2009 (2) TMI 481 - HC - Income Tax

Shame Transactions - the arrangement was not collusive or that the mutual fund had not provided accommodation entries to the assessee to purchase a loss. It is not disputed that the mutual fund has an approval from the Securities and Exchange Board of India (SEBI). Furthermore, nothing has been brought on record to show that the transaction between the assessee and the mutual fund was not an arm s length transaction. Dividend Stripping - at the relevant time there was no provision under the Act which could be invoked to disallow a loss of the nature incurred by the assessee. As correctly held by the Tribunal the provisions of section 94(7) of the Act were inserted in the Act with effect from April 1, 2002 and hence, would impact, if at all, transactions undertaken in the assessment year 2002-03. Section 14A - There is no whisper of any expenditure either in the assessment order or in the order of the Commissioner of Income-tax (Appeals) with respect to expenditure which the assessee incurred for earning income i.e., dividends from units which are admittedly exempted under section 10(33) of the Act. Nothing has also been indicated in the appeal which would lead us to believe that there was material which could have been looked into had the Tribunal permitted the Revenue to take up the said additional ground pertaining to section 14A of the Act.

Issues Involved:
1. Deletion of disallowance of a loss of Rs. 19,67,450 claimed by the assessee on account of purchase and redemption of units of Kothari Pioneer Mutual Fund.
2. Rejection of the Revenue's plea to canvass submissions with reference to section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Loss:

The Revenue contested that the Income-tax Appellate Tribunal (Tribunal) misdirected itself in law by deleting the disallowance of a loss of Rs. 19,67,450 claimed by the assessee due to transactions with Kothari Pioneer Mutual Fund. The Assessing Officer (AO) had concluded that the transaction was a "collusive arrangement" to purchase a loss and involved "dividend stripping" to avoid tax. The AO pointed out discrepancies such as the timing of cheque clearance and dividend reinvestment, suggesting that the transactions were not genuine.

The Commissioner of Income-tax (Appeals) (CIT(A)) examined the discrepancies in detail and found that:
- The assessee had applied for and recorded the purchase of units worth Rs. 1 crore on March 9, 2001, with the mutual fund encashing the cheque on March 12, 2001.
- The mutual fund's statements corroborated the transactions, including the reinvestment of dividends and subsequent redemption of units.
- The cheques received from the mutual fund were deposited in the assessee's bank account within the expected timeframe.

The CIT(A) concluded that the transactions were genuine and not collusive. The Tribunal upheld this view, noting that there was a real and genuine flow of funds and rejecting the Revenue's claim of a tax avoidance scheme. The Tribunal also referenced judgments from the Delhi High Court which supported the genuineness of such transactions prior to the insertion of section 94(7) of the Act, which was effective from April 1, 2002, and thus not applicable to the assessment year 2001-02 under consideration.

2. Rejection of Revenue's Plea on Section 14A:

The Revenue sought to raise an additional ground pertaining to section 14A of the Act, which disallows deductions for expenditure incurred in relation to income not forming part of total income under the Act. The Tribunal rejected this plea, stating that there was no material on record to invoke section 14A, as neither the AO nor the CIT(A) had discussed any related expenditure in their orders.

The Tribunal's decision was based on the absence of any indication that such expenditure existed. The Tribunal's rejection was deemed correct as allowing the additional ground would necessitate a fresh investigation, which was not permissible.

The Revenue's reference to the Supreme Court judgment in National Thermal Power Co. Ltd. v. CIT was acknowledged, but the Tribunal emphasized that additional grounds could only be entertained if there was material on record, which was not the case here.

Conclusion:

The High Court found no fault with the findings of fact by the CIT(A) and the Tribunal. The transactions between the assessee and the mutual fund were genuine and not collusive. The Tribunal's rejection of the Revenue's plea to invoke section 14A was also upheld due to the lack of material evidence. Consequently, the appeal was dismissed, with no substantial question of law arising for consideration.

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