2013 (6) TMI 534 – ITAT KOLKATA – TMI – – Disallowance u/s 14A – CIT(A) restricted it to 1% only – Held that:- As on the issue of disallowance u/s. 14A, this Bench of the Tribunal has been taking a consistent view that this disallowance should be restricted to 1% of dividend income. Following the same, in this appeal also we hold that the disallowance u/s 14A for earning exempt dividend income should be restricted to 1% of dividend income.
Disallowance u/s. 94(7) – assessee has only challenged disallowance of loss in respect of transfer of units of Pru. ICICI Power Fund on the ground that all the three conditions as laid down in section 94(7) are not satisfied in this transaction – Held that:- In respect of Pru. ICICI Power Fund the units were purchased on 11.7.2003 and date of dividend was 24.10.2003 and 26.12.2003, therefore, the first condition as laid down in clause (a) of Sec. 94(7) that the units be purchased or acquired within a period of three months prior to the r
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as unjustified and wrong in directing the Assessing Officer to restrict the disallowance under section 14(A) of the I. T. Act as per the calculation of Rule 8D which came into force face only with effect from Assessment Year 2008-09 whereas the subject Appeal is for the Assessment Year 2005-06. (b) That the CIT(A) was unjustified in passing the orders for disallowance for the amount under section 14(A) though there is no expenses incurred by the company and erred in not following the judgment in the case of CIT Vs. United Colleries Pvt. Ltd. 1994 ITR 203/857 of Calcutta High Court). 2. That the Ld. CIT(A) was wrong in confirming the disallowances of ₹ 75,505/- under section 94(7) of the Income Tax Act though this provision was not applicable as the Mutual Fund units was acquired beyond 3 months from record date as stated by the Assessing Officer in his Assessment Order itself. 3. The Ld. CIT(A) was not justified in confirming the disallowance of certain expenses incurred on accou
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rities, mutual funds etc. The company also derived income during the year from dividend in course of carrying its business activities the company incurred expenditure on various administrative heads including salary electricity, telephone, staff welfare etc. He also stated that dividend income is incidental to the investment business which the company has been carrying. Certain shares/units were held as investment from earlier years and dividend accrued on the same. The expenses incurred are statutorily required to maintain and keep the company its accounts and compliances of various legal formalities and will have to be incurred in the same manner even if there is no dividend income or exempted income. On perusal of the reply of the assessee and on perusal of the accounts, the Assessing Officer held that the assessee failed to bifurcate the expenditure claimed in the light of section 14A of the Act and have applied pro rata basis the expenses claimed and disallowed a sum of ₹ 1,
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end and disallowance is uncalled for. The assessee also submitted that in case CIT vs United Collieries Pvt. Ltd (1993) 203 ITR 857 (Cal) and in case of ITO vs AP Financial Corporation (1984) 8 ITD 473 it has been held that the expenditure towards the dividend cannot be disallowed if actually there was no expenses. The Ld CIT (Appeal) did not appreciate these facts and though did not agree with A.O s disallowance of proportionate expenses but direct that the Rule 8D should be applied and the expenses disallowance should be restricted to the amount calculated under Rule 8D. The Ld. CIT(A) also did not appreciate that Rule 8D was applicable only from 24.03.2008 and the relevant assessment year under appeal is much earlier to this. He, therefore, submitted that the Ld. CIT(A) was wrong in not giving the relief by deleting the disallowance of expenses made by the Assessing Officer u/s. 14A of the Act and prayed before the bench to set aside the orders of the lower authorities and delete th
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tal loss of ₹ 1,03,842.17 on transfer of MF as claimed by the assessee attracts the provision of sec. 94(7) of the I. T. Act because the funds were acquired within 3 months from the record date of dividend and the original units were transferred within 9 months from the record date and suffered loss. During the course of hearing, assessee was asked to show cause as to why the provision of sec. 94(7) should not be applicable for the above loss. No satisfactory reply was given. Hence, the above loss of ₹ 1,03,842.17 was ignored as per the provision of section 94(7) of the I. T. Act and the same was added to the total income of the assessee. In appeal, the Ld. CIT(A) confirmed this action of the Assessing Officer. Aggrieved by the said order, now the assessee is in appeal before us. 7. At the time of hearing before us, the Ld. Counsel for the assessee submitted the following : The brief facts relating to this issue are that the assessee is a private limited company engaged in
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edemption of units are reproduced below in the following chart : Particulars Purchase date Purchase price Units purchased Dividend date Re-invested Dividend Amount Sale date Units sold Sale price Gain/loss DSP Merrill Lynch Oppor Fund 12/12/2003 994,098.44 59455.647 @ 16.72/unit 19/01/2004 178,366.00 13/04/2004 59349.16 @16.51/Unit 981,612.73 – 12,485 .68 Pru. ICICI Power (D) 23/07/2003 100,000.00 7067.1378 @ 14.15/unit 25/07/2003 14,134.28 19/04/2004 7067.1378 @ 12.19 86,148.40 – 13,851 .59 Pru.ICICI Power (D) 11/07/2003 300,000.00 16565.4335 @ 18.11/unit 24/10/2003 26/12/2003 77,505.49 94,805.82 19/04/2004 17626.321 @ 12.19 214,864.85 – 85,135 .14 During the year under appeal, the assesee earned dividend income but due to the effect of the above transactions there was a capital loss of ₹ 1,03,842.17 (12485.68 +13851 +77505.49). The Assessing Officer, however, disallowed the said loss which was incurred on sale of aforesaid units alleging that the said transactions are hit by th
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amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax. In view of the foregoing, it is submitted that the provisions of sec.94(7) are not applicable to the assessee in respect of loss of ₹ 77,505/- (being restricted to dividend income) for transfer of units of Pru. ICICI Power Fund as the following three conditions are cumulatively required to be satisfied by the assessee in order to fall within the purview of sec.94(7) of the IT Act, which are narrated as under : (i) The shares/units must be purchased within a period of three months prior to the record date; and (ii) a) The shares must be sold within a period of three months after such date; or b) The units must be sold within a period of nine months after such date; and (iii) The dividend income earned from such securities/units should be exempt from tax. In the instant case, in case of purchase and sale of units of DSP Merril
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dition is also satisfied. Hence, the provisions of sec. 94(7) of the I. T. Act are applicable in respect of transfer of these units of Pru. ICICI Power fund. However, in respect of another set of units of Prudential ICICI Power Fund: The date of purchase was 11th July, 2003. The record date for declaration of dividend was 24th October, 2003. Therefore, the 1st condition i.e. purchase of the units within a period of 3 months prior to the record date is not satisfied. This itself shows that the provisions of section 94(7) of the Act arc not applicable in respect of transfer of such units. Again, these units were sold on 19th April, 2004 which means that the 2 condition viz, that these units should be sold within a period of 9 months from the record date is satisfied. However, although the second condition is satisfied, the capital loss incurred by the assessee on redemption of aforementioned units of Pru. ICICI Power Fund is not liable for disallowance under sec.94(7) in view of the fact
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for incorporating The relevant portions of the said circular is reproduced hereunder for the sake of ready reference. 56. Measures to curb creation of short-term losses by certain transactions in securities and units. 56.1. Under the existing provisions contained in Section 94, whether the owner of any securities enters into transactions of sale and re-purchase of those securities which result the interest or dividend in respect of such securities being received by a person other than such owner, the transactions are to be ignored and the interest or dividend from such securities is required to be included in the total income of the owner. 56.2. The existing provisions did not cover a case where a person buys securities (including units of a mutual fund) shortly before the record date fixed for declaration of dividends, and sells the same shortly after the record date. Since the cum-dividend price or which the securities are purchased would normally be higher than the ex-dividend pric
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of such person. As is clearly evident, the aforesaid circular uses the word and and not or . In view of the same, the intention of the Board was very clear that all the conditions prescribed in sec.94(7) of the Act are to be cumulatively satisfied. In the instant case, the conditions of three months before and nine months after the record date for purchase and sale respectively have not been satisfied in respect of aforementioned units of Pru-ICICI Power Fund cumulatively. In this regard, perusal of the statements of demat account of the assessee as maintained in CIII Bank, copies of which were already enclosed during the course of assessment, confirms the purchase date, record date and redemption date of the said units of mutual fund. Therefore, the allegation of the Ld. CIT(A) that the assessee has failed to bring on record any evidence in support of its claim is also not correct. Examination of these statements clearly shows that purchase of these units were made more than three mon
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mstances, one should construct the provisions of sec.94(7) in such a manner so as to place least restriction on an individual s i.e. assessee s rights. Therefore, in view of above, it is submitted that all the conditions laid down in clauses (a), (b) and (c) have to be satisfied before the said provisions can be applied in respect of transfer of aforementioned units of Pru. ICICI Power fund. In this connection, reliance is placed on the judgment of the Hon ble ITAT Delhi in the case of Income Tax Officer Vs. Shambhu Mercantile Ltd. reported in (2008) 116 TTJ 784, wherein it was held as follows : For application of sub-section (7) of sec. 94, all the three conditions mentioned in cls. (a), (b) and (c) thereof must be cumulatively satisfied; conditions of three months before and after record date for purchase and sale respectively of units having not been satisfied cumulatively in all the transactions, loss incurred in those transactions could not be disallowed by invoking sub-s. (7) of
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ion of all the three conditions. Thus, the view of the CBDT is also that all the conditions prescribed in sec. 94(7) are to be cumulatively satisfied and not otherwise. Therefore, in view of the above, it is submitted that the disallowance made by the Assessing Officer and sustained by the CIT on account of the claim of non-applicability of the provisions of sec. 94(7) of the Act in respect of transfer of aforementioned units of Pru. ICICI Power Fund on the alleged ground that each of the conditions laid down in sec. 94(7) is independent and if an assessee satisfies any one of the conditions, then he should be held to be covered within the mischief of the law, is bad in law and uncalled for. 8. The Ld. D.R. on the other hand, relied on the orders of the lower authorities. 9. I have heard the rival submissions and perused the material available on record and also the case laws cited by the Ld. Counsel for the assessee. I find that during the year under appeal, the assessee purchased and
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nt dates of purchase and sale of units and date of receipt of dividend are not in dispute. In respect of Pru. ICICI Power Fund the units were purchased on 11.7.2003 and date of dividend was 24.10.2003 and 26.12.2003, therefore, the first condition as laid down in clause (a) of Sec. 94(7) that the units be purchased or acquired within a period of three months prior to the record date is not satisfied. Therefore, following the ratio as laid down in the judgment of the Hon ble ITAT, Delhi bench in the case of Income Tax Officer Vs. Shambhu Mercantile Ltd. reported in (2008) 116 TTJ 784, wherein it was held that for application of sub-section 7 of section 94 all the three conditions mentioned in clauses (a), (b) and (c) thereof must be cumulatively satisfied, I hold that the provisions of section 94(7) are not attracted in respect of this transaction and, therefore, the authorities below are not justified to disallow the claim of the assessee in respect of loss suffered by him on sale of u
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