Decided on May 07,2014



SAKTIJIT DEY - (1.) THIS appeal by the assessee is directed against the order dated 13 -5 -2011 of CIT (A) -III, Hyderabad pertaining to assessment year 2004 -05.
(2.) BRIEFLY stated facts are, the assessee company has filed its return of income for the asst. Year 2004 -05 admitting loss of Rs.5,74,517/ - under the head 'business loss' and loss of Rs.1,60,58,189/ - under the head 'capital gains'. Assessment in case of the assessee was completed u/s 143(3) of the Act on 20 -11 - 2006 accepting the return filed. However, subsequently, the Assessing Officer being of the opinion that income chargeable to tax has escaped assessment, issued a notice u/s 148 of the Act reopening the assessment completed earlier. As noted by the Assessing Officer, neither in response to notice u/s 148, the assessee filed a return nor he complied with the notices issued u/s 142(1) of the Act subsequently. Therefore, the Assessing Officer finally issued a show cause notice u/s 144 of the Act on 14 -7 -2009 proposing to complete the assessment to the best of his judgment. Even to this notice also, there was no response by the assessee. Therefore, the Assessing Officer proceeded to compete the assessment ex parte u/s 144 of the Act. The Assessing Officer noticed that the assessee had declared capital loss both long term and short term of Rs.1,60,58,190/ - He further noted that the short term capital loss of Rs.12,33,988 comprised of the following items: - i) Short term capital loss on sale/redemption of units of MF Rs.43,56,961 ii) Short term capital gain against sale/redemption of units of MF Rs.31,22,974 He further noted that as per information available on record, the assessee claimed exempt income being dividend from units of Mutual Fund at Rs.95,84,031/ - u/s 10(34) of the Act. The Assessing Officer on verifying the details such as date of purchase, date of sale and dividend received of short term capital gain amounting to Rs.43,56,961/ - noticed that part of the loss is not allowable in terms of provisions of section 94(7) of the Act as the assessee has acquired the units within a period three months prior to the record date and has sold/transferred such units within the period of 9 months after such date. Accordingly, he disallowed loss to the extent of Rs.39,85,180/ -. Being aggrieved of the disallowance so made, the assessee preferred an appeal before the CIT (A).
(3.) IN course of proceedings before the CIT (A), it was contended by the assessee that the Assessing Officer has disallowed loss by applying the amended provisions of section 94(7) which was brought to the statute w.e.f. 1 -4 -2005. It was contended that since the amended provision is applicable for assessment year 2005 -06, the disallowance made on account of loss claimed for the assessment year 2004 -05 by applying the said provision is erroneous. It was contended that as the assessee sold the securities after three months as per the existing provision of section 94(7) prior to its amendment w.e.f. 1 -4 -2005, there cannot be any disallowance. The CIT (A) after considering the submissions of the assessee called for a remand report from the Assessing Officer. As observed by the CIT (A) in para 4.8 of his order, the Assessing Officer in his report dated 11 -5 -2011 acknowledged that transaction in case of equity funds mentioned in serial Nos. 5,7,8,10 and 11 of the list, the assessee has sold the units after three months and in respect of transaction at serial No.13, there is no record date and the assessee has not received any dividend. The CIT (A) however held that in view of the provision contained u/s 94(7) of the Act the loss claim cannot be allowed even in case where the units were sold after holding them for a period of more than three months. The finding of the CIT (A) in this regard is extracted hereunder for the sake of convenience. "5.4 After carefully going through the provisions of section 94(7) of the Act, even through in the pre - amended provisions i.e., prior to such substitution vide Finance (No.2) Act,2004 w.e.f. 1 -4 -2005, there is reference that such persons sales or transfers such securities or units within a period of 3 months after such date, and in the case of the appellant there were four instances, where such period i.e., the difference between the record date and the date of redemption/sale was more than 3 months, having regard to the basic objectives behind introduction of such section in the statute, I am of the view that even in such instances, since the dividend income shown from such units is claimed exempt from tax, the claim of loss to the extent of dividend received, cannot be allowed deduction. Even though vide such amendment made vide Finance Act, 2004, w.e.f. 1 -4 -2005, when such period has been extended to 9 months, it cannot be said that, if such period i.e., from the record date to the date of redemption/sale of the unit, exceeds 3 months during F.Y.2003 -04, the loss arising from such transactions cannot be disallowed u/s 94(7). When the primary objective behind introduction of such section 94(7) has been not to allow claim of loss separately, while at the same time claiming exemption from tax of the dividend income received from such units, the amount of loss referred to by the Assessing Officer in respect of those four equity funds/company at,7,8 and 11, in my considered view, cannot be allowed deduction.;

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