PUNITA KALPESH PATEL,AHMEDABAD vs. THE ACIT, CIRCLE-5(2)(1), AHMEDABAD

A.Y. 2018-19 3 Punita Kalpesh Patel Vs. ACIT 3. Aggrieved against the assessment order the assessee filed an appeal. The appellant contends that section 94(7) applies only to exempt dividends (i.e. Rs.10,00,000/- for shares and the full for mutual funds) and only to transactions strictly meeting the timing conditions, limiting the disallowance to Rs. 93,47,645/-. Detailed annexures were submitted listing transactions, arguing that most shares were held beyond the prescribed periods or not sold in the relevant year. Ld CIT[A] considered the submissions of the appellant and confirmed the addition made by the AO by observing as follows:

“… Section 94(7) is an anti-avoidance measure designed to curb "dividend stripping," where taxpayers purchase securities or units shortly before a record date to receive dividends (often exempt or low-taxed) and sell them soon after at a loss, setting off the artificial loss against other capital gains. The provision states: "Where any person buys or acquires any securities or unit within a period of three months prior to the record date and such person sells or transfers- (a) securities within a period of three months after such date; or (b) unit within a period of nine months after such date, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax." The language is clear the disallowance applies to the "amount of dividend or income received or receivable," without qualifying it as "exempt" dividend. The purpose, as evident from the Explanatory Memorandum to the Finance Act, 2001 (which introduced the provision for securities) and Finance Act, 2004 (extending to units), is to prevent tax avoidance by disregarding notional losses to the extent of dividends/income derived from such transactions, irrespective of the tax treatment of the dividend itself. In A.Y. 2018-19, dividends from domestic companies were exempt u/s 10(34) up to Rs. 10 lakh, with excess taxed at 10% u/s 115BBDA (a special rate provision introduced by Finance Act, 2016). The appellant argues that section 94(7) applies only to the exempt portion (Rs. 10 lakh for shares), as A.Y. 2018-19 4 Punita Kalpesh Patel Vs. ACIT the taxed portion under 115BBDA does not confer a "double benefit warranting disallowance. This interpretation is misconceived. The "double benefit" in dividend stripping arises not solely from exemption but from receiving dividend income (even if partially taxed) while claiming a loss set-off that reduces tax on other income. Even for the taxed portion under 115BBDA, the effective tax rate (10%) is lower than the normal capital gains tax rates (15% for STCG u/s 111A or 20% for LTCG). Allowing loss set-off would still enable avoidance, undermining the revenue's interest. The provision's use of "dividend or income" encompasses all amounts received, as held in analogous contexts by courts (e.g.. CIT v. Walfort Share & Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), where the Supreme Court upheld the anti-avoidance intent of section 94(7). emphasizing that losses are to be ignored to the extent of dividends, without limiting to exemption status). No judicial precedent directly restricts section 94(7) to exempt dividends post-introduction of section 115BBDA. On the contrary, the broad wording and purpose support its application to the entire dividend received, as done by the A.O. The appellant's reliance on a narrow reading ignores the mischief rule of interpretation, where the provision must be construed to suppress tax avoidance (as per Heydon's case principle applied in Indian tax jurisprudence). 4.2 Verification of Transactions and Quantum of Addition The A.O. meticulously prepared a table listing 275 share scrips and 125 mutual fund schemes, identifying those meeting the twin conditions of purchase within 3 months pre-record date and sale within the post-record period. For shares, nearly all transactions qualified, leading to disallowance of STCL to the extent of Rs. 4,70,66,892/-. For mutual funds, only two schemes were added (Rs. 60,70,498/-), as admitted by the appellant. The appellant's annexures claim only Rs. 32,76,735/- for shares qualify, asserting most holdings exceeded the periods or were not sold timely. However, upon perusal of the records (including purchase/sale dates, record dates, and holding periods submitted during assessment), the A.O.'s findings are corroborated. For instance: Bharat Forge Ltd.: Multiple purchases in February-March 2018, record date March 2018, sales in April-May 2018-within thresholds.

A.Y. 2018-19 5 Punita Kalpesh Patel Vs. ACIT Reliance Industries Ltd.: Similar pattern, with holdings not exceeding 3 months on either side in many instances. The appellant's selective calculation omits several qualifying transactions and miscomputes days (e.g., excluding weekends or holidays incorrectly, whereas the Act uses calendar days). The burden to prove non- applicability lies on the appellant (u/s 101 of Evidence Act, applied via tax proceedings), and the submissions fail to rebut the A.O.'s detailed analysis. Thus, the addition of Rs. 4,70,66,892/- for shares is upheld. For mutual funds, the appellant admits Rs. 60,70,910/-, but the A.O. added Rs. 60,70,498/--a minor variance not warranting interference. The corresponding adjustment to section 54F deduction neutralizes any net impact, as correctly done by the A.O. ”

1. Ld. CIT (A) (NFAC) erred in law and on facts in confirming addition made by AO of Rs. 5, 31, 37, 390/- applying provisions of Sec. 94(7) of the Act.

2. Ld. CIT (A) (NFAC) erred in law and on facts in confirming view of AO that entire dividend of Rs. 4, 70, 66, 892/- received on domestic shares transactions qualified for disallowance u/s 94(7) of the Act whereas dividend of only Rs. 32, 76, 735/- qualified for disallowance as per the appellant.

3. Ld. CIT (A) (NFAC) erred in law and on facts confirming disallowance by AO without taking into consideration provisions of Section 115BBDA and of Section 10(38) of the Act as applicable to relevant assessment.

4. Ld. CIT (A) (NFAC) erred in law and on facts confirming finding of AO based on misunderstanding as to date of purchase & sale of shares, record date & date of receipt of dividend on equity shares of domestic companies to hold that dividend of Rs. 4,70, 66, 892/- is covered u/s 94(7) of the Act.

5. Ld. CIT (A) (NFAC) erred in law and on facts in dismissing the alternate contention of the appellant that provisions of Sec. 94(7) be restricted to the extent of exempt dividend post introduction of Sec. 115BBDA of the Act.

7. Initiation of penalty proceedings u/s 270A of the Act is unjustified.

a. Section 94(7) refers to “dividend or income received or receivable” without restricting it to exempt dividend. b. The provision was introduced as an anti-avoidance measure to curb dividend stripping.

A.Y. 2018-19 7 Punita Kalpesh Patel Vs. ACIT c. The Supreme Court in CIT vs Walfort Share & Stock Brokers Pvt Ltd (326 ITR 1) has upheld the legislative intent behind section 94(7).

7.1 The Hon’ble Supreme Court in CIT vs Walfort Share & Stock Brokers Pvt Ltd explained that section 94(7) is a specific anti- avoidance provision intended to neutralize artificial losses arising from dividend stripping transactions.

7.2 The next question that arise is whether Section 94(7) of the Act applies only to exempt dividend. The principal contention of the assessee is that the provision applies only to exempt dividend income. We are unable to accept this contention. The statutory language refers to “dividend or income received or receivable” and does not restrict the operation of the provision only to exempt dividend. Even after the introduction of section 115BBDA, the possibility of tax arbitrage continues because the dividend may be taxed at a concessional rate, whereas the capital loss may be used to reduce taxable gains.

A.Y. 2018-19 8 Punita Kalpesh Patel Vs. ACIT 7.3. It is further clarified from the Explanatory Memorandum to the Finance Act, 2001 (which introduced the provision for securities) and Finance Act, 2004 (extending to units), is to prevent tax avoidance by disregarding notional losses to the extent of dividends/income derived from such transactions, irrespective of the tax treatment of the dividend itself. Therefore, the mischief sought to be prevented by section 94(7) would continue even where dividend is partly taxable. Accordingly, we hold that section 94(7) applies to the entire dividend received and not merely the exempt portion.

7.4. We also see from record that the Assessing Officer examined the transactions in detail and identified those where:

• shares were purchased within three months prior to the record date; and • sold within three months thereafter. Based on this analysis, the Ld AO computed the dividend relatable to such transactions at Rs.4,70,66,892. The assessee has submitted alternative computations restricting the amount to Rs.32,76,735. However, the annexures filed by the assessee do not convincingly rebut the detailed findings recorded by the Assessing Officer. We also notice that several transactions such as those relating to Bharat Forge Ltd., Reliance Industries Ltd. and other scrips clearly fall within the time limits prescribed under section 94(7). The burden to establish that the transactions fall outside the statutory conditions lies upon the assessee, which in the present case has not been satisfactorily discharged.

A.Y. 2018-19 9 Punita Kalpesh Patel Vs. ACIT 7.5. In respect of mutual funds, the assessee has substantially accepted the disallowance relating to two schemes. The difference between the amount admitted by the assessee and that added by the Ld. AO is insignificant and does not warrant interference.

In the result, the appeal filed by the assessee is dismissed. 11.