2012 (9) TMI 514 - HC - Income Tax

Disallowance of short term capital loss on sale of mutual funds units - assessee contested that the capital loss on sale of units would be covered by Section 94(7)(b)(i) and in such case the units which are in fact securities are required to be kept only for a period of three months after the recorded date and not for a period of nine months as required under Section 94(7)(b)(ii) - Held that - The submission made by assessee that units are included within the meaning of the word securities and therefore, Section 94(7)(b)(i) is applicable and the period of holding has to be only three months does not impress us. The Parliament has not only used two different terms namely securities and units in Section 94(7)(b)(i) and 94(7)(b)(ii) but has dealt with them separately providing different minimum periods of holding for securities and units . It is settled position in law that Parliament would not have used words in vain and a construction which renders redundant any part of the statute must be avoided. Therefore, units would be governed by the provisions in respect thereof in Section 94(7)(b)(ii). A view to the contrary would render the provisions of Section 94 relating to units otiose. Further, there is no warrant to read the meaning of the word securities as defined in the Securities Contract (Regulation) Act, 1956 to interpret the meaning of the word securities in Section 94(7). Clause (d) of the Explanation to Section 94(7) provides that units shall have the meaning assigned to it in clause (b) of the Explanation to Section 115AB. Section 115AB Explanation (b) defines units to mean a unit of a mutual fund specified in Section 10(23D) or of the Unit Trust of India. The definition therefore identifies the type of unit. It does not equate units with securities or vice versa. Section 10(23D) does not do so either. The reliance upon Section 10(23D) Explanation (c) is entirely misplaced. It refers not to securities but to the SEBI - No substantial questions arises - against assessee.

Summary

Issues:
1. Interpretation of Section 94(7) of the Income Tax Act, 1961 regarding disallowance of short term capital loss on the sale of mutual fund units.
2. Retrospective application of the amendment made to Section 94(7)(b)(ii) by the Finance Act (No.2) of 2004.

Analysis:

Issue 1: Interpretation of Section 94(7) of the Income Tax Act, 1961
The appellant-assessee challenged the disallowance of short term capital loss on the sale of mutual fund units under Section 94(7)(b)(ii) of the Act. The Assessing Officer disallowed the loss as the units were held for less than nine months from the record date, based on the amendment made by the Finance Act (No.2) of 2004. The appellant contended that the amendment should not apply to the period before July 2004 when the loss occurred. The Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the amendment was effective from April 2005. The Tribunal also upheld this decision, stating that the issue of retrospectivity was not within its jurisdiction. The High Court dismissed the appeal, emphasizing that the amendment was effective from April 2005, covering the period of loss incurred by the appellant.

Issue 2: Retrospective application of the amendment
The appellant argued that the loss on capital gain was not affected by the 2004 amendment to Section 94(7) of the Act. The appellant contended that units fell under the definition of securities, thus subject to a three-month holding period. The respondent-revenue argued that the legislature intentionally differentiated between "securities" and "units" in Section 94(7)(b)(i) and (ii), providing separate holding periods. The High Court held that the appellant's new argument before the Court, not raised before the authorities or Tribunal, could not be considered. Even if considered, the Court rejected the argument that units were covered under securities, emphasizing the legislative intent to treat securities and units separately under Section 94(7) of the Act.

In conclusion, the High Court dismissed the appeal, ruling that the questions raised did not present substantial questions of law. The Court affirmed that the provisions of Section 94 regarding units must be interpreted separately from securities, and the amendment applied retrospectively from April 2005.