2014 (5) TMI 583 - AT - Income Tax

Dividend stripping - Scope of section 94 of the Act - Computation of income Transaction in shares Loss as well as profits made Held that -The shares which incurred loss on sale were actually sold on 29.11.2005 and not on 24.11.2005 - Transfer of shares is coming to effect when transferring entries are made in the registers maintained by the company the transfers are governed by statutory provisions the AO s view is upheld that the shares were actually sold by the assessee only on 29.11.2005 - the dividends were declared on 25.11.2005 and received by the assessee on 29.11.2005 itself - the shares resulted in a loss were sold by the assessee after enjoying the dividends declared on that - u/s 94, it is a clear case of dividend stripping the AO is justified in ignoring that loss and bringing to tax the entire amount of short term capital gains without setting off the short term capital loss the order of the CIT(A) is upheld Decided in favour of Revenue.

Summary

Issues:
1. Short term capital gains and losses on sale of shares.
2. Dividend received and its impact on capital gains computation.
3. Application of Section 94(7) regarding dividend stripping.
4. Discrepancy in sale date of shares and dividend declaration date.
5. Interpretation of statutory provisions for share transfer.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai involved the computation of short term capital gains and losses on the sale of shares by the assessee during the relevant assessment year. The assessee had earned short term capital gains and suffered a loss from selling shares of a company. Additionally, the assessee had received a dividend against the shareholdings in the same company during the same period. The Assessing Officer found that the shares resulting in a capital loss were sold after the dividend declaration date, raising concerns of dividend stripping under Section 94(7) of the Income-tax Act, 1961.

In the first appeal, the Commissioner of Income Tax (Appeals) concluded that the loss-making shares were sold before the dividend declaration date, thereby rejecting the Assessing Officer's adjustment. However, the Appellate Tribunal disagreed with this interpretation. The Tribunal held that the shares were actually sold after the dividend declaration and receipt, constituting a clear case of dividend stripping as per Section 94. Consequently, the Tribunal set aside the Commissioner's order and upheld the Assessing Officer's decision to ignore the capital loss for tax computation purposes.

The Tribunal emphasized that statutory provisions govern share transfers, and the actual sale date, as recorded in the company's registers, determines the tax implications. The transfer of shares is deemed effective upon entry in the registers, not upon physical handover of scrips. Given that the shares were sold after the dividend enjoyment, the Tribunal affirmed the Assessing Officer's approach to disregard the loss and tax the entire short term capital gains without offsetting the loss amount.

Ultimately, the Tribunal allowed the Revenue's appeal, overturning the Commissioner's decision and reinstating the Assessing Officer's order. The Tribunal directed the Assessing Officer to take necessary consequential actions in accordance with the law. The judgment highlights the significance of adhering to statutory provisions in determining tax liabilities related to share transactions and the impact of dividend receipt on capital gains computation.