2008 (2) TMI 467 - AT - Income Tax

Disallowing exemption under section 10(34) - Avoidance Of Tax in other words Interest stripping Transaction - Transactions did not satisfy all the conditions as specified u/s 94(7) - expression 'or' nor the expression 'and' - Clauses (a), (b), and (c) of section 94(7) need to be satisfied cumulatively or not? - HELD THAT - We find that a plain reading of the provision of section 94(7) of the Act shows that it has neither used the expression 'or' nor the expression 'and' . We would place a construction on the provisions of section 94(7) so as to place least restriction on an individual's (assessee) rights. Therefore, hold that the claim of the assessee that all the conditions laid down in clauses (a), (b), (c) have to be satisfied before the said provisions can be applied in a given case, should be accepted. Therefore, the absence of word 'or' at the end of clauses (a) and (b) does not provide for the interpretation that sub-section (7) of section 94 apply, where transactions satisfy at least one condition. Rather, simple reading of the clauses even without the expression 'and' can lead only to one condition that all the three conditions cumulatively is required to be satisfied before invoking section 94(7). The use of words as 'such person', 'such unit', 'such date', 'such securities or units' in clauses (b) and (c) of section 94(7), also indicates that the three clauses have to be read together . Thus they advocate for cumulative application of conditions and not otherwise. In view of the CBDT Circular, which explains the Finance Act, 2001 is that all the conditions prescribed in section 94(7) are to be cumulatively satisfied and not otherwise. Therefore, we find no reason to interfere with the order of learned CIT(A) and the grounds raised by revenue in appeal, being devoid of merit, are rejected. In the result, the appeal by the revenue is dismissed.

Issues Involved:
1. Deletion of addition by disallowing exemption under section 10(34).
2. Interpretation of conditions prescribed in section 94(7) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition by Disallowing Exemption under Section 10(34):
The revenue's primary contention was that the learned CIT(A) erred in deleting the addition of Rs. 1,88,47,816 by disallowing the exemption under section 10(34) claimed by the assessee. The assessee, a public limited company engaged in trading stocks, shares, and mutual fund units, had purchased units of mutual funds and subsequently sold them, incurring a capital loss. The assessee also received dividend income on these units, which was claimed exempt under section 10(34) of the Act. The Assessing Officer (AO) disallowed the loss incurred on the sale of these units, alleging that the transactions were hit by the provisions of section 94(7) of the Act.

2. Interpretation of Conditions Prescribed in Section 94(7):
Section 94(7) of the Act, as it stood prior to its amendment effective from 1-4-2005, stipulated three conditions that needed to be cumulatively satisfied to disallow the loss arising from the purchase and sale of securities or units. These conditions are:
- (a) The securities or units must be purchased within three months prior to the record date.
- (b) The securities or units must be sold within three months after the record date.
- (c) The dividend income received from such securities or units should be exempt from tax.

The assessee argued that the provisions of section 94(7) were not applicable because not all three conditions were cumulatively satisfied in their transactions. For instance, in the case of Tata Index Fund Nifty Plan Option-A, the units were purchased on 25-11-2003, and the first dividend was received on the same date. These units were sold on 9-3-2004, which is more than three months after the record date, thus not meeting the second condition. Similarly, for the IL & FS Index Fund Nifty Plan, the units were purchased on 16-12-2003, and the dividend was received on the same date. These units were sold on 17-3-2004, again more than three months after the record date, thus not meeting the second condition.

The AO, however, contended that the provisions of section 94(7) would apply even if any one of the conditions was satisfied, alleging that the transactions were a case of dividend stripping aimed at creating short-term losses for adjusting against other taxable profits.

The CIT(A) held that all three conditions prescribed in section 94(7) must be cumulatively satisfied for the provisions to apply. This interpretation was supported by Circular No. 14/2001 issued by the Central Board of Direct Taxes, which used the word 'and', indicating that all conditions must be met together.

Upon appeal, the Tribunal agreed with the CIT(A)'s interpretation, stating that a plain reading of section 94(7) shows that it does not use the expression 'or' or 'and' explicitly. The Tribunal noted that the absence of 'or' implies that the conditions must be read together and satisfied cumulatively. The Tribunal also referenced other sections of the Income-tax Act where the Legislature explicitly used 'or' to indicate that satisfying any one condition was sufficient. The Tribunal concluded that the language and the use of words like 'such person', 'such unit', 'such date', 'such securities or units' in section 94(7) support the interpretation that all conditions must be cumulatively satisfied.

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order that the provisions of section 94(7) were not applicable as all conditions were not cumulatively satisfied in the assessee's transactions. Consequently, the capital loss incurred by the assessee on the redemption of mutual fund units was not liable for disallowance under section 94(7).

Conclusion:
The appeal by the revenue was dismissed, affirming that all conditions prescribed in section 94(7) must be cumulatively satisfied for the provisions to apply, and the exemption under section 10(34) claimed by the assessee was valid.

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