2009 (2) TMI 478 - HC - Income Tax

Capital loss - Dividend - Transaction in securities - Dividend stripping - Loss on sale of units set off against profit on sale of units - Sale beyond statutory period of three months - section 94(7) not attracted

Summary

Issues:
1. Whether the capital loss incurred by the assessee on redemption of units of mutual funds was liable for disallowance under section 94(7) of the Income-tax Act, 1961?

Analysis:
The case involved an appeal by the Revenue against a judgment passed by the Income-tax Appellate Tribunal regarding the disallowance of capital loss incurred by the assessee on redemption of mutual fund units. The Assessing Officer invoked the provisions of section 94(7) of the Act, alleging "dividend stripping" by the assessee. The Commissioner of Income-tax (Appeals) agreed with the assessee that the conditions under section 94(7) were not cumulatively satisfied in this case, leading to the disallowance being overturned. The Revenue then appealed to the Tribunal, which upheld the CIT(A)'s decision, prompting the current appeal before the High Court.

The High Court noted that section 94(7) of the Act, inserted in 2002, required specific conditions to be cumulatively met for disallowance of capital loss. The provision mandated that the purchase and sale of securities or units within specified periods, along with exempt dividend income, must align for the loss to be ignored in tax computation. The Court reviewed the transactions involving mutual fund units by the assessee and found that the conditions under section 94(7) were not met as the sale occurred outside the prescribed statutory periods. The Court emphasized the cumulative nature of the conditions, highlighting the importance of the record date in determining the applicability of the provision.

Ultimately, the High Court concluded that the transactions in question did not fall within the scope of section 94(7) of the Act due to the timing misalignment of purchases, record dates, and sales. The Court upheld the decisions of the lower authorities and dismissed the appeal by the Revenue, stating that no substantial question of law arose for consideration in this case.