9911796707
|
Home
Issues Involved:
1. Whether the loss incurred by the assessee on purchase and sale of units of Mutual Funds is allowable or not? 2. Whether the provisions of section 94(7) of the Income-tax Act, 1961 can be interpreted as retrospective in operation and if so, its effect? Summary: Issue 1: Allowability of Loss on Purchase and Sale of Mutual Fund Units The assessee filed returns for AY 2001-02 and 2000-01, disclosing losses from transactions involving units of Sun F&C Mutual Fund and Chola Mutual Fund, respectively. The Assessing Officer (AO) disallowed the losses, arguing that the transactions were pre-mediated tax avoidance schemes, lacking commercial justification and profit motive. The AO concluded that the transactions were designed to generate tax-free dividends while incurring a certain loss, which was then set off against other taxable income. The CIT(A) upheld the AO's decision, citing judgments that emphasized the importance of profit motive in business transactions. The Tribunal, however, found that the transactions were genuine business transactions. It relied on the principle that a transaction does not cease to be a business transaction merely because it is motivated by tax considerations. The Tribunal referred to the judgments in Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC), Finsbury Securities Ltd. v. Bishop (Inspector of Taxes) [1966] 43 TC 5911 (HL), and Lupton v. F.A. & A.B. Ltd. 47 TC 580 (HL), concluding that the transactions had all the characteristics of trading transactions and were not artificial or sham. Issue 2: Retrospective Operation of Section 94(7) The Tribunal examined whether section 94(7) of the Income-tax Act, introduced by the Finance Act, 2001, with effect from 1-4-2002, could be applied retrospectively. The Tribunal noted that the provision was intended to curb tax avoidance through dividend stripping by disallowing losses arising from the purchase and sale of securities or units within a specified period around the record date for dividend declaration. The Tribunal found that the provision was not retrospective, as indicated by the legislative intent and CBDT Circular No. 14 of 2001, which stated that the provision was prospective. The Tribunal also referred to the CBDT Instruction F. No. 178/32/2003-ITA 1, dated 23-2-2004, which advised that disallowances for assessment years prior to 2002-03 should be made only after in-depth investigation and proper recording of facts to establish the motive of tax avoidance. The Tribunal concluded that the provisions of section 94(7) could not be applied retrospectively to the assessment years under consideration. Conclusion: The Tribunal allowed the appeals, holding that the losses claimed by the assessee for AY 2000-01 and 2001-02 were allowable as business losses and that the provisions of section 94(7) could not be applied retrospectively.
|
