2010 Supreme(SC) 520

Supreme Court of India
THE HONOURABLE CHIEF JUSTICE MR. S.H. KAPADIA & THE HONOURABLE MR. JUSTICE SWATANTER KUMAR
C.I.T., Mumbai
Versus
M/s. Walfort Share & Stock Brokers P. Ltd.
CIVIL APPEAL NO.4927 of 2010 (Arising out of S.L.P. (C) No. 19422 of 2009) WITH CIVIL APPEAL NO.4928 OF 2010 ARISING OUT OF S.L.P. (C) No.30283 of 2009 CIVIL APPEAL NO.4929 OF 2010 ARISING OUT OF S.L.P. (C) No.33749 of 2009 CIVIL APPEAL NO.4930 OF 2010 ARISING OUT OF S.L.P. (C) No.33144 of 2009 CIVIL APPEAL NO.4931 OF 2010 ARISING OUT OF S.L.P. (C) No.1701 of 2010 CIVIL APPEAL NO.4932 OF 2010 ARISING OUT OF S.L.P. (C) No.19492 of 2009 CIVIL APPEAL NO.4933 OF 2010
Decided on : 06-07-2010

Headnote:(a) Income Tax Act, 1961 – Section 14A – Income not forming part of total income – Related expenditure will be outside the ambit of the applicability of Section 14A. (Para 18)

       (b) Income Tax Act, 1961 – Section 14(3) and 10(33) (before insertion of Section 94(7)) – Dividend income was received – Post dividend, units were sold – Losses pertaining to exempted income cannot be disallowed – Assessee making use of section 10(33) – Cannot be called "abuse of law". (Para 21)

       [1991] 187 ITR 541; 154 ITR 148(SC); 263 ITR 706(SC) – Relied upon

       (c) Income Tax Act, 1961 – Section 14A, 10(33) and 94(7) – Assessee buying cum-dividend units, receiving tax free dividend – Selling the units thereafter – Incurring losses – Losses over and above the amount of the dividend received would still be allowed – Dividend stripping transaction not sham or bogus. (Para 21)

       (d) Section 14A and 94(7) – Section 14A applies when there is claim for deduction of an expenditure – Section 94(7) applies when there is claim for allowance for the business loss. (Para 22)

       (e) Accounting Standard AS-13 – Dividend income – Return on investment – Not return of investment – Mere receipt of dividend subsequent to purchase of units cannot go to offset the cost of acquisition of the units – AS-13 not applicable to instant case. (Para 23)

       Facts of the case:

       During the financial year 1999-2000, relevant to the assessment year 2000-01, the Chola Freedom Technology Mutual Fund came out with an advertisement stating that tax free dividend income of 40% could be earned if investments were made before the record date, i.e., 24.3.2000. The assessee by virtue of its purchase on 24.3.2000 became entitled to the dividend on the units at the rate of Rs. 4/- per unit and earned a dividend of Rs. 1,82,12,862.80. As a result of the dividend payout, the NAV of the said mutual fund which was Rs. 17.23 per unit on 24.3.2000, at which rate it was purchased, stood reduced to Rs. 13.23 per unit on 27.3.2000, which was the succeeding working day in the stock exchange. This fall in the NAV was equal to the amount of the dividend payout. The assessee sold all the units on 27.3.2000 at the NAV of Rs. 13.23 per unit and collected an amount of Rs. 5,90,55,207.75. The assessee also received an incentive of Rs. 23,76,778/-in respect of the said transaction. Thus, the assessee thereby received back Rs. 7,96,44,847 (Rs. 1,82,12,862.80 + Rs. 5,90,55,207.75 + Rs.23,76,778) against the initial payout of Rs.8,00,00,000/-. For the income tax purposes, the assessee, in its return, claimed the dividend received of Rs. 1,82,12,862.80 as exempt from tax under Section 10(33) of the Income Tax Act, 1961 and also claimed a set-off of Rs. 2,09,44,793 as loss incurred on the sale of the units thereby seeking to reduce its overall tax liability.

       The AO in his assessment order dated 21.3.2003 accepted that the dividend income amounting to Rs.1,82,12,862.80 was exempt under Section 10(33) of the Act. However, the AO disallowed the loss of Rs.2,09,44,793 claimed by the assessee inter alia on the ground that a dividend stripping transaction was not a business transaction and since such a transaction was primarily for the purpose of tax avoidance, the loss so-called was an artificial loss created by a pre-designed set of transaction. Accordingly, the AO deducted the incentive income of Rs. 23,76,778 received by the assessee + transaction charges from the loss of Rs.2,09,44,793 and added back the reduced loss of Rs.1,82,12,862.80 to the repurchase price/ redemption value amounting to Rs. 5,90,55,207.75.

       Being aggrieved by the disallowance of the reduced loss of Rs. 1,82,12,862.80, the assessee filed an appeal before CIT(A) who by his order dated 12.12.2003 confirmed the order of the AO saying that the loss of Rs. 1,82,12,862.80 incurred by the assessee on the sale of units should be totally ignored and that the same should not be allowed to be set-off or carried forward. Thus, the Department disallowed the reduced loss of Rs. 1,82,12,862.80 which amount was equal to the dividend, on the units declared by the mutual fund, of Rs. 1,82,12,862.80. In other words, by the impugned orders passed by the AO, the Department sought to tax the dividend income of the assessee during the relevant assessment year of Rs. 1,82,12,862.80.

       The assessee moved the tribunal against the order dated 12.12.2003. The disallowance stood deleted by the Special Bench of the Tribunal vide its impugned order dated 15.7.2005 by holding that the assessee was entitled to set-off the said loss from the impugned transactions against its other income chargeable to tax. This view of the tribunal has been affirmed by the High Court.

       Finding of the Court:

       Losses over and above the amount of the dividend received would still be allowed.

       Result:

       Appeals dismissed.