Commissioner Of Income Tax v. Areez P. Khambhatta....opponent(S

O/TAXAP/834/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 834 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================COMMISSIONER OF INCOME TAX....Appellant(s) Versus AREEZ P. KHAMBHATTA....Opponent(s) ================================================================ Appearance: MR MANISH BHATT, SENIOR COUNSEL WITH MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR SN SOPARKAR, SENIOR COUNSEL WITH MR BS SOPARKAR FOR MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERIandHONOURABLE MR.JUSTICE K.J.THAKER Date : 24/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1.Being aggrieved and dissatisfied with the impugned order dated 17.11.2005 passed by the Income Tax Appellate Tribunal, Ahmedabad ‘B’ Bench (hereinafter referred to as ‘the Tribunal’) in Income Tax Appeal No. 1597/Ahd/2005 for the assessment year 2001-02, the revenue has preferred the present tax appeal. 2.This appeal was admitted by this Court on 28.11.2006 for consideration of the following substantial question of law: “(A) Whether the Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) deleting the disallowance of short term capital loss amounting to Rs. 2,87,21,480/-? (B) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of Rs. 2,65,137 on account of valuation of closing stock?” 3.The assessee company is engaged in the business of manufacturing & selling of soft drink concentrate. The assessee company had filed return of income showing total loss at Rs. 82992622/-. During the assessment proceedings the Assessment Officer disallowed the expenditure by way of short term capital loss incurred to earn tax free dividend. Being aggrieved by the same, the assessee preferred appeal before CIT(Appeals) and the said appeal came to be allowed whereby CIT(A) held that the short term capital loss cannot be disallowed in terms of the provisions of section 14A of the Act. The revenue thereafter preferred appeal before the Tribunal and the Tribunal after hearing the parties, dismissed the same. Being aggrieved by the same, the present appeal is preferred. 4.Mr. Manish Bhatt, learned Senior Counsel appearing with Ms. Mauna Bhatt, learned advocate for the revenue submitted that the decision of the Tribunal is erroneous inasmuch as the assessee has on one hand earned dividend income which has been claimed as exempt and on other hand created loss of Rs. 42994541 which is claimed to be set off against the income. He submitted that the assessee under a colourable device and fully aware entered into transactions of investment with mutual funds. 4.Mr. Manish Bhatt, learned Senior Counsel appearing with Ms. Mauna Bhatt, learned advocate for the revenue submitted that the decision of the Tribunal is erroneous inasmuch as the assessee has on one hand earned dividend income which has been claimed as exempt and on other hand created loss of Rs. 42994541 which is claimed to be set off against the income. He submitted that the assessee under a colourable device and fully aware entered into transactions of investment with mutual funds. 5.Mr. S.N. Soparkar, learned Senior Counsel appearing for the assessee supported the impugned order and submitted that the same having been passed in accordance with law does not call for any interference by this Court. He submitted that so far as question no. 1 is concerned, the Tribunal while deciding the issue has relied upon a decision of the Income Tax Appellate Tribunal, Mumbai Special Bench in the case of Wallfort Shares & Stock Brokers Ltd vs. ITO reported in 96 ITD (Mum)(SB). He submitted that the said decision was taken in appeal before the Apex Court, wherein the Apex Court has held in favour of the assessee. He has therefore relied upon the said decision in the case of C.I.T. Mumbai vs. M/s. Walfort Shares & Stock Brokers P. Ltd reported in [2010] 326 ITR 1. 6.We have heard learned advocates for both the sides and perused the orders passed by the CIT as well as the Tribunal. So far as question no. (A) raised in the present appeal is concerned, we are of the view that the same is governed by the decision of the Apex Court in the case of C.I.T. Mumbai vs. M/s. Walfort Shares & Stock Brokers P. Ltd, [2010] 326 IT 1. The relevant part of the said decision reads as under: “In the lead case, we are concerned with the assessment years prior to insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. We are of the view that the AO had erred in disallowing the loss. In the case of Vijaya Bank v. AdditionalCommissioner of Income Tax[1991] 187 ITR 541, it was held by this Court that where the assessee buys securities at a price determined with reference to their actual value as well as interest accrued thereon till the date of purchase the entire price paid would be in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on those securities. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. With regard to such cases we may state that on facts it is established that there was a "sale". The sale-price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under Section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. Commercial TaxOfficer[154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v.Azadi Bachao Andolan[263 ITR 706(SC)] it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra). Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of Section 94(7). The object of Section 94(7) is to curb the short term losses. Applying Section 94(7) in a case for the assessment year(s) falling after 1.4.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, losses over and above the amount of the dividend received would still be allowed from which it follows that the Parliament has not treated the dividend stripping transaction as sham or bogus. It has not treated the entire loss as fictitious or only a fiscal loss. After 1.4.2002, losses over and above the dividend received will not be ignored under Section 94(7). If the argument of the Department is to be accepted, it would mean that before 1.4.2002 the entire loss would be disallowed as not genuine but, after 1.4.2002, a part of it would be allowable under Section 94(7) which cannot be the object of Section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, Section 14A was inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by SEBI for last couple of years. If Section 94(7) would have been brought into effect from 1.4.1962, as in the case of Section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to Section 94(7) only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to Sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why Section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002. 6.1Going by the aforesaid decision, we are of the opinion that the Tribunal was justified in relying upon the said decision as the Apex Court has confirmed the said view. Therefore, we answer question no. (A) in favour of the assessee and against the revenue. 7.So far as question no. (B) is concerned, we are of the opinion that the dividend income was being offered on receipt basis by the assessee on regular basis and when the assessee has valued the closing stock at lower of the two values i.e. either the cost price or the market value, the Assessing Officer was not justified in disallowing the business loss. The authorities below have not committed any error in deleting the addition made by the Assessing Officer. We therefore answer the question no. (B) against the revenue and in favour of the assessee. 8.In the premises aforesaid, appeal is dismissed. We answer both the questions raised in the present appeal in favour of the assessee and against the revenue. The impugned judgement passed by the Tribunal is upheld. (K.S.JHAVERI, J.) divya (K.J.THAKER, J)