2016 (1) TMI 122 - AT - Income Tax

Disallowance of short- term capital loss - whether loss would have been allowed if the sale were made after nine months as against the applicable law of three months in the month of June 2004 Held that - There is no dispute that prior to amendment by Finance Act 2004 in the provisions of sec.94(7) of the Act, loss if any, arising from the purchase and sale of securities or units acquired within a period of three months prior to record date and unsold within 3 months after such record date, then the loss on sale of units shall be ignored to the extent of the amount of the dividend or income received which is exempt as per the provisions of the Act. Post amendment the requirement of holding the units has been enhanced to a period of 9 months from the recorded date and therefore, as per amended provisions of sec.94(7), if any person buys or requires any unit within a period of 3 months prior to recorded date and sales/transfers the same within a period of 9 months after such record date, then the loss if any arising from such sale/purchase shall be ignored to the extent of the amount of dividend or income received or receivable which is exempt as per the provisions of the Act. The transaction in question was completed prior to the bill proposing the amendment to be introduced then it is not disputed that the assessee could not visualize the subsequent amendment in the provisions of sec.94(7) and enhancement of tax liability as per the subsequent amendment. When the incident of tax being sale of units occurred prior to the introduction of the bill proposing the amendment in section 94(7) then the additional tax liability cannot be fastened on the transactions of and sale of securities/units by virtue of subsequent amendment. Accordingly, in view of the above discussion and in the facts and circumstances of the case, we hold that by virtue of the amendment vide Finance Act 2004 in section 94(7) no additional tax liability can be imputed on the transaction of sale of M.F.units completed prior to the introduction of bil proposing the amendment. Hence, the addition made by AO by invoking the provision of section 94(7) is deleted. - Decided in favour of assessee

Issues:
1. Disallowance of short-term capital loss under sec.94(7) of the Income-tax Act, 1961.
2. Interpretation of the applicability of sec.94(7)(b)(ii) of the Act to the transactions of the assessee.
3. Whether subsequent amendments imposing new liabilities should be treated as prospective or retrospective.
4. Application of law on the date of transaction for determining tax liability.
5. Consideration of case laws in determining tax liability.
6. Whether additional tax liability can be imposed on transactions completed before the introduction of amendments.

Analysis:

1. The Assessing Officer disallowed the short-term capital loss incurred by the assessee under sec.94(7) of the Income-tax Act, 1961. The AO found that when units were sold within 9 months of the record date and the assessee received dividends, the short-term capital loss on those transactions had to be disallowed. The AO specifically focused on transactions related to Birla Yield Plus, Chola Triple Ace, and Templeton India Growth funds.

2. The CIT(A) upheld the AO's decision, stating that sec.94(7)(b)(ii) of the Act was applicable to the assessee's case. The CIT(A) referred to the judgment of the Hon'ble Supreme Court in a relevant case to support this view. The assessee argued that the transactions took place before the amendment came into effect, and therefore, the amended provisions should not apply. However, the CIT(A) disagreed and held that the amended provisions were applicable.

3. The assessee contended that subsequent amendments imposing new liabilities should be treated as prospective and not retrospective. The assessee argued that it was not foreseeable at the time of the transactions that such amendments would be introduced. The AR relied on relevant case law to support this argument, emphasizing that tax liability arises at the fixed point of time, i.e., the date of transfer.

4. The Tribunal analyzed the provisions of sec.94(7) both before and after the amendment by the Finance Act 2004. The Tribunal observed that tax planning within the framework of the law is permissible. It noted that if a transaction was completed as per existing law without foreseeing any subsequent changes that would enhance tax liability, such changes should not be applied retrospectively to completed transactions.

5. The Tribunal referred to the judgment of the Hon'ble Gujarat High Court and emphasized that the taxable event is the date of transfer, and tax liability should be determined based on the law in force at that time. The Tribunal concluded that since the transactions in question were completed before the proposed amendment, no additional tax liability could be imposed on the assessee. Therefore, the addition made by the AO under sec.94(7) was deleted.

6. The Tribunal allowed the appeal, holding that the additional tax liability imposed by the AO was not applicable to transactions completed before the introduction of the amendments. The decision was pronounced in open court on 13th November 2015.

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