Pre S. 94(7) dividend stripping loss cannot be disallowed (Read more)

[CA Students Forum]

CIT vs. Walfort Share & Stock Brokers (Supreme Court)

Pre S. 94(7) dividend stripping loss cannot be disallowed. Transaction
cannot be ignored on ground that it is for tax-planning


In respect of AY 2000-01, the assessee bought units of a mutual fund
on 24.3.2000 (the record date) for Rs. 17.23 each and immediately
became entitled to receive dividend of Rs. 4 per unit. After the
dividend payout, the NAV of the unit fell by Rs. 4 to Rs. 13.23. The
assessee redeemed the units on 27.3.2000 at Rs. 13.23 per unit and
claimed a loss of Rs. 4. The dividend of Rs. 4 was claimed exempt u/s
10(33). The AO & CIT (A) rejected the claim of loss on the ground that
the loss was “artificial” and could not be allowed. On appeal by the
assessee, a Five Member Special Bench of the Tribunal 96 ITD 1 (Mum)
(SB) upheld theclaim and this was confirmed by the Bombay High Court
310 ITR 421 (Bom). On appeal to the Supreme Court, HELD, dismissing
the appeal:



(i) The argument of the department that the loss (the difference
between the purchase and sale price of the units) constitutes
“expenditure incurred” for earning tax-free income and was liable to
be disallowed u/s 14A is not acceptable. The difference arose as a
result of thedividend payout. The said “pay-out” is not “expenditure”
to fall within s. 14A. For attracting s. 14A, there has to be a
proximate cause for disallowance, which is its relationship with the
taxexempt income, which is absent in the present case.

(ii)...........

Read more: http://www.castudentsforum.in/viewtopic.php?f=57&t=1037#ixzz0tRWw3m7o