2015 (4) TMI 442 - HC - Income Tax

Business loss incurred in the course of purchase and sale of mutual fund units - whether is an expenditure incurred for earning exempt dividend income and hence not allowable under Section 14-A ? - whether the Tribunal was right in holding that the transaction of purchase and sale of units had not taken place without appreciating the evidence produced and after holding that loss on sale of shares is an expenditure for earning dividend income? - whether Section 14-A of the Act is invokable by the Department in the transaction in issue? Held that - In decision of Commissioner of Income Tax - Vs - Walfort Share & Stock Brokers P. Ltd. 2010 (7) TMI 15 - SUPREME COURT wherein identical issue fell for consideration and the Supreme Court while negativing the stand of the Department that the transaction in the said case would fall under Section 14-A, distinguished the stand of the Department, in bringing the case under Section 14-A holding that the loss in the sale of units could be disallowed on the ground that the impugned transaction was a transaction of dividend stripping and, therefore, it was alleged to be a colourable device. Return of investment cannot be construed to mean expenditure and if it is construed to mean expenditure in the sense of physical spending still the expenditure was not such as could be claimed as an allowance against the profits of the relevant accounting year under Sections 30 to 37 of the Act and, therefore, Section 14A cannot be invoked. The Supreme Court, in the above decision, further fortified this issue by stating that such a transaction was curbed by the introduction of Section 94 (7) in Finance Act, 2001 with effect from 1.4.02 relevant to the assessment year 2002-2003. In view of the abovesaid decision of the Supreme Court, the plea of the Department that the transaction would attract Section 14-A of the Act fails and, this Court holds that the assessee is entitled to claim the amount as business loss during the assessment year in question. - Appeals are allowed setting aside the order of the Tribunal - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 14-A of the Income Tax Act.
2. Validity of the Tribunal's decision on the transaction of purchase and sale of mutual fund units.
3. Consideration of the Supreme Court's decision in the case of Commissioner of Income Tax vs. Walfort Share & Stock Brokers P. Ltd.

Issue-wise Detailed Analysis:

1. Applicability of Section 14-A of the Income Tax Act:
The primary issue was whether the Tribunal was correct in holding that the business loss incurred in the purchase and sale of mutual fund units was an expenditure for earning exempt dividend income and thus not allowable under Section 14-A of the Income Tax Act. The court noted that the appellant/assessee had claimed a dividend of Rs. 98,47,325 as exempt under Section 10 (33) of the Act. The assessing officer disallowed the claim of expenditure/loss in the purchase and sale of units, which was upheld by the CIT (Appeals) and the Tribunal. The appellant argued that Section 94 (7) of the Act, introduced by the Finance Act, 2001, effective from 1.4.2002, was not applicable to the assessment year 2001-2002. The court agreed, stating that Section 94 (7) was not enforceable for the assessment year in question.

2. Validity of the Tribunal's Decision on the Transaction:
The Tribunal had held that the transaction of purchase and sale of units did not take place, ignoring the evidence produced. The court examined the details of the transaction, where the assessee had accepted a loan from M/s. Kotak Mahindra Finance Ltd. to purchase mutual fund units, received dividends, and then redeemed the units at a loss. The court found that the transaction was genuine and that the assessee had incurred a business loss. The court referred to the Supreme Court's decision in Commissioner of Income Tax vs. Walfort Share & Stock Brokers P. Ltd., which clarified that such transactions could not be equated to those covered under Section 94 (7) for the relevant assessment year.

3. Consideration of the Supreme Court's Decision:
The court relied heavily on the Supreme Court's decision in Commissioner of Income Tax vs. Walfort Share & Stock Brokers P. Ltd., which dealt with a similar issue. The Supreme Court had held that the loss on the sale of units could not be considered as expenditure in relation to earning exempt dividend income under Section 14-A of the Act. The court noted that the insertion of Section 14-A was to prevent the deduction of expenses incurred for earning exempt income against taxable income. However, in the present case, the transaction did not fall under Section 14-A as there was no proximate cause for disallowance related to the tax-exempt income. The court concluded that the assessee was entitled to claim the amount as a business loss for the assessment year in question.

Conclusion:
The court allowed the appeal, setting aside the Tribunal's order and holding that the assessee was entitled to claim the business loss during the assessment year 2001-2002. The substantial questions of law were answered in favor of the assessee, and there was no order as to costs.