COMMISSIONER OF INCOME TAX Vs. SHAMBHU MERCANTILE LTD.

JUDGEMENT

(1.) THIS is an appeal preferred by the Revenue against the judgment dt. 29th Feb., 2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal') in ITA No. 2056/Del/2006 [reported as ITO v. Shambhu Mercantile Ltd., (2008) 116 TTJ (Del) 784 :, (2008) 9 DTR (Del) 617 -Ed.] pertaining to asst. yr. 2004 -05. The only issue which arose for consideration was whether the capital loss incurred by the assessee on redemption of units of mutual funds was liable for disallowance in view of the provisions of Section 94(7) of the IT Act, 1961 (hereinafter referred to as the 'Act').

(2.) THE assessee, which is a public limited company, is engaged in the business of sale/purchase and trade in stock/units and units of mutual fund. During the relevant assessment year the assessee purchased units of mutual funds which included funds such as Tata Index Fund Nifty Plan Option -A and IL & FS Index Fund Nifty Plan (in short 'mutual funds'). The assessee undisputedly had received dividend income on the said units which were exempt under Section 10(34) of the Act. The assessee during the relevant year sold the said units. The loss which the assessee suffered on sale of said units was sought to be set off against profits on sale of said units in respect of said mutual funds. The assessee's case was picked up for scrutiny and accordingly, notice under Section 143(2) of the Act was issued and served upon the assessee. During the course of scrutiny the AO raised queries with respect to the purchase and sale of the aforementioned units of mutual funds. After examining the details submitted by the representative of the assessee, the AO came to the conclusion that the assessee had indulged in a practice which is popularly known as 'dividend stripping' whereby a person purchases a cum -dividend unit in respect of which dividend receivable is exempt from Income Tax. After dividend is received the purchaser sells the units at a price which is obviously less than the price at which the units had been purchased, since cost of purchase of units at the relevant (time) included the dividend receivable on the units. The resultant loss on sale of units is sought to be set off against other income. Resultantly unintended benefit flows to such a purchaser.

(3.) WE have heard the learned Counsel for the Revenue Mr. Sanjeev Sabharwal. In the present case the facts are not disputed. The only question is whether the conditions laid down in Sub -section (7) Clauses (a) to (c) of the Act have to be read cumulatively or, as contended by the Revenue, on a standalone basis. It is important to mention at this stage that Section 94(7) of the Act was inserted in the statute by virtue of the Finance Act, 2001 w.e.f. 1st April, 2002. In respect of transactions prior to the insertion of this section this Court in the case of CIT v. Vikram Aditya & Associates (P) Ltd. : (2006) 204 CTR (Del) 238 : (2006) 287 ITR 268 (Del) has sustained such like transactions. In the instant case we are concerned with the provisions of Section 94(7) of the Act as it stood prior to the amendment carried out by the Finance Act No. 2, 2004 w.e.f. 1st April, 2005. The relevant provision reads as follows: