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TMI Blog2010 (12) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... "then" occurring in the section makes it clear. - On going through the context used in s. 94(7)(b), the object of the legislature, circumstances under which the statute was amended, the conclusion is that the amended provision is applicable to the asstt. year 2005-06. - payment had been made to the Stock Exchange on account of short payment of margin money. This is only a compensatory payment under the rules of the Stock Exchange which is allowable as revenue expenditure as the same is not for infraction of law. Disallowance of protective addition amounting to Rs. 37,95,700 - the entire loss on purchase and sale is to be considered only in this year. - the loss to be disallowed is only the loss which arises on the purchase and sale of such securities or units. Loss on account of valuation has no place in the section. Section 94(7) comes into operation only in the event of sale of securities or units which is taken place in this year. As the loss on sale and purchase of unit is above the dividend declared, the loss to the extent of Rs. 71,41,420 has to be disallowed in this year. - the appeal filed by the assessee is allowed in part and the appeal filed by the Revenue is also all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of technical services and therefore covered u/s 194J for deduction of T.D.S. 2. The Ld. CIT (A) erred in confirming the addition and directing to recomputed the disallowance u/s 14A as made by the Ld. Addl. CIT - 4(1) of Rs. 1,15,077. 3. The Ld. CIT (A) erred in confirming the addition made u/s 94(7) by Ld. Addl. CIT - 4(1) to the extent of Rs. 33,45,420 (erroneously stated as Rs. 37,95,000 in the Order of Hon'ble CIT (A)-IV). 6. The learned counsel for the assessee, Mr. Hiro Rai, filed an amended ground of appeal No. 2 which reads as follows : "The learned CIT(Appeals) was not justified in directing that the disallowance u/s 14A was to be computed as per Rule 8D". 7. Ground No. 1 is against the confirmation of a disallowance made by the AO u/s 40( a )( ia ) of the Act. The assessee had made certain payments on account of transaction charges and V-sat charges to Stock Exchanges. The AO was of the opinion that section 194J is attracted and as the assessee has not deducted tax at source, the expenditure should be disallowed u/s 40( a )( ia ) of the Act. Both the parties submitted that the issue now stands covered in favour of the assessee and against the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the record dates. Mr. Hiro Rai submitted that as per the provisions of section 94(7) as they stood on the date of the transaction, since the redemption dates were beyond three months from the record dates, the provisions of section 94(7) were not applicable. However, he pointed out that section 94(7) was amended by the Finance (No. 2) Act, 2004 with effect from1-4-2005, wherein, in respect of units, the period of redemption was extended to nine months from the record dates. The Finance (No.2) Bill 2004 was introduced in Parliament on8-7-2004 and had received the President's assent on10-9-2004. From this he pointed out that it is clear that the assessee had redeemed the units even prior to the bill being introduced in Parliament. 11. Mr. Hiro Rai advanced three alternative submissions, based on which he claimed that the disallowance made u/s 94(7) is bad in law. 12. The first proposition canvassed by Mr. Hiro Rai was that section 94(7) was inserted to avoid dividend striping transactions which were approved by the Hon'ble Supreme Court in the case of CIT v. Walfort Shares and Stock Brokers P. Ltd. 326 ITR 1. He submitted that to plug this loophole, section 94(7) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st year. He further submitted that when the statute is silent, the view in favour of the assessee should be adopted. For this proposition he relied on the decision of Hon'ble Calcutta High Court in the case of Magma Leasing Ltd. v. CIT 260 ITR 36. 15. The third proposition is that the amended provisions of section 94(7) would not apply to the transaction in the case of the assessee since the transaction had already taken place even prior to the introduction of Finance (No. 2) Bill 2004. 16. The learned DR, Mr. Jitendra Yadav, on the other hand, opposed the contentions of the assessee and submitted that the undisputed fact is that the assessee gets hit by the provisions of section 94(7)( b )( ii ) which has been amended with effect from 1-4-2005 for the assessment year 2005-06. He placed reliance on the decision of the Amritsar Bench of the Tribunal in the case of Suri Sons v. ACIT 124 TTJ (Asr.) 800 wherein it is held that, the amendment would come into force at the beginning of the relevant assessment year and that such amendment would govern the case, though the amendment itself was made after the income in question was earned. 17. Coming to the first propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale of units of mutual funds. He submitted that there is no ambiguity in the statute and hence interpreting the same in the manner beneficial to the assessee does not arise. He relied on the order of the CIT(Appeals) 20. In reply, the learned counsel for the assessee distinguished the order of the Amritsar Bench of the Tribunal in the case of Suri and Sons by submitting that the sales in that case, had been effected, even after the Presidential assent to the Finance (No. 2) Bill 2004. He further tried to distinguish the judgment by submitting that the Tribunal was dealing in capital gain and not stock in trade. 21. Both the parties submitted that ground No. 13 of the departmental appeal relates to same issue of disallowance u/s 94(7) and that the submissions that they have made in the assessee's appeal are relevant in the Revenue's appeal also. He submitted further submissions on the Revenue's ground would be addressed at the time of hearing of the Revenue appeal. 22. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee should buy securities or units within a period of three months, prior to the record date; b) should sell or transfer such securities within a period of three months from the record date or in cases of units within a period of nine months from the record date and c) the dividend or income on such securities or units is exempt from tax. The wording "then" occurring in the section makes it clear. 26. When all these three conditions are fulfilled, then only the loss, if any, arising on account of such purchase and sale of securities/units would not be allowed to the extent of dividend income. In the case on hand, all the three conditions are fulfilled only in this year. Thus, in our opinion, the loss has to be disallowed only in the current year. The other aspect that is clear from the section is that, the loss is defined and means, loss on account of purchase and sale of securities/unit. Decrease in value of investment is not hit by this section. The cost of purchase must be reduced from the sale proceeds and loss determined. When such an exercise is done then the loss would be Rs. 1,11,70.686.62 against the dividend received or receivable of Rs. 71,41,420 27. Comi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we find that the issue is covered against the assessee and in favour of the Revenue by the decision of the Amritsar Bench of the Tribunal in the case of Suri Sons v. Addl. CIT 124 TTJ (Asr.) 800. The Hon'ble Tribunal held as follows : "There was an amendment to cl.( b ) to s., 94(7) w.e.f. 1st April, 2005. Under the IT Act, though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year, unless otherwise stated or implied. Any amendment which is in force at the beginning of the relevant assessment year must govern the case though the amendment is made after the income under assessment year under consideration is earned. In other words, the IT Act as it stands amended on 1st April of a finance year must apply to the assessment for that year. It is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication. The subject of charge is not the income of the year of assessment, but the income of the previous year. As the Finance Acts come into force on the first day of April each year, therefore, the law to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra). Respectfully following the same, we dismiss ground Nos. 1 to 7. 34. Ground Nos. 8 to 12 are on the issue of allowability of penalty paid to stock exchange for violation of bye-laws of the stock exchange. This issue is covered in favour of the assessee and against the Revenue by the decision of the Tribunal in the case of ACIT v. Ramesh M. Damani ITA No. 5143/Mum/2006 where at para 3.1 it is held as follows : "3.1 After hearing both the parties, we find that the payment had been made to the Stock Exchange on account of short payment of margin money. This is only a compensatory payment under the rules of the Stock Exchange which is allowable as revenue expenditure as the same is not for infraction of law. The issue is covered by the decision of Mumbai Bench of Tribunal in case of Classic shares and Stock Trading Services Ltd. (11 SOT 377) in which similar payment have been held to be of compensatory nature and allowable as revenue expenditure. Respectfully following the same we upheld the order of the CIT(A)." Respectfully following the same, we dismiss these grounds. 35. Ground No. 13 reads as follows : "On the facts and in the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its valuation of closing stock and such loss becomes disallowable because of the provisions of sec. 94(7) on account of redemption of units in the next year, then the loss on account of valuation of closing stock to the extent of loss to be disallowed as per the provisions of sec. 94(7) is required to be written back to the accounts of the assessee as income of the next year. This is as per the accounting policies followed regularly by all the assesses. Hence as per this view, the loss of Rs. 37,95,700 should be considered as income of the A.Y. 2005-06 itself. On Protective basis, this amount is added to the total income of the assessee for the A.Y. 2005-06. Addition on this account comes to Rs. 37,95,700 and total addition on account of sale and purchase of units of mutual funds as per the provisions of sec. 94(7) comes to Rs. 71,41,120." Aggrieved, the assessee carried the matter in appeal. The first appellate authority at para 4.3 page 12 of his order held as follows : "4.3 I have gone through the order of the A.O. and submission of the appellant. So far as the disallowance of loss of Rs. 37,95,700 made on protective basis is concerned, there does not appear to be any just ..... X X X X Extracts X X X X X X X X Extracts X X X X
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