2019 (1) TMI 1143 - HC - Income Tax

Allowability of business loss - loss arising out of sale of mutual fund units - applicability of provision of Section 94(7) - record date of purchase - Held that - Two securities of KGILT were purchased on the record date coming on 21.09.2003. The computation has to be made from 22.09.2003 and the sale made on 22.12.2003 is removed by one day from the expiry of the three month period. Likewise, the unit purchased of Sundaram Bond Annual Plan on the record date, 07.11.2003 was sold on 09.02.2004. The three month period expires on 7.2.2004, two days before the sale was effected. Hence in these three items the sale was made after the period provided under Section 94(7)(1)(b). As to the other three purchases made of Sundaram Bond Half Yearly; it was on the record date 26.12.2003. Computing the three months period from 27.12.2013 it expires on 26.03.2004 when the sale was made. The said sale has to be found as having been made within the three months period. Hence with respect to the units purchased and sold of Sundaram Bond Half Yearly Section 94 squarely applies. We answer the question partly in favour of the revenue and partly in favour of the assessee. Addition u/s 14A - Held that - No substantial question of law since the Tribunal has made a remand. We also notice that as of now the issue stands covered in favour of the assessee in Commissioner of Income Tax v. Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA as found that the machinery provisions having been brought under the Rules only from the assessment year 2007-08; the disallowance under Section 14A could be only from that year. We hence decline to answer the question of law. Staff Welfare Scheme - whether amount credited to the Staff Welfare Scheme as akin to the sundry creditors and hence a permissible deduction? - Held that - since the employer having shown the amount in the salary slip of the employee and retained the same with the employer; it becomes an income includable under Section 2(24)(x). When the amount is included as income of the employee, then retention of the same by the employer, makes it the income of the employer, makes otherwise exempted or permitted deduction under the Act. Deduction under Section 36(1)(va) permeability - We find from the order of the First Appellate Authority that the amounts retained with the employer and the interest accrued in the name of a particular employee, was taxed in the hands of that employee. Hence though there is a common fund and accrual of interest, the same has to be treated as having been credited separately on the employees account in the relevant fund; the principal and interest accrued, being eventually payable to the employee on his superannuation. We hence find that the deduction under Section 36(1)(va) is permissible. We find that the assessee had claimed it as expenditure under Section 37 which however, is not permissible. The Tribunal s finding as to treating it as Sundry Credit also cannot be sustained, but we answer the question of law in favour of the assessee and against the revenue in so far as the deduction being permissible under Section 36(1)(va).

Summary

Issues Involved:
1. Interpretation of Section 94(7) regarding the treatment of loss arising from the sale of mutual fund units as a business loss.
2. Deletion of disallowance made under Section 14A of the Income-Tax Act and remanding the matter for fresh consideration.
3. Determination of whether the amount credited to the Staff Welfare Scheme is akin to sundry creditors and hence a permissible deduction.

Analysis:

Issue 1: Interpretation of Section 94(7)
The Tribunal examined the applicability of Section 94(7) concerning the purchase and sale of securities or units around the record date and the exemption of dividend income. It was concluded that the conditions of Section 94(7) must be met, including the acquisition within three months from the record date, sale within three months after the date, and receipt of exempted income. The Tribunal disagreed with the CIT appeals, emphasizing that even purchases made on the record date with the intention to receive dividend income should satisfy the conditions of Section 94(7).

Issue 2: Disallowance under Section 14A
The Tribunal declined to address the issue of disallowance under Section 14A, citing a previous judgment that disallowance under this section could only be made from a specific assessment year. The Supreme Court's ruling clarified that such disallowance could only be applied from a particular year, leading to the refusal to answer the question of law in this case.

Issue 3: Treatment of Staff Welfare Scheme
Regarding the Staff Welfare Scheme, the Assessing Officer initially disallowed the expenditure, but the Tribunal found it akin to sundry credit and allowed it as a deduction. However, the court disagreed with this interpretation, stating that the amount, once included in the employee's income, cannot be retained by the employer and claimed as a deduction. The court analyzed the provisions of Section 36(1)(va) and concluded that the deduction could be claimed if the sum was credited to the employee's account in the relevant fund before the due date.

In a subsequent year, a similar issue arose regarding the Staff Welfare Scheme, with a different outcome. The court noted a mistake in previous findings and remanded the matter to the Assessing Officer for verification of the claimed expenditure, distinguishing between contributions to the Staff Welfare Scheme and other business expenses under Section 37.

In conclusion, the judgment addressed complex issues related to the interpretation of tax laws, specifically Section 94(7), Section 14A, and the treatment of contributions to the Staff Welfare Scheme under different provisions of the Income-Tax Act. The court's detailed analysis and application of legal principles provide clarity on these matters, ensuring a fair and reasoned decision.