ALASKA MERCANTILE CO, PVT. LTD.,MUMBAI vs. A.C.I.T.9(1), MUMBAI

Facts relating to the issue are stated in brief. During the year under consideration the assessee had purchased units of mutual fund and received dividend income of ` 15.86 crores. The method of valuation of closing stock of mutual fund units followed by the assessee was “cost at market rate whichever is less”. Accordingly the assessee valued its units of mutual fund at market value and the same has resulted in loss of ` 64.05 lakhs.

The Assessing Officer noticed that the provisions of section 94(7) of the Act, which provides for reduction of loss to the extent of dividend income, shall be applicable to the assessee. Accordingly, the Assessing Officer computed disallowance made u/s. 94(7) of the Act at ` 61,89,745/-. The assessee also accepted the same. Subsequently, the Assessing Officer levied penalty of `

Learned AR did not dispute the fact that the provisions of section 94(7) of the Act shall be applicable to the assessee, since it had sold the units of mutual fund on 21.7.2008 i.e. within the period of nine months from the record date for declaring the dividend. Learned AR submitted that the provisions of section 94(7) should, however, be applied only at the time of sale of mutual fund units. Accordingly, learned AR submitted that the disallowance, if any, required to be made u/s. 94(7) of the Act should have been made in the succeeding year, i.e., in A.Y. 2009-10 since the mutual fund units were sold on 21.7.2008. Learned AR submitted that the view taken by the assessee that the provisions of section 94(7) of the Act should be applied only in the year of sale of mutual fund units is supported by the decision rendered by the Coordinate Bench in the case of Ashok Kumar Damani Vs. Addl. CIT (2011) 138 TTJ (Mum) 45 and also by the decision rendered in the case of ACIT Vs. M/s. Four Dimensions Securities (India) Ltd. (ITA No. 7951/Mum/2010 dated 16.9.2015). Accordingly the Ld A.R submitted that the assessee’s action of not applying the provisions of sec. 94(7) during the year under consideration is supported by the above said decisions. Hence the question of disallowance made by the AO during the year under consideration shall become a debatable one.

Learned AR submitted that the assessee, in the instant case, was constrained to book loss, since the assessee was following a particular method of valuation of the closing stock, i.e., the cost of market value whichever is less. Hence the loss shown by the assessee was not on account of sale of mutual fund units, but on account of valuation. Accordingly, learned AR submitted that the assessee was under bona fide belief that provisions of section 94(7) of the Act are not applicable to the year under consideration, since the mutual fund units were sold during the succeeding year.

The Learned AR further submitted that the disallowance prescribed u/s 94(7) of the Act is a statutory disallowance and there is no failure on the part of the assessee to disclose full particulars relating to the income. He submitted that this Bench of the Tribunal, in the case of Ramesh M. Damani (ITA No.1625/Mum/2012 dated 22.08.2014), has taken the view that penalty u/s. 271(1)(c) of the Act is not exigible in respect of disallowance made u/s. 94(7) of the Act as the same is statutory disallowance and further there was no concealment of particulars of income or furnishing inaccurate particulars of income. Accordingly he contended that the impugned penalty is not sustainable.

On the contrary, learned Departmental Representative submitted that the assessee is required to make disallowance under provisions of section 94(7) of the Act which the assessee has failed to do. He further submitted that Hon'ble Punjab & Haryana High Court has confirmed the penalty levied u/s. 271(1)(c) of the Act for not making disallowance u/s. 94(7) of the Act in the case of VSB Investment (P) Ltd. reported in 212 Taxman 162. Accordingly, he submitted that learned CIT(A) was justified in confirming the penalty u/s. 271(1)(c) of the Act.

We have heard the rival contentions and perused the record. The fact, which is not in dispute, remains that the assessee did not sell the units of mutual fund during the year under consideration. The loss booked by the assessee relates to the valuation loss and not real loss arising on account of sale of mutual fund units. In the case of Ashok Kumar Damani (supra) and M/s Four Dimensions Securities (India) Ltd (supra), the co-ordinate benches of the Tribunal has taken the view that the provisions of sec. 94(7) are required to be applied only at the time of sale of mutual fund units. Even though the assessee has accepted the disallowance made by the AO u/s 94(7) of the Act, yet the fact remains that the said disallowance is not required to be made during the year under consideration, meaning thereby, there is merit in the contentions of the assessee that it did not apply the provisions of sec. 94(7) of 4 Alaska Mercantile Company Private Limited the Act during the year under consideration, as it was under bonafide belief that the same is required to be applied in the year of sale of mutual fund units. Hence there is merit in the contentions of the assessee that impugned issue relating to the year of applying the provisions of sec. 94(7) is a debatable one and the assessee had entertained a bonafide belief in this regard and the same was also getting support from the decisions rendered by the co-ordinate benches of Tribunal, referred supra.

Further, it is not the case of the revenue that the assessee has concealed any particulars relating to the purchase and sale of mutual fund units. Though the AO has taken the view that the assessee has filed inaccurate particulars of income, yet we are of the view that the facts prevailing in the instant case do not lead to such a conclusion. The dispute was with regard to the year in which the provisions of sec. 94(7) of the Act should be applied. We have noticed that the view taken by the assessee is supported by the two decisions rendered by the Tribunal.

We notice that the impugned disallowance has been made on account of statutory legal fiction prescribed in sec. 94(7) of the Act. Under identical set of facts, this bench of the Tribunal has taken the view in the case of Ramesh M Damani (supra) that the penalty u/s 271(1)(c) of the Act is not leviable.

In view of the foregoing discussions, we are of the view that the Ld CIT(A) was not justified in confirming the penalty levied by the AO on the above said disallowance made u/s 94(7) of the Act. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to delete the impugned penalty.

In the result, the appeal filed by the assessee is allowed. Order has been pronounced in the Court on 16.8.2016