Income Tax Appellate Tribunal - Delhi
Income Tax Officer vs Shambhu Mercantile Ltd. on 29 February, 2008
Equivalent citations: [2008]304ITR36(DELHI), (2008)116TTJ(DELHI)784
ORDER
D. Karunakara Rao, A.M.
1. This is an appeal by the Revenue against the order dt. 20th March, 2006 of learned CIT(A)-XI, New Delhi. The Revenue has raised the following grounds:
1. On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 1,88,47,816 by disallowing exemption under Section 10(34) claimed by the assessee.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that all the conditions prescribed in Section 94(7) (sic).
2. Briefly stated, the facts are that the assessee is a public limited company engaged in the business of sale, purchase and trading in stock, shares and units of mutual fund. During the relevant assessment year, assessee purchased units of mutual funds, which include units of Tata Index Fund Nifty Plan Option-A and IL & FS Index Fund Nifty Plan. The assessee sold the said units during the relevant assessment year and 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 under Section 10(34) of the Act. The relevant date of purchase, date of receipt of dividend and date of redemption are shown in the following chart:
__________________________________________________________________________________ |Name of mutual | Date of | Purchase | Record date of | Dividend | Date of | | fund | purchase | amount | dividend | amount | redemption| | | | (In Rs.) | | (In Rs.) | | |_______________|__________|____________|________________|___________|___________| |Tata Index Fund| 25.11.03 |1,00,00,000 | 25.11.03 (1st | 29,89,774 | 9.3.04 | |Nifty Plan | | | dividend) | & | | |Option-A | | | & 3.3.04 | 9,96,591 | | | | | | (next dividend)| | | |_______________|__________|____________|________________|___________|___________| |Tata Index Fund| 25.11.03 |1,00,00,000 | 25.11.03 (1st | 44,84,662 | 9.3.04 | |Nifty Plan | | | dividend) | & | | |Optlon-A | | | & 3.3.04 | 14,94,887 | | | | | |(next dividend) | | | |_______________|__________|____________|________________|___________|___________| |IL & FS Index | 16.12.03 |4,00,00,000 | 16.12.03 |1,18,35,408|17.3.04 | | Fund Nifty | | | | | | | Plan | | | | | | |_______________|__________|____________|________________|___________|___________|
3. Assessee earned dividend income as shown in the table above. However, the effect of the above transactions was capital loss of Rs. 1,88,47,816. The AO has, however, not allowed the said loss, which was incurred on sale of aforesaid units alleging the said transactions are hit by the provisions of Section 94(7) of the Act. Section 94(7) of the Act as it stood prior to its amendment w.e.f. 1st April, 2005 reads as follows:
Where--
(a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
(b) such person sells or transfers such securities or unit within a period of three 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, if 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.
4. According to the assessee, provisions of Section 94(7) are not applicable as the following three conditions are cumulatively required to be satisfied by the assessee in order to fall within purview of Section 94(7) of the IT Act, which are as under:
(i) The shares/units must be purchased within a period of three months prior to the record date; and
(ii) The shares/units must be sold within a period of three months after such date; and
(iii) The dividend income earned from such securities/units should be exempt from tax.
5. The assessee explained that in the case of purchase and sale of Tata Index Fund : The date of purchase was 25th Nov., 2003 and the record date for declaration of 1st dividend was 25th Nov., 2003. Therefore, the 1st condition i.e., purchase of the units within a period of 3 months prior to the record date for declaration of dividend was satisfied. These were sold on 9th March, 2004. The 'second condition viz. that these units should be sold within a period of 3 months from the record date is not satisfied and therefore, the provisions of Section 94(7) were not attracted. With regard to the 2nd record date in respect of these units for declaration of dividend, the same was 3rd March, 2004. The date of purchase of these units was 25th Nov., 2003 and therefore, the first condition viz. that the units should have been purchased within 3 months prior to record date is not satisfied. The second condition viz. that the units should not be sold within 3 months from the record date however is satisfied.
As far as the purchase and sale of IL & SF units are concerned the date of purchase was 16th Dec, 2003 and the record date for declaration of dividend was 16th Dec, 2003 and therefore, the 1st condition, i.e., purchase of units within 3 months prior to the record date is satisfied. These units were sold on 17th March, 2004 beyond 3 months from the record date and therefore, the second condition was not satisfied. Hence, the provisions of Section 94(7) of the IT Act are not applicable. Accordingly, the capital loss incurred by the assessee on redemption of units of mutual fund is not liable for disallowance under Section 94(7).
6. The AO in this regard has observed that in the case of purchase and sale of units of Tata Index Fund, all the three conditions were satisfied and in the case of units of IL & SF, only two conditions were satisfied, because period of sale was more than three months from the record date. The AO was of the view that the provisions of Section 94(7) will apply even if any one of the conditions is satisfied and that it was not necessary that all the three conditions have to be satisfied. The AO held that this is 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 Section 94(7) of the Act.
7. Aggrieved by the order of the AO dt. 30th Dec, 2005, the assessee filed an appeal before the learned CIT(A). The learned CIT(A) held that the provisions of Section 94(7) will apply only when three conditions laid down therein are cumulatively satisfied. For this, the learned CIT(A) relied on a Circular No. 14 of 2001 [(2002) 172 CTR (St) 13] issued by the CBDT explaining the provisions of Finance Act, 2001 and the reasons for incorporating Section 94(7) of the Act. The relevant part 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, where the owner of any securities enters into transactions of sale and repurchase of those securities which result in 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 at which the securities are purchased would normally be higher than the ex-dividend price at which they are sold, such transactions would result in a loss which could be set off against other income of the year. At the same time, the dividends received would be exempt from tax under Section 10(33). The net result would be the creation of a tax loss, without any actual outgoings.
56.3. With a view to curb the creation of such short-term losses, 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 (emphasis, italicised in print, supplied) sells or transfers the same within a period of three months after such record date, and (emphasis, italicised in print, supplied) the dividend or income received or 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.
8. According to CIT(A) 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 Section 94(7) of the Act are to be cumulatively satisfied. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.
9. Before us, the learned Departmental Representative relied on the assessment order. Whereas the learned Authorised Representative of the assessee argued explaining how the transaction described in the table above did not satisfy all the three conditions as specified in the provisions of Section 94(7). In this regard, he has taken us through the portions mentioned in pp. 12 and 13 of the CIT(A)'s order. At the end of his arguments, he has submitted that none of the transactions vis-a-vis five record dates, the conditions mentioned in Clauses (a), (b) and (c) of Section 94(7) of the Act are cumulatively satisfied.
10. We have heard the rival submissions, perused orders of the lower authorities and the documents filed before us. Table contains three transactions of purchases on 25th Nov., 2003, 25th Nov., 2003 and 16th Dec, 2003. We find that the conditions of three months before and after the record date for purchase and sale respectively have not been satisfied in all of the transactions cumulatively.
11. Order of the CIT(A) details the facts of the transactions showing as to how the conditions in Section 94(7) are not fulfilled. Relevant parts from pp. 15 and 16 are as under:
Now coming to the case of the appellant it is noticed that the mutual funds of Tata Index Fund Nifty Plan-Option A, were purchased on 25th Nov., 2003 for Rs. 1,00,00,000. On the same date the dividend of Rs. 29,89,774 was received by the appellant. The next dividend on the said mutual funds was received on 3rd March, 2004 of Rs. 9,96,591. The aforesaid mutual funds were redeemed thereafter on 9th March, 2004. It is noticed that in the case of first dividend received, the time gap between the record date and the date of redemption is more than three months and in the case of second dividend, the time gap between the date of purchase and the record date is more than three months.
The another mutual funds of Tata Index Fund Nifty Plan-Option A were purchased by the appellant on 25th Nov., 2003 for Rs. 1,50,00,000. On the said mutual funds, the first dividend was received on the very same date, i.e. 25th Nov., 2003 and the second dividend was received on 3rd March, 2004. The said mutual funds were redeemed on 9th March, 2004. Like in the first case also the time gap between the record date of first dividend and the date of redemption is more than three months and the time gap between the date of purchase and the record date of second dividend is more than three months.
The mutual funds of IL & FS Index Fund of Rs. 4,00,00,000 were purchased on 16th Dec., 2003 and on the very same date, the dividend of Rs. 1,18,35,408 was received by the appellant. The said mutual funds were redeemed on 17th March, 2004. In the aforesaid case the time gap between the record date of dividend and date of redemption is more than three months.
12. The question that now arises for consideration is as to whether Clauses (a), (b) and (c) of Section 94(7) need to be satisfied cumulatively or not. We may take a look at the language used in other portions of the IT Act, 1961, where such requirement for satisfying one of the many conditions or all conditions cumulatively is laid down. The case where only one condition is needed to be satisfied as laid down in the proviso to Section 139(1) relating to one by six scheme, may be taken for instance. The language of such provision uses the expression 'or' at the end of each condition. Apart from the above, the provision uses expression "any one of the following conditions". For an example where the legislature when it desired that all conditions are to be satisfied cumulatively, we may take the language used in provisions of Section 80-0, 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.
13. We find that a plain reading of the provision of Section 94(7) of the Act shows that it has neither used the expression "or" nor the expression "and". The Revenue wants to say that each of the conditions laid down in Section 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. The provisions are ambiguous and obscure, as we have already noticed above. In the circumstances, we would place a construction on the provisions of Section 94(7) so as to place least restriction on an individual's (assessee) rights. We would therefore, hold that the claim of the assessee that all the conditions laid down in Clauses (a), (b) and (c) have to be satisfied before the said provisions can be applied in a given case, should be accepted.
14. Therefore, the absence of word 'or' at the end of Clauses (a) and (b) does not provide for the interpretation that Sub-section (7) of Section 94 applies, where transactions satisfy at least one condition. Rather, simple reading of the clauses even without the expression 'and' can lead only to one condition that all the three conditions cumulatively are required to be satisfied before invoking Section 94(7). The use of words as 'such person', 'such unit', 'such date', 'such securities or units' in Clauses (b) and (c) of Section 94(7), also indicates that the three clauses have to be read together. Thus they advocate for cumulative application of conditions and not otherwise. In support of this interpretation, we find that the Circular No. 14 of 2001, which explains the Finance Act, 2001 issued by CBDT provides necessary stamp of approval to such interpretation. 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 that all the conditions prescribed in Section 94(7) are to be cumulatively satisfied and not otherwise. Therefore, we find no reason to interfere with the order of learned CIT(A) and the grounds raised by Revenue in appeal, being devoid of merit, are rejected. In the result, the appeal by the Revenue is dismissed.