C.I.T., MUMBAIversusM/S. WALFORT SHARE & STOCK BROKERS P. LTD.

                        [2010] 7 S.C.R. 748


A                          C.l.T., MUMBAI
                                  v.
      MIS. WALFORT SHARE & STOCK BROKERS P. L ro.
               (Civil Appeal No. 4927 of 2010)

                           JULY 06, 2010
B
      [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
of the total income under the Act against the taxa~le
                                                             E
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
                                                             F
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
    the Act and, if so read, it is clear that it disallows certain
8
    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 ascertaining
    the true profits. A return of investment or a pay-back is
    not such a Debit Item, hence, it is not 'expenditure
    incurred' in terms of section 14A. Expenditure is a pay-
E   out. It relates to disbursement. A pay-back is not an
    expenditure in the scheme of section 14A. For attracting
    section 14A, there has to be a proximate cause for
    disallowance, which is its relationship with the tax exempt
    income. Pay-back or return of investment is not such
F   proximate cause, hence, section 14A is not applicable in
    the instant case. Thus, in the absence of such proximate
    cause for disallowance, section 14A cannot be invoked.
    Return of investment cannot be construed to mean
    "expenditure" and if it is construed to mean
G   "expenditure" in the sense of physical spending still the
    expenditure was not such as could be claimed as an
     "allowance" against the profits of the relevant accounting
    year under sections 30 to 37 of the Act and, therefore,
    section 14A cannot be invoked. Hence, the two asset
H   theory is not applicable as there is no expenditure
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK              751
                  BROKERS P. LTD.
incurred in terms of section 14A. [Para 14] (771-G-H; 772-      A
A-E]

     1.3. The AO disallowed the loss of Rs. 1,82, 12,862 on
the sale of 40% tax-free units of the mutual fund. The
Department submitted that the assessee is getting tax-          B
free divid~nd; that at the same time it is claiming loss on
the sale of the,units; that the assessee had purposely and
in a planned manner entered into a pre-meditated
transaction of buying and selling units yielding exempted
dividends with full knowledge about the fall in the NAV         C
after the record date and the payment of tax-free dividend
and, therefore, loss on sale was not genuine and
disallowed the loss, cannot be accepted. The instant
case is with regard to the assessment years prior to
insertion of section 94(7) vide Finance Act, 2001 w.e.f.
1.4.2002. The AO had erred in disallowing the loss. [Paras      D
15, 16 and 17] [772-G-H; 773-E-F; B-C]

    1.4. On facts, it is established that there was a "sale".
The sale-price was received by the assessee. That, the
assessee did receive dividend. The fact that the dividend       E
received was tax-free is the position recognized under
section 10(33) of the Act. The assessee had made use of
the said provision of the Act. That such use cannot be
called "abuse of law"., Even assuming that the
transaction was pre-planned there is nothing to impeach         F
the genuineness of the transaction. (Para 17] (773-G-H;
774-A]

     Vijaya Bank v. Additional Com.missioner of Income Tax
(1991) 1_87 ITR 541; McDowell & Co. Ltd. v. Commercial Tax
Officer 154 ITR 148(SC); Union of India v. Azadi Bachao         G
Ando/an 263 ITR 706(SC), referred to.

    1.5. In the cases arising before 1.4.2002, losses
pertaining to exempted income cannot be disallowed.
However, after 1.4.2002, Sl!Ch losses to the. extent of         H
   752      SUPREME COURT REPORTS                 [2010) 7 S.C.R.

A dividend received by the assessee could be ignored by
  the AO in view of section 94(7). The object of section 94(7)
  is to curb the short term losses. Applying section 94(7)
  in a case for the assessment year(s) falling after 1.4.2002,
  the loss to be ignored would be only to the extent of the
B dividend received and not the entire loss. In other words,
  losses over and above the amount of the dividend
  received would still be allowed from which it follows that
  the Parliament has not treated the dividend stripping
  transaction as sham or bogus. It has not treated the
c entire loss as fictitious or only a fiscal IG>ss. After 1.4.2002,
  losses over and above the dividend received will not be
  ignored under section 94(7). If the argument of the
  Department is to be accepted, it would mean that before
  1.4.2002 the entire loss would be disallowed as not
  genuine but, after 1.4.2002, a part of it would be allowable
0
  under section 94(7) which cannot be the object of section
  94(7) which is inserted to curb tax avoidance by certa•n
  types of transactions in securities. [Para 17] [774-C-G]
      1.6. Sections 14A and 94(7) were simultaneously
E inserted by the same Finance Act, 2001. Section 1.itA was
  inserted w.e.f. 1.4.1962 whereas section 94(7) was
  inserted w.e.f. 1.4.2002. The Parliament realized that
  several public sector undertakings and public sector
  enterprises had invested huge amounts over last couple
F of years in the impugned dividend stripping transactions
  so also declaration of dividends by mutual fund are
  being vetted and regulated by SEBI for last couple of
  years. If section 94(7) would have been brought into
  effect from 1.4.19&2, as in the case of section 14A, it
G would have resulted in reversal of large number of
  transactions. This could be one reason why the
  Parliament intended to give effect to section 94(7) only
  w.e.f. 1.4.2002. However, it is the duty of the court to
  examine the circumstances and reasons why section
  14A inserted by Finance Act 2001 stood inserted w.e.f.
H
    C.l.T., MUMBAI v. WALFORT SHARE & STOCK             753
                 BROKERS P. LTD.
 1.4.1962 while section 94(7) inserted by the same Finance    A
 Act as brought into force w.e.f. 1.4.2002. [Para 17] [774-
 G-H; 775-A-C]
       1.7. Sections 14A and 94(7) operate in different fields.
  Section 14A deals with disallowance of expenditure
                                                                8
  incurred in earning tax-free income against the profits of
  the accounting year under sections 30 to 37 of the Act.
  On the other hand, section 94(7) refers to disallowance
  of the loss on the acquisition of an asset whi~h situation
  is not there in cases falling under section 14A. Under C
  section 94(7), the dividend goes to reduce the loss. It
  applies to cases where the loss is more than the
  dividend. Section 14A applies to cases where the
  assessee incurs expenditure to earn tax fre~ income but
  where there is no acquisition of an asset. In cases falling
   under section 94(7), there is acquisition of an asset and D
   existence of the loss which arises at a point of time
   subsequent to the purchase of units and receipt of
/ exempt income. It occurs only when the sale t.akes place.
   Section 14A comes in when there is claim for deduction
   of an expenditure whereas section 94(7) comes in when E
   there. is claim for allowance for the business loss. One
   must keep in ·mind the conceptual difference between
   loss, expenditure, cost of acquisition, etc. while
   in~erpreting the scheme of the Act. [Para 18] [775-D-G]

       1.8. Para 12 of the Accounting Standard AS-13 F
  indicates that interest/ dividends received on investments
  are generally regarded as return on investment and not
  return of investment. It is only in certain circumstances
  where the purchase price includes the rigtit to receive
  crystallized and accrued dividends/ interest, that have G
  already accrued and become due for payment before the
  date of purchase of the units, that the same has got to
  be reduced from the purchase cost of the investment. A
  mere receipt of dividend subsequent to purchase of
  units, on the basis of a person holding units at the time H
    754      SUPREME COURT REPORTS                [2010] 7 S.C.R.


A of declaration of dividend on the record date, cannot go
  to offset the cost of acquisition of the units. Therefore,
  AS-13 has no application to the facts of the instant cases
  where units are bought at the ruling NAV with a right to
  receive dividend as and when declared in future and did
B not carry any vested right to claim dividends which had
  already accrued prior to the purchase. [Para 19] [775-H;
  776-A-D]
       Rajasthan State Warehousing Corporation v.
  Commissioner of Income-Tax 242 ITR 450; Commissioner
C of Income-Tax, Madras v. Indian Bank Limited 56 ITR 77,
  referred to.
                         Case Law Reference:
          242 ITR 450              Referred to.        Para 9
D
          56 ITR 77                Referred to.        Para 9
          (1991) 187 ITR 541       Referred to.        Para 16
          154 ITR 148(SC)          Referred to.        Para 17
E         263 ITR 706(SC)          Referred to.        Para 17
        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    4927 of 2010.
       From the Judgment and Order dated 8.8.2008 of the High
F Court of Judicature at Bombay in Income Tax Appeal No. 18
  of 2006.
          C.A. No. 4928 of 2010
          C.A. No. 4929 of 201 O
G
          C.A. No. 4930 of 2010
          C.A. No. 4931 of 2010

          C.A. No. 4932 of 201 O
H         C.A. No. 4933 of 2010
C.l.T., MUMBAI v. WALFORT SHARE & STOCK   755
             BROKERS P. LTD.
C.A. No. 4934 of 2010                           A
C.A. No. 4935 of 2010

C.A. No. 4936 of 2010

C.A. No. 4937 of 2010                       . B
C.A. No. 4938 of 2010

C.A. No. 4939 of 2010

C.A. No. 4940 of 21il10                         c
                            /
C.A. No. 4941 of 2010

C.A. No. 4942 of 2010

C.A. No. 4943 of 2010                           D
C.A. No. 4944 of 201 O

C.A. No. 4945 of 2010

C.A. No. 4954 of 2010                           E

C.A. No. 4946 of 2010

C.A. No. 4947 of 2010

C.A. No. 4948 of 201 O                          F
C.A. No. 4949 of 2010

C.A. No. 4950 of 2010

C.A. No. 4951 of 2010                           G
C.A. No. 4952 of 2010

C.A. No. 4953 of 2010

                                                H
    756       SUPREME COURT REPORTS                 [201 O] 7 S.C.R.


A       Parag P. Tripathi, ASG., Preetesh Kapoor, C.V. Subba
    Rao, Arijit Prasad, Kunal Bahri, B.M. Chatterjee, Varun Sarin,
    Farrukh Rashid, Vikas Malhotra, Fuzail A. Ayyubi, Amey
    Nargolkar, Satyakam, Balaji, B.V. Balaram Das for the
    Appellant.
B
      Soli E. Dastur, C.S. Aggarwal, R. Murlidhar, Rustom B.
  Hathikhanawala, B.S. Banthia, Jitendra Jain, Ankur Saigal Bina
  Gupta, Gaurav Singh, Ashok Kumar Sharma, T N. Chopra,
  Debasis Misra, Jatin Zaveri, Rajeev Wagle, Rukhsana
  Choudhury, Sridevi Pannikar, Vijay Kumar, Bharat L. Gandhi,
C R. Chandrachud, Bhargava V. Desai, Rahul Gupta, Nikhil
  Sharma, Ajay Vohra, Kavita Jha, Sandeep S. Karhail,
  Rashmikumar Manila! Vithlani and Gaurav Agrawal for the
  Respondent.

D         The Judgment of the Court was delivered by

          5. H. KAPADIA, J. 1. Delay condoned.

          2. Leave granted.

E       3. Whether the loss arising in the course of dividend
  stripping transaction taking place prior to 1.4.2002 was
  disallowable on the ground that such loss was artificial as the
  dividend stripping transaction was not a business transaction,
  is the question which arises for determination in this batch of
F Civil Appeals; the lead matter of which is C. /. T., Mumbai v. Ml
  s. Walfort Share & Stock Brokers Pvt. Ltd.

          4. The facts in the lead matter are as follows:

       The assessee is a member of Bombay Stock Exchange
G and it earns income mainly from share trading and brokerage.
  During the financial year 1999-2000, relevant to the assessment
  year 2000-01, the Chola Freedom Technology Mutual Fund
  came out with an advertisement stating that tax free dividend
  income of 40% could be earned if investments were made
H before the record date, i.e., 24.3.2000. The assessee by virtue
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK                   757
       BROKERS P. LTD. [S.H. KAPADIA, CJI.]
of its purchase on 24.3.2000 became entitled to the dividend         A
on the units at the rate of Rs. 4/- per unit and earned a dividend
of Rs. 1,82, 12,862.80. As a result of the dividend payout, the
NAV of the said mutual fund which was Rs. 17.23 per unit on
24.3.2000, at which rate it was purchased, stood reduced to
Rs. 13.23 per unit on 27.3.2000, which was the succeeding            B
working day in the stock exchange. This fall in the NAV was
equal to the amount of the dividend payout. The assessee sold
all the units on 27 .3.2000 at the NAV of Rs. 13.23 per unit and
collected an amount of Rs. 5,90,55,207.75. The assessee also
received an incentive of Rs. 23,76,778/- in respect of the said      c
transaction. Thus, the assessee thereby received back Rs.
7,96,44,847 (Rs. 1,82, 12,862.80 + Rs. 5,90,55,207.75 + Rs.
23,76,778) against the initial payout of Rs. 8,00,00,000/-. For
the income tax purposes, the assessee, in its return, claimed
the dividend received of Rs. 1,82, 12,862.80 as exempt from          0
tax under Section 10(33) of the Income Tax Act, 1961 ("the Act"
for short) and also claimed a set-off of Rs. 2,09,44,793 as loss
incurred on the sale of the units thereby seeking to reduce its
overall tax liability.

     The AO in his assessment order dated 21.3.2003                  E
accepted that the dividend income amounting to Rs.
1,82, 12,862.80 was exempt under Section 10(33) of the Act.
However, the AO disallowed the loss of Rs. 2,09,44,793
claimed by the assessee inter alia on the ground that a dividend
stripping transaction was not a business transaction and since       F
such a transaction was primarily for the purpose of tax
avoidance, the loss so-called was an artificial loss created by
a pre-designed set of transaction. Accordingly, the AO
deducted the incentive income of Rs. 23,76,778 received by
the assessee + transaction charges from the loss of Rs.              G
2,09,44,793 and added back the reduced loss of Rs.
1,82, 12,862.80 to the repurchase price/ redemption value
amounting to Rs. 5,90,55,207.75. (See page 77 of the SLP
Paper Book)
                                                                     H
    758      SUPREME COURT REPORTS                   [2010] 7 S.C.R.


A        Being aggrieved by the disallowance of the reduced loss
    of Rs. 1,82, 12,862.80, the assessee filed an appeal before
    CIT(A) who by his order dated 12.12.2003 confirmed the order
    of the AO saying that the loss of Rs. 1,82, 12,862.80 incurred
    by the assessee on the sale of units should be totally ignore<i.
B   and that the same should not be allowed to be set-off or carried
    forward. Thus, the Department disal!Jwed the reduced loss of
    Rs. 1,82, 12,862.80 which amount was equal to the dividend,
    on the units declared by the mutual fund, of Rs. 1,82, 12,862.80.
    In other words, by the impugned orders passed by the AO, the
c   Department sought to tax the dividend income of the assessee
    during the relevant assessment year of Rs. 1,82, 12,862.80.

       To complete the chronology of events, it may be stated that
  the assessee moved the tribunal against the order dated
  12.12.2003. The disallowance stood deleted by the Special
D Bench of the Tribunal vide its impugned order dated 15.7.2005
  by holding that the assessee was entitled to set-off the said loss
  from the impugned transactions against its other income
  chargeable to tax. This view of the tribunal has been affirmed
  by the High Court vide its impugned judgment dated 8.8.2008,
E hence this civil appeal.

        5. According to Shri Parag P. Tripathi, learned Additional
  Solicitor General and Shri Preetesh Kapur, learned counsel for
  the Department, the amount received by the assessee as
F "dividend", in fact and in law, constitutes a "return of investment"
  in the hands of the assessee and, therefore, it follows that the
  said amount is required to be adjusted against the cost of
  purchase of the original units and once that is done there is in
  fact no loss suffered by the assessee on subsequent sale/
G redemption. Alternatively, if the so-called "dividend" did not
  constitute a return of investment, then since the price of units
  necessarily included the price of dividend as an identifiable
  element embedded therein to which a definite value could be
  assigned at the time of the purchase, the "dividend" is in effect
  "paid for". In such circumstances that part of the price of units
H
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK                   759
       BROKERS P. LTD. [S.H. KAPADIA, CJI.]
which clearly represented the cost of the dividend, is the           A
expenditure incurred for obtaining exempt income and if that
is the case then Section 14A requires that such expenditure
should be netted against the receipt of dividend. Before us, it
was also submitted that in any event "loss" is a commercial
concept under the Act. if a transaction is such that a "tax loss"    B
is created or contrived without suffering any corresponding
financial I commercial loss inasmuch as the money has in fact
been recouped in some other form (such as dividend), then
such a loss needs to be ignored for tax purposes, only to the
extent that the loss has in fact been recouped in another form.      c
This is because such a loss. not being a "commercial loss".
was never intended to be allowed under the Act. As.a corollary,
it was submitted that introduction of Section 94(7) prospectively
w.e.f. 1.4.2002 does not obliterate the aforementioned last
submission since a prospective amendment, by its very                D
definition, did not alter the existing law in respect of the past
transactions. Moreover, Section 94(7) specifically adopts the
above principle of tax avoidance and modifies it for the purpose
of dealing with what is called as "dividend stripping
transactions".
                                                                     E
     6. On facts it was submitted that the assessee had the
option to buy three different kinds of assets. Option was
available to the assessee to buy either the unit (ex-dividend)
or the unit and the dividend (cum-dividend) or only the dividend.
As far as the first two assets. there was no issue. If an            F
assessee wanted to buy a unit after declaration of the dividend,
then he can buy the ex-dividend unit as soon as possible after
the record date so that he pays only for the NAV relatable to
ex-dividend unit. after declaration of the dividend, without being
affected by market fluctuations. Similarly, if an assessee wants     G
to buy an asset consisting of the dividend and the unit, he can
buy cum-dividend unit at any point of time after the declaration
of the dividend but before the record date. According to the
Department, the problem arises in cases where an assessee
is desirous of buying only the dividend. In order to do so, he       H
    760         SUPREME COURT REPORTS               [2010) 7 S.C.R.


A buys the cum-dividend unit, after declaration of dividend but as
  close as possible to the record date (so as to isolate himself
  from market fluctuations), whereby he becomes entitled to
  receive the dividend payout on the record date and
  immediately after the record date is able to sell the ex-dividend
B unit. Consequently, by a series of fiscal transactions, the
  assessee ends up buying the dividenJ. Therefore, if 'x' is the
  price/ expenditure associated with the purchase of dividend,
  'y' is the price/ expenditure associated with the unit without
  dividend then, 'x' + 'y' would be the price of cum-dividend unit.
c Then price may be called 'z' in which event, the equation is:
          'x' i· 'y' = 'z'

       There is no dispute as to the identity of 'z', which is the
  price/ expenditure for purchasing cum-dividend unit, i.e., Rs.
D 17.23. In that event, 'y' would represent the sale price of ex-
  dividend unit, i.e., Rs. 13.23. Thus, 'x' can be found by the
  simple mathematical formula:

          'x'   ='z' - 'y'
E         'x' is equal to Rs. 17.23 ('z') - Rs. 13.23 ('y') =Rs. 4

       7. According to the Department, therefore, in the present
  case, Rs. 4 will be expenditure, attributable towards earning tax
  free dividend income which is disallowable under Section 14A
F of the Act. That, the newspaper advertisements issued by the
  Mutual Fund in the present case'8s on March 8, March 18 and
  March 22 amounted to an offer by Mutual Fund to the target
  buyers, i.e., a buyer who wants to claim losses in the trade of
  shares and securities so as to set it off against his other
G ~ncome. The effect of the newspaper advertisements is to
  segregate the unit into two assets, namely, the asset of the tax
  free dividend and the ex-dividend unit which will have an NAV
  reduced by the amount of the dividend payout per unit. Since
  there are two assets which are sold to the buyer of the cum-
H dividend units, it follows that the difference between the
        C.l.T., MUMBAI v. WALFORT SHARE & STOCK                   761
            BROKERS P. LTD. [S.H. KAPADIA, CJI.]
    purchase and sale price of the unit, is nothing but the               A
    expenditure incurred for purchasing the asset of tax free
    dividend. In this connection, reliance is placed on the
    Explanatory Memorandum accompanying the Finance Bill of
    2001 reported in 248 ITR 195 (St.).
                                                                          B
         8. In conclusion, it was submitted before us that the tax free
    dividend income was really in essence a cost recovery
    mechanism which finds an independent support in Accounting
    Standard No: 13, i.e., to the effect that such a return should go
    to reduce the cost of acquisition as such a return is really a        C
    return of investment and not return on investment.

         9. On behalf of assessee(s), Shri S.E. Dastur, learned
    senior counsel, Shri Ajay Vohra, learned counsel and Shri O.S.
    Bajpai, learned senior counsel, submitted that the basic
    submission of the Department to the effect that the amount            D
    received by the assessee as "dividend", in. fact and in law,
    constitutes "return of investment" is fallacious for several
    reasons. Firstly, the question whether an amount is a "cost
    return" depends on the terms of the contract. Secondly, the
    argument of the Department runs counter to Section 94(7). That        E
    sub-section clearly accepts that payment by way of dividend is
    a revenue receipt but it is exempt from tax under Section
    10(33). According to the assessee, if the argument of the
    Department is to be accepted that the amount represents
    "return of investment" then it would constitute a capital receipt     F
    and not a revenue receipt. Thirdly, if the dividend of Rs. 4 per
    unit is treated as "expenditure" covered by Section 14A and
    not as "dividend" as required by Section 94(7), it would mean
    that for the assessment years 2000-01 and 2001-02 the
    assessee would be in a worse position because for the relevant        G
    assessment years based on the "fiscality principle" the entire
    loss of Rs. 1,85,68,015 would be disallowed whereas for the
    subsequent years after insertion of Section 94(7) w.e.f.
    1.4.2002 only loss to the extent of the "dividend" amounting to
1
    Rs. 1,82, 12,862 would stand disallowed leaving Rs. 3,55, 153/        H
    762      SUPREME COURT REPORTS                  [2010] 7 S.C.R.


A   - as loss allowable. That was never the intention of the
    Parliament for inserting Section 94(7). The said sub-section
    was not intended to be beneficial. Fourthly, the fact that Section
    94(7) allows loss in excess of dividend means that it accepts
    that the transaction is genuine and in course of business. If the
B   transaction was a nullity, the entire loss would have been
    disallowed and not only to the extent of the dividend. Moreover,
    if losses could be disallowed on fiscality/ first principles then
    Section 94(7) is redundant. Fifthly, Section 14A is enacted for
    non-deduction of expenditure whereas Section 94(7) is enacted
c   to curb creation of short-term losses. Lastly, there is nothing to
    show that the NAV felron the next trading date after the record
    date on account of the dividend payout. In this connection, it
    was submitted that fall or increase in NAV depended upon the
    value of the underlying assets and not on the basis of the
    dividend payout. On interpretation of Sections 14A and 94(7)
0
    it was submitted that Section 14A deals with expenditure in
    relation to income whereas Section 94(7) deals with acquisition
    and sale of securities or units and provides for a consequence
    where the purchase and sale take place within a specified time
E   period. Each provision operates in its own field. When Section
    14A refers to disallowance of expenditure in relation to non-
    taxable income for computing the total income, what is meant
    is that such expenditure should be taken into account only for
    determining the quantum of the non-taxable income. This would
    result in the exempt dividend being reduced by the alleged
F   expenditure. The only impact on the exempting provision of
    Section 10(33) for unit income is by Section 94(7) and one
    cannot interpret Section 14A as leading to the same conclusiori
    as then Section 94(7) will be rendered nugatory. In other words.
    the two provisions operate in different time and space zones.
G   In support of the above contention, the assessee (s) has relied
    on the Memorandum as well as Circular No. 14 which clearly
    states that losses referred to in Section 94(7) are allowable
    from the assessment year 2002-03 subject to reduction of the
    actual computed loss to the extent of the dividend. If Section
H    14A is also to apply simultaneously then Section 94(7) will
    C.l.T., MUMBAI v. WALFORT SHARE & STOCK                 763
        BROKERS P. LTD. [S.H. KAPADIA, CJI.]
become nugatory. Whereas Section 14A applies to                     A
expenditure incurred to earn tax free income from the inception
of the Act, Section 94(7) seeks to reduce the quantum of the
loss with reference to the dividend earned from the assessment
year 2002-03. The two terms "expenditure" and "loss" are
conceptually different. Section 94(7) is a provision to set at      B
naught "avoidance of tax". If Sections 14A and 94(7) are
applied to the same transaction, it will result in Section 94(7)
being a "tax levying provision" and not an "avoidance of tax
provision". The effect of accepting the submission of the
Department is that in the present case the sum of Rs.               c
1,82, 12,862 would have to be considered twice, once, by way
of expenditure to earn the dividend income and the second
time by way of ignoring the loss to the extent it does not exceed
the dividend income of Rs. 1,82, 12,862. According to the
assessee (s), the embargo in Section 14A on the deductibility       D
of expenditure applies where admittedly an expenditure has
 been incurred and a deduction is claimed specifically in respect
thereof. In this connection, reliance was placed on the word
"allowed" in the said Section. In the present case, the assessee
(s) has not made any claim for deduction of Rs. 1,82, 12,862
and, therefore, the question of the said sum being disallowed       E
did not arise. On the other hand, Section 94(7) proceeds on
the footing that the entire dividend income falls within Section
 10(33) and the only adjustment is that the loss which has arisen
and would otherwise be allowable shall be ignored to the extent
it does not exceed the Section 10(33) income. Therefore,            F
according to the assessee (s), in applying Section 94(7) there
 is no question of making a deduction at the stage of Section
 14A as suggested by the learned Solicitor General Shri Gopal
Subramanium. According to the assessee (s), under Section
94(7) the dividend should go to reduce the loss already worked      G
out which implies that the loss is more than the dividend income
because it is only then that the question of reducing the loss to
some extent would arise. In this connection, the assessee(s)
submitted that for the assessment year 2002-03 the loss was
Rs. 1,85,68,015 which exceeded the dividend of Rs.                  H
    764     SUPREME COURT REPORTS                 [2010] 7 S.C.R.


A 1,82, 12,862 and, therefore, the loss allowable applying Section
  94(7) stood at Rs. 3,55, 153. Therefore, in order to reconcile
  Section 14A with Section 94(7) it was suggested on behalf of
  the assessee(s) that Section 14A should be confined to a case
  where there is expenditure on earning tax free income but
B where there is no acquisition of an asset and Section 94(7)
  should be confined to a case where there is acquisition of an
  asset thereby indicating a distinction between a claim for
  deduction of an expenditure and a claim for allowance of a
  business loss. Section 14A deals with disallowance of
c expenditure per se and not with a disallowance of a loss which
  arises at a point of time subsequent to the purchase of units
  and the receipt of exempt income and occurring only when there
  is a sale of the purchased units. Section 14A is not concerned
  with a purchase and subsequent sale of an asset which is dealt
D with in Section 94(7) alone. In other words, Section 14A does
   not apply to the case of a claim for set off of a loss which is
  dealt with only in Section 94(7) and that too from assessment
  year 2002-03. Section 14A was inserted to meet cases where
  deductions have been claimed in respect of expenditure for
  earning exempt income like dividend income and the said
E Section was never intended and does not apply to the case of
   a claim for set off of a loss which as stated above is dealt with
   in Section 94(7) alone and that too with effect from the
   assessment year 2002-03. Thus, whereas Section 14A was
   designed to overcome the problem created by certain
F decisions of this Court in Rajasthan State Warehousing
   Corporation v. Commissioner of Income- Tax [242 ITR 450]
   and in the case of Commissioner of Income- Tax, Madras v.
   Indian Bank Limited [56 ITR 77], Section 94(7) had no such
   object. The two, therefore, operate in different fields and they
G have different objects and because the two provisions operated
   in two different fact situations Section 14A was made effective
   from assessment year 1962-63 whereas Section 94(7) is made
   effective from the assessment year 2002-03. Thus, the
   Parliament has treated both the sections as dealing with
H separate circumstances and, therefore, one must confine
    C.l.T., MUMBAI v. WALFORT SHARE & STOCK                  765
        BROKERS P. LTD. [S.H. KAPADIA, CJI.]
Section 14A to expenditure of the type.referred to in Sections       A
30 to 43B of the Act which relates to expenditure which does
not result in acquisition of an asset. It is clear that where the
asset so acquired is sold and results in a loss Section 94(7)
steps in.
                                                                     B
      10. According to the learned Solicitor General of India,
 Section 14A was inserted by Finance Act 2001 with effect from
 1.4.1962. According to him, the fundamental principle
 underlying Section 14A is that income which is not taxable or
 exempt falls in a separate stream distinct from income taxable      C
 under the Act. That, expenditure which is incurred in relation to
 income subject to tax would be admissible under Sections 30
 to 43B whereas expenditure incurred to earn exempt income
 would be extraneous in the computation of taxable income
 under the Act. Thus, only that expenditure is deductible which
 is incurred·in relation to business or profession. Expenditure      D
 producing non-taxable income would not be permitted to be
 claimed as admissible expenditure. Thus, in all cases where
 the assessee has some exempt income, 'his total expenditure
 has got to be apportioned between taxable income and exempt
,income and the latter would have to be 'tlisallowed. The only       E
 event that triggers Section 14A is that the'assessee has both
 taxable and exempt income and, therefor~. one need not go
 by the "two asset" theory. According to the learned SGI, Section
 14A is not concerned with whether the assessee makes a profit
 or a loss. According to the learned SGI, application of Section     F
 94(7) will not rule out Section 14A. It was submitted that both
 the provisions can apply simultaneously. In this connection, it
 was urged that in the first stage Section 14A can be applied
 to determine the expenditure to be excluded. After excluding
 such expenditure from the cost of purchase, what remains may        G
 be called as adjusted purchase cost. If units qre bought and
 sold within 3/9 months period, then, the adjusted purchase cost
 must be deducted from the sale. If this leads to a profit then
 Section 94(7) will not apply. However, if there is a loss, such
 loss will have to be ignored to the extent of the dividend          H
    766           SUPREME COURT REPORTS               [2010] 7 S.C.R.


A   received. This was the suggested mode for reconciling Section
    14A with Section 94(7) by the learned SGI, which according to
    the assessee(s) would result in double counting of the dividend
    amount of Rs. 1,82, 12,862, one as dividend and the other as
    a loss.
B
          11. In this batch of cases, we are required to decide three
    distinct points which are as follows:

           (i)      Whether "return of investment" or "cost recovery"
                    would fall within the expression "expenditure
C                   incurred" in Section 14A?

           (ii)     Impact of Section 94(7) w.e.f. 1.4.2002 on the
                    impugned transactions.

           (iii)    Reconciliation of Section 14A with Section 94(7) of
D                   the Act.

         12. To answer the above, we need to reproduce
    hereinbelow Sections 10(33), 14A, 94(7) and the relevant paras
    of Circular No. 14 of 2001 issued by the CBDT:
E
          Section 10 - Incomes not included in total income

          In computing the total income of a previous year of any
          person, any income falling within any of the following
          clauses shall not be included-
F
           (33) any income by way of -

           (i)      dividends referred to in section 115-0; or

           (ii)     income received in respect of units from the Unit
G                   Trust of India established under the Unit Trust of
                    India Act, 1963 (52 of 1963); or

           (iii)    income received in respect of the units of a mutual
                    fund specified under clause (230):
H
C.l.T., MUMBAI v. WALFORT SHARE & STOCK                  767
    BROKERS P. LTD. [S.H. KAPADIA, CJI.]
      Provided that this clause shall not apply to any          A
income arising from transfer of units of the Unit Trust of
India or of a mutual fund, as the case may be.

Section 14A - Expenditure incurred in relation to income
not includible in total income
                                                                B
      For the purposes of computing the total income
under this Chapter, no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation
to income which does not form part of the total income
under this Act.                                                 c
       Provided that nothing contained in this section shall
empower the Assessing Officer either to reassess under
section 147 or pass an order enhancing the assessment
or reducing a refund already made or otherwise increasing       D
the liability of the assessee under section 154, for any
assessment year beginning on or before the 1st day of
April, 2001.

Chapter : X - SPECIAL PROVISIONS RELATING TO
A VO/DANCE OF TAX                                               E
Section 94 - Avoidance of tax by certain transactions in
securities

(7) Where -
                                                                F
(a) any person buys or acquires any securities or unit within
a period of three months prior to the record date ;

(b) such person sells or transfers such securities or within
a period of three months after such date;                       G

(c) the dividend or income on such securities or unit
received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such
purchase and sale of securities or unit, to the extent such     H
    768      SUPREME COURT REPORTS                   [2010] 7 S.C.R.


A         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.

          Circular No. 14 of 2001
B
          56. Measures to curb creation of short-term losses by
          certain transactions in securities and units

          56.1 Under the existing provisions contained in Section 94,
c         where the owner of any securities enters into transactions
          of sale and repurchase of those securities which result in
          the interest or dividend in respect of such securities being
          received by a person other than such owner, the
          transactions are to be ignored and the interest or dividend
D         from such securities is required to be included in the total
          income of the owner.

          56.2 The existing provisions did not cover a case where
          a person buys securities (including units of a mutual fund)
          shortly before the record date fixed for declaration of
E         dividends, and sells the same shortly after the record date.
          Since the cum-dividend price at which the securities are
          purchased would normally be higher than the ex-dividend
          price at which they are sold, such transactions would result
          in a loss which could be set off against other income of
F         the year. At the same time, the dividends received would
          be exempt from tax under Section 10(33). The net result
          would be the creation of a tax loss, without any actual
          outgoings.

          56.3 With a view to curb the creation of such short-term
G
          losses, the Act has inserted a new Sub-section (7) in the
          section to provide that where any person buys or acquires
          securities or units within a period of three months prior to
          the record date fixed for declaration of dividend or
          distribution of income in respect of the securities or units,
H
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK                   769
       BROKERS P. LTD. [S.H. KAPADIA, CJI.]
    and sells or transfers the same within a period of three         A
    months after such record date, and the dividend or income
    received or receivable is exempt, then, the loss, if any,
    arising from such purchase or sale shall be ignored to the
    extent such loss does not exceed the amount of such
    dividend or interest, in the computation of the income           B
    chargeable to tax of such person.

    56.4 Definitions of the terms "record date" and "unit" have
    also been provided in the Explanation after sub-section (7)
    of section 94.
                                                                     c
    56.5 This amendment will take effect from 1st April, 2002,
    and will accordingly, apply in relation to the assessment
    year 2002-2003 and subsequent years.

     13. The main issue involved in this batch of cases is -         D
whether in dividend stripping transaction (alleged to be
colourable device by the Department) the loss on sale of wnits
could be considered as expenditure in relation to earning of
dividend income exempt under Section 10(33), disallowable
under Section 14A of the Act? According to the Department,           E
the differential amount between the purchase and sale price of
the units constituted "expenditure incurred" by the assessee for
earning tax-free income, hence, liable to be disallowed under
Section 14A. As a result of the dividend pay-out, 'according to
the Department, the NAV of the mutual fund, which was Rs.
                                                                     F
17.23 per unit on the record date, fell to Rs. 13.23 on 27.3.2000
(the next trading date) and, thus, Rs. 4/- per unit, according to
the Department, constituted "expenditure incurred" in terms of
Section 14A of the Act. In its return, the assessee, thus, claimed
the dividend received as exempt under Section 10(33) and
also claimed set-off for the loss against its taxable income,        G
thereby seeking to reduce its tax liability and gain tax
advantage.

      14. The insertion of Section 14A with retrospective effect
is the serious attempt on the part of the Parliament not to allow    H
    770     SUPREME COURT REPORTS                  (2010] 7 S.C.R.


A deduction in respect of any expenditure incurred by the
  assessee in relation to income, which does not form part of the
  total income under the Act against the taxable income (see
  Circular No. 14 of 2001 dated 22.11.2001 ). In other words,
  Section 14A clarifies that expenses incurred can be allowed
B only to the extent they are relatable to the earning of taxable
  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
c 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 against
  taxable income and at the same time avail the tax incentive by
  way of exemption of exempt income without making any
0 apportionment of expenses incurred in relation to exempt
  income. The basic reason for insertion of Section 14A is that
  certain incomes are not includible while computing total income
  as these are exempt under certain provisions of the Act. In the
  past, there have been cases in which deduction has been
  sought in respect of such incomes which in effect would mean
E that tax incentives to certain incomes was being used to reduce
  the tax payable on the non-exempt income by debiting the
  expenses, incurred to earn the exempt income, against taxable
  income. The basic principle of taxation is to tax the net income,
  i.e., gross income minus the expenditure. On the same analogy
F the exemption is also in respect of net income. Expenses
  allowed can only be in respect of earning of taxable income.
  This is the purport of Section 14A. In Section 14A, the first
  phrase is "for the purposes of computing the total income under
  this Chapter" which makes it clear that various heads of income
G as prescribed under Chapter IV would fall within Section 14A.
  The next phrase is, "in relation to income which does not form
  part of total income under the Act". It means that if an income
  does not form part of total income, then the related expenditure
  is outside the ambit of the applicability of Section 14A. Further,
H Section 14 specifies five heads of income which are
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK               771
       BROKERS P. LTD. [S.H. KAPADIA, CJI.]
chargeable to tax. In order to be chargeable, an income has to A
be brought under one of the five heads. Sections 15 to 59 lay
down the rules for computing income for the purpose of
chargeability to tax under those heads. Sections 15 to 59
quantify the total income chargeable to tax. The permissible
deductions enumerated in Sections 15 to 59 are now to be B
allowed only with reference to income which is brought under
one of the above heads and is chargeable to tax. If an income
like dividend income is not a part of the total income, the
expenditure/ deduction though of the nature specified in
Sections 15 to 59 but related to the income not forming part of c
total income could not be allowed against other income
includible in the total income for the purpose of chargeability
to tax. The theory of apportionment of expenditures between
taxable and non-taxable has, in principle, been now widened
 under Section 14A. Reading Section 14 in juxtaposition with 0
 Sections 15 to 59, it is clear that the words "expenditure
 incurred" in Section 14A refers to expenditure on rent, taxes,
 salaries, interest, etc. in respect of which allowances are
 provided for (see Sections 30 to 37). Every pay-out is not
 entitled to allowances for deduction. These allowances are
 admissible to qualified deductions. These deductions are for E
 debits in the real sense. A pay-back does not constitute an
 "expenditure incurred" in terms of Section 14A. Even applying
 the principles of accountancy, a pay-back in the strict sense
 does not constitute an "expenditure" as it does not impact the
 Profit & Loss Account. Pay-back or return of investment will F
 impact the balance-sheet whereas return on investment will
 impact the Proftt & Loss Account. Cost of acquisition of an
 asset impacts the balance sheet. Return of investment brings
 down the cost. It will not increase the expenditure. Hence,
 expenditure, return on investment, return of investment and cost G
 of acquisition are distinct concepts. Therefore, one needs to
 read the words· "expenditure incurred" in Section 14A in the
 context of the scheme of 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 H
    772     SUPREME COURT REPORTS                  (2010] 7 S.C.R.

A includible in the "total income" for the purpose of chargeability
  to tax. As stated above, the scheme of Sections 30 to 37 is
  that profits and gains must be computed subject to certain
  allowances for deductions/ expenditure. The charge is not on
  gross receipts, it is on profits and gains. Profits have to be
B 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 facts of the case
  a proper Debit Item to be charged against the Incomings of the
  business in ascertaining the true profits. A return of investment
c or a pay-back is not such a Debit Item as explained above,
  hence, it is not "expenditure incurred" in terms of Section 14A.
  Expenditure is a pay-out. It relates to disbursement. A pay-back
  is not an expenditure in the scheme of Section 14A. For
  attracting Section 14A, there has to be a proximate cause for
D disallowance, which is its relationship with the tax exempt
  income. Pay-back or return of investment is not such proximate
  cause, hence, Section 14A is not applicable in the present case.
  Thus, in the absence of such proximate cause for disallowance,
  Section 14A cannot be invoked. In our view, return of investment
E cannot be construed to mean "expenditure" and if it is construed
  to mean "expenditure" in the sense of physical spending still
  the expenditure was not such as could be claimed as an
  "allowance" against the profits of the relevant accounting year
  under Sections 30 to 37 of the Act and, therefore, Section 14A
  cannot be invoked. Hence, the two asset theory is not applicable
F in this case as there is no expenditure incurred in terms of
  Section 14A.

       15. The next point which arises for determination is whether
  the "loss" pertaining to exempted income was deductible
G agaiAst the chargeable income. In other words, whether the loss
  in the sale of units could be disallowed on the ground that the
  impugned transaction was a transaction of dividend stripping.
  The AO in the present case has disallowed the loss of Rs.
  1,82, 12,862 on the sale of 40% tax-free units of the mutual fund.
H The AO held that the assessee had purposely and in a planned
    C.l.T., MUMBAI v. WALFORT SHARE & STOCK                    773
        BROKERS P. LTD. [S.H. KAPADIA, CJI.]

manner entered into a pre-meditated transaction of buying and          A
selling units yielding exempted income with the full knowledge
about the guaranteed fall in the market value of the units and
the payment of tax-free dividend, hence, disallowance of the
loss.
                                                                       B
     16. In the lead case, we are concerned with the
assessment years prior to insertion of Section 94(7) vide
Finance Act, 2001 w.e.f. 1.4.2002. We are of the view that the
AO had erred in disallowing the loss. In the case of Vijaya
Bank v. Additional Commissioner of Income Tax [1991] 187               C
ITR 541, it was held by this Court that where the assessee buys
securities at a price determined with reference to their actual
value as well as interest accrued thereon till the date of purchase
the entire price paid would be in the nature of capital outlay and
no part of it can be set off as expenditure against income
accruing on those securities.                                          D

      17. The real objection of the Department appears to be
that the assessee is getting tax-free dividend; that at the same
time it is claiming loss on the sale of the units; that the assessee
had purposely and in a planned manner entered into a pre-              E
meditated transaction of buying and selling units yielding
exempted dividends with full knowledge about the fall in the NAV
after the record date and the payment of tax-free dividend and,
therefore, loss on sale was not genuine. We find no merit in
the above argument of the Department. At the outset, we may            F
state that we have two sets of cases before us. The lead matter
covers assessment years before insertion of Section 94(7) vide
Finance Act, 2001 w.e.f. 1.4.2002. With regard to such cases
we may state that on facts it is established that there was a
"sale". The sale-price was received by the assessee. That, the         G
assessee did receive dividend. The fact that the dividend
received was tax-free is the position recognized under Section
10(33) of the Act. The assessee had made use of the said
provision of the Act. That such use cannot be called "abuse of
law". Even assuming that the transaction was pre-planned there
                                                                       H-
    774      SUPREME COURT REPORTS                   [2010] 7 S.C.R.


A   is nothing to impeach the genuineness of the transaction. With
    regard to the ruling in McDowell & Co. Ltd. v. Commercial Tax
    Officer [154 ITR 148(SC)], it may be stated that in the later
    decision of this Court in Union of India v. Azadi Bachao
    Ando/an [263 ITR 706(SC)] it has been held that a citizen is
B   free to carry on its business within the four corners of the law.
    That, mere tax planning, without any motive to evade taxes
    through colourable devices is not frowned upon even by the
    judgment of this Court in McDowell & Co. Ltd. 's case (supra).
    Hence, in the cases arising before 1.4.2002, losses pertaining
c   to exempted income cannot be disallowed. However, after
     1.4.2002, such losses to the extent of dividend received by the
    assessee could be ignored by the AO in view of Section 94(7).
    The object of Section 94(7) is to curb the short term losses.
    Applying Section 94(7) in a case for the assessment year(s)
    falling after 1.4.2002, the loss to be ignored would be only to
0
    the extent of the dividend received and not the entire loss. In
    other words, losses over and above the amount of the dividend
    received would still be allowed from which it follows that the
     Parliament has not treated the dividend stripping transaction
E    as sham or bogus. It has not treated the entire loss as fictitious
    or only a fiscal loss. After 1.4.2002, losses over and above the
    dividend received will not be ignored under Section 94(7). If the
    argument of the Department is to be accepted, it would mean
     that before 1.4.2002 the entire loss would be disallowed as not
    genuine but, after 1.4.2002, a part of it would be allowable
F    under Section 94(7) which cannot be the object of Section 94(7)
    which is inserted to curb tax avoidance by certain types of
     transactions in securities. There is one more way of answering
     this point. Sections 14A and 94(7) were simultaneously inserted
     by the same Finance Act, 2001. As stated above, Section 14A
G    was inserted w.e!.f. 1.4.1962 whereas Section 94(7) was
     inserted w.e.f. 1.4.2002. The reason is obvious. Parliament
     realized that several public sector undertakings and public
     sector enterprises had invested huge amounts over last couple
     of years in the impugned dividend stripping transactions so also
H    declaration of dividends by mutual fund are being vetted and
   C.l.T., MUMBAI v. WALFORT SHARE & STOCK                   775
       BROKERS P. LTD. [S.H. KAPADIA, CJI.]
regulated by SEBI for last couple of years. If Section 94(7)        A
would have been brought into effect from 1.4.1962, as in the
case of Section 14A, it would have resulted in reversal of large
number of transactions. This could be one reason why the
Parliament intended to give effect to Section 94(7) only w.e.f.
1.4.2002. It is important to clarify that this last reasoning has   B
nothing to do with the interpretations given by us to Sections
14A and 94(7). However, it is the duty of the court to examine
the circumstances and reasons why Section 14A inserted by
Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section
94(7) inserted by the same Finance Act as brought into force        c
w.e.f. 1.4.2002.

     18. The next question which we need to decide is about
reconciliation of Sections 14A and 94(7). In our view, the two
operate in different fields. As stated above, Section 14A deals
with disallowance of expenditure incurred in earning tax-free       D
income against the profits of the accounting year under Sections
30 to 37 of the Act. On the other hand, Section 94(7) refers to
disallowance of the loss on the acquisition of an asset which
situation is not there in cases falling under Section 14A. Under
Section 94(7) the dividend goes to reduce the loss. It applies      E
to cases where the loss is more than the dividend. Section 14A
applies to cases where the assessee incurs expenditure to
earn tax free income but where there is no acquisition of an
asset. In cases falling under Section 94(7), there is acquisition
of an asset and existence of the loss which arises at a point of    F
time subsequent to the purchase of units and receipt of exempt
income. It occurs only when the sale takes place. Section 14A
comes in when there is claim for deduction of an expenditure
whereas Section 94(7) comes in when there is claim for
allowance for the business loss. We may reiterate that one must     G
keep in mind the conceptual difference between loss,
expenditure, cost of acquisition, etc. while interpreting the
scheme of the Act.

     19. Before concluding, one aspect concerning Para 12 of
                                                                    H
   776     SUPREME COURT REPORTS                [2010) 7 S.C.R.


A Accounting Standard AS-13 relier upon by the Revenue needs
  to be highlighted. Para 12 indicates that lnteresU dividends
  received on investments are generally regarded as return on
  investment and not return of investment. It is only in certain
  circumstances where the purchase price includes the right to
B receive crystallized and accrued dividends/ interest, that have
  already accrued and become due for payment before the date
  of purchase of the_units, that the same has got to be reduced
  from the purchase cost of the investment. A mere receipt of
  dividend subsequent to purchase of units, on the basis of a
C person holding units at the time of declaration of dividend on
  the record date, cannot go to offset the cost of acquisition of
  the units. Therefore, AS-13 has no application to the facts of
  the present cases where units are bought at the ruling NAV with
  a right to receive dividend as and when declared in future and
  did not carry any vested right to claim dividends which had
0
  already accrued prior to the purchase.

       20. For the above reasons, we find no infirmity in the
  impugned judgment of the High Court and, accordingly, these
  Civil Appeals filed by the Department are dismissed with no
E order as to costs.               •

    N.J.                                    Appeals dismissed.