfort Share & Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), where the Supreme Court upheld the anti-avoidance intent of section 94(7). emphasizing that losses are to be ignored to the extent of dividends, without limiting to exemption status). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1. Ld. CIT (A) (NFAC) erred in law and on facts in confirming addition made by AO of Rs. 5, 31, 37, 390/- applying provisions of Sec. 94(7) of the Act. 2. Ld. CIT (A) (NFAC) erred in law and on facts in confirming view of AO that entire dividend of Rs. 4, 70, 66, 892/- received on domestic shares transactions qualified for disallowance u/s 94(7) of the Act whereas dividend of only Rs. 32, 76, 735/- qualified for disallowance as per the appellant. 3. Ld. CIT (A) (NFAC) erred in law and on facts confirming disallowance by AO without taking into consideration provisions of Section 115BBDA and of Section 10(38) of the Act as applicable to relevant assessment. 4. Ld. CIT (A) (NFAC) erred in law and on facts confirming finding of AO based on misunderstanding as to date of purchase & sale of shares, record date & date of receipt of dividend on equity shares of domestic companies to hold that dividend of Rs. 4,70, 66, 892/- is covered u/s 94(7) of the Act. 5. Ld. CIT (A) (NFAC) erred in law and on facts in dismissing the alternate contention of the appellant that provisions of Sec. 94(7) be restricted to the extent of exempt dividend post introd....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies only to exempt dividend income. We are unable to accept this contention. The statutory language refers to "dividend or income received or receivable" and does not restrict the operation of the provision only to exempt dividend. Even after the introduction of section 115BBDA, the possibility of tax arbitrage continues because the dividend may be taxed at a concessional rate, whereas the capital loss may be used to reduce taxable gains. 7.3. It is further clarified from the Explanatory Memorandum to the Finance Act, 2001 (which introduced the provision for securities) and Finance Act, 2004 (extending to units), is to prevent tax avoidance by disregarding notional losses to the extent of dividends/income derived from such transactions, irrespective of the tax treatment of the dividend itself. Therefore, the mischief sought to be prevented by section 94(7) would continue even where dividend is partly taxable. Accordingly, we hold that section 94(7) applies to the entire dividend received and not merely the exempt portion. 7.4. We also see from record that the Assessing Officer examined the transactions in detail and identified those where: * shares were purchased wit....