Sagrika Goods & Services Pvt. Ltd. Versus Income-tax Officer, Wd-7 (3), Kolkata
Income Tax
2013 (6) TMI 534 – ITAT KOLKATA – TMI
ITAT KOLKATA – AT
Dated:- 24-9-2010
I.T.A No. 1278/Kol/2010
Income Tax
Sri D. K. Tyagi, JM,JJ.
For the Appellant : Sri Ravi Tulsiyan
For the Respondent : Sri R. K. Paul
ORDER
This appeal has been preferred by the assessee against the order of the Ld. CIT(A), Kolkata dated 31.03.2010 for assessment year 2005-06 on the following grounds :-
“1(a) Under the facts and circumstances of the case Ld. CIT(A) was 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
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counts, the Assessing Officer observed that during the relevant previous year the assessee company had earned dividend income, profit on sale/purchase of mutual fund units, shares and sale of computer. The company debited expenses under various heads including electrical expenses but could not bifurcate the same in relation to income not included in total income i.e. dividend income in the light of section 14A of the Act. On being asked to explain, the assessee stated that the assessee company is engaged in the business of trading investment in shares, securities, 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
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mitted that the assessee Company is a Private Ltd Company engaged in the business of shares & securities, mutual fund and also carrying trading activities. In course of assessment the A.O disallowed certain expenses u/s.14(A) against the dividend income received by the company. The assessee filed Appeal before CIT (Appeal) – VIII, Cal and submitted that the dividend Income is not a regular income and is incidental to the vestment Business carried out by it. The assessee also explained that no specific expenditures have been incurred to earn the dividend 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 b
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sallowance 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. The Assessing Officer is accordingly directed to do so and work out the quantum of disallowance.
This ground of appeal of the assessee is allowed as directed above.
6. Ground No. 2 relates to confirming the disallowances of Rs. 75,505/- u/s. 94(7) of the I. T. Act. Facts of the case as observed by the Assessing Officer are that the total loss of Rs. 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
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ch Opport. Fund, loss of Rs. 13,851/- on transfer of Pru. ICICI Power Fund and again loss of Rs. 77,505/- which was restricted to dividend income, out of loss of Rs. 85,135.14 for transfer of Pru. ICICI Power fund. The loss incurred on sale of such units was set off against the profits on sale of other units of mutual funds. The assessee also received dividend income on the aforesaid units, which was claimed exempt u/s. 10(34) of the Act. In this connection, the relevant date of purchase, date of receipt of dividend and date of redemption 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
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od after the amendment w.e.f lst April, 2005 which reads as follows :
“(7) Where-
(a) any person buys or acquires any securities or unit within a period of three months priror to the record date;
**(b) such person sells or transfers-
(i) such securities within a period of three months after such date, or
(ii) such unit within a period of nine months after such date;
(c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, f any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the 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 Rs. 77,505/- (being restricted to dividend income) for transfer of units of Pru. ICICI Po
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e sold within a period of 9 months from the record date is also satisfied and hence, the provisions of sec.94(7) is attracted in case of loss suffered from transfer of units of DSP Merrill Lynch.
As far as the purchase and sale of units of Prudential ICICI Power Fund are concerned in one case, the date of purchase was 23rd July, 2003 and the record date for declaration of dividend was 25th July, 2003 which means that the 1st condition i.e., purchase of units within 3 months prior to the record date is satisfied. These units were sold on 19th April, 2004 within 9 months from the record date and, therefore, the second condition 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 condi
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be satisfied. Accordingly, the AO held that this was a case of dividend stripping and managed for creation of short-term losses only for adjustment of losses against the other taxable profit, which is sought to be prohibited by the provisions of sec.94(7) of the Act.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A) who also confirmed the said addition.
In this connection, it may be relevant to note here that while making aforesaid addition, the Assessing Officer completely brushed aside Circular No. 14 of 2001 issued by the CBDT explaining the provisions of Finance Act, 200l and the reasons 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-purc
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the Act has inserted a new sub-section (7) in the section to provide that where any person buys or acquires securities or units within a period of three months prior to the record date fixed for declaration of dividend or distribution of income in respect of the securities or units, and sells or transfers the same within a period of three months after such record date, and the dividend or income received of receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or interest, in the computation of the income chargeable to tax 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 pu
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used in other portions of the Income Tax Act, 1961, where such requirement for satisfying one of the many conditions or all conditions cumulatively is laid down. As for example, where the legislature desired that all conditions are to be satisfied cumulatively, the language used in provisions of sec.80-O (for instance), where the conditions of receipt of income in convertible foreign exchange and such income should be for services rendered outside India are cumulatively required to be satisfied. A plain reading of the provision of sec.94(7) of the Act shows that it has neither used the expression “or” nor the expression “and”. Under such circumstances, 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
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lead only to one condition that all the three conditions cumulatively are required to be satisfied before invoking sec.94(7). Further, the use of words as 'such person', 'such unit', 'such date', 'such securities or units' in clauses (b) and (c) of sec. 94(7), also indicates that the three clauses have to be read together. Thus, they advocate for cumulative application of conditions and not otherwise. This interpretation is further approved by Circular No.14 of 2001, which explains the Finance Act, 2001 issued by CBDT. In the said circular, it is noticeable that in para 56.3, it uses the word 'and' at couple of places thereby providing for cumulative application 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-appli
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lso received dividend income on these units which was claimed exempt u/s. 10(34) of the Act. However, the Assessing Officer allowed this loss of Rs. 1,03,842.17 (Rs.12,485.68/- + Rs. 13,851/- + Rs/77,505.49) on the ground that these transactions are hit by the provision of section 94(7) of the I. T. Act. This action of the Assessing Officer stands confirmed by the Ld. CIT(A). Before me, the assesee has only challenged the disallowance of loss of Rs. 77,505.49 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. The relevant 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 mo
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