C.I.T.,Mumbai vs M/S.Walfort Share & Stock Brokers P.Ltd

The facts in the lead matter are as follows:

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. (See page 77 of the SLP Paper Book) 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.

To complete the chronology of events, it may be stated that 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 vide its impugned judgment dated 8.8.2008, hence this civil appeal.

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 sells or transfers the same within a period of three months after such record date, and 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. 56.4 Definitions of the terms "record date" and "unit" have also been provided in the Explanation after sub-section (7) of section 94. 56.5 This amendment will take effect from 1st April, 2002, and will accordingly, apply in relation to the assessment year 2002-2003 and subsequent years.

The main issue involved in this batch of cases is

For the above reasons, we find no infirmity in the impugned judgment of the High Court and, accordingly, these Civil Appeals filed by the Department are dismissed with no order as to costs.

.................................CJI (S. H. Kapadia) ....................................J. (Swatanter Kumar) New Delhi;

July 06, 2010