LexC.I.T., MUMBAI versus M/S. WALFORT SHARE & STOCK BROKERS P. LTD.
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A B [2010] 7 S.C.R. 748 C.l.T., MUMBAI v. MIS. WALFORT SHARE & STOCK BROKERS P. L ro. (Civil Appeal No. 4927 of 2010) JULY 06, 2010 [S.H. KAPADIA, CJI AND SWATANTER KUMAR, J.) Income Tax Act, 1961: c ss. 10(33), 14A and 94(7) - Dividend stripping transaction - Cases prior to 1. 4. 2002 - Loss on sale of units - Exemption from income - Held: Losses pertaining to exempted income, cannot be disallowed - After, 01042002, losses over and above the amount of dividend received would 0 still be allowed - It will not be ignored u/s. 94(7) - 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. ss. 14A and 94(7) - Reconciliation of ss. 14A with ss. 94 E (7) - Held: ss. 14A and 94 (7) operate in different fields - Section 14A comes in when there is claim for deduction of expenditure whereas s. 94 (7) comes in when there is claim for allowance for the business loss. F Accounting Standard AS-13 Para 12 - Applicability of - Units bought at the ruling Net Asset Value with a right to receive dividend as and when declared in future - Held: AS- 13 not applicable. The respondent-assessee is engaged in trading of G shares. During the assessment year 2000-01, the assessee purchased some units of Mutual Funds on the rncord date-24.03.2000 and earned dividend income. Thereafter, the NAV (net asset value) of the units got H 748 C.l.T., MUMBAI v. WALFORT SHARE & STOCK 749 BROKERS P. LTD. reduced and the assessee sold these units at a lesser A price and incurred losses. The assessee claimed the dividend received as exempt from tax under section 10(33) of the Income Tax Act, 1961 and also claimed setoff as loss incurred ori the sale of units. The Assessing Authority did not allow the claim of loss on the ground B that the dividend stripping transaction was not business transaction. The CIT (A) upheld the order of the Assessing Officer. The tribunal allowed the appeal holding that the assesee was entitled to set off the said loss from the said transactions against its other income c chargeable to tax. The High Court upheld the order of the tribunal. Hence, these appeals. Dismissing the appeals, the Court HELD: 1.1.The insertion of section 14A of the Income o Tax Act, 1961 with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part E F of the total income under the Act against the taxa~le iflcome (Circular No. 14 of 2001 dated 22.11.2001). Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxallle income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income G against taxable income and at the same time avail th~ tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible H 750 SUPREME COURT REPORTS [2010) 7 S.C.R. A while computing total income as these are exempt under certain provisions of the Act. [Para 14] [769-H; 770-A-E] 1.2. One needs to read the words 'expenditure incurred' in section 14A in the context of the scheme of 8 the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. The scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for C deductions/ expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the D facts of the case a proper Debit Item to be charged against the oncomings of the business in ascertaini
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