Can a dividend-stripping loss be disallowed for a year before s.94(7) came in, on the footing that it was expenditure relating to exempt income?
No. Sub-section (7) of s.94 was inserted by the Finance Act 2001 with effect from 1 April 2002 and is enforceable only from AY 2002-03 onwards; it did not apply to AY 2001-02. And on Walfort Share and Stock Brokers, a loss on the purchase and sale of units is not expenditure incurred in relation to exempt income, so s.14A does not reach it either.
Decided by the High Court (R. Sudhakar J and R. Karuppiah J) on 2015-02-02, reported as T.C.A. Nos. 1174 and 1175 of 2007 (High Court of Judicature at Madras). It bears on section 94(7), section 14A, section 260A of the Income Tax Act 1961, in Deductions & Disallowances, Capital Gains Exemptions, How Tax Law Is Read and Capital Gains matters.
The two propositions have to be kept apart. The first is a pure commencement point and is now of narrow use, since the years it governs are long closed except in stray reassessment and appeal-effect matters. The second is the durable one: the department's habit of recasting a stripping loss as s.14A expenditure fails because a return of investment is not expenditure — and that reasoning is unaffected by the Finance Act 2022 Explanation, which is about whether exempt income arose, not about whether a loss is expenditure. The real point of s.94(7) for a live year is that it is a targeted and limited provision: it ignores the loss only up to the amount of the dividend or income received, and it bites only if all three of its conditions are satisfied on the record dates. Where any one condition fails, the loss survives in full.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Appeals under s.260A against the order of the Chennai Bench of the Tribunal dated 4 April 2007 in ITA Nos. 3323 and 3324/Mds/2004. The assessee had incurred a loss in the course of the purchase and sale of mutual fund units, having received dividend on those units before the loss arose. The Tribunal held that the business loss was an expenditure incurred for earning exempt dividend income and therefore not allowable under s.14A, and further held that the transaction of purchase and sale of units had not taken place. The questions admitted were whether the Tribunal was right in treating the loss as expenditure incurred for earning exempt dividend income under s.14A when the dividend income preceded the occurrence of the loss, and whether it was right in holding that the transaction had not taken place while at the same time holding the loss to be expenditure for earning dividend income. The assessment year before the Court was 2001-02.
The appeals were allowed and the Tribunal's order set aside, with no order as to costs. Section 94(7) did not apply to AY 2001-02 because it came into effect only from 1 April 2002 and is enforceable from AY 2002-03 onwards; and on Walfort Share and Stock Brokers the Department's plea that the transaction attracted s.14A failed, so the assessee was entitled to claim the amount as business loss in the year in question.
Reading the sub-section, the Court held that s.94(7) was inserted to clarify how income is to be computed for the purpose of charging tax in the case of purchase and sale of securities or units within a specified period, and that the purport of its insertion is only to curb dividend stripping used as a colourable device. Since it came into effect on 1 April 2002 it is enforceable only from AY 2002-03 and could not govern AY 2001-02 (para 8). On the s.14A limb, the Court applied the Supreme Court's decision in CIT v. Walfort Share & Stock Brokers P. Ltd. that a pay-back does not constitute expenditure incurred within s.14A and that a return of investment cannot be construed as expenditure, and held that the Department's plea that the transaction attracted s.14A failed.
The said Section 94 (7) having come into effect from 1.4.2002, the same will be enforceable only from the assessment year 2002-2003 onwards. In the present case, the assessment year pertains to 2001-2002.
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Handle my notice → Ask a CA on WhatsAppNo. Sub-section (7) of s.94 was inserted by the Finance Act 2001 with effect from 1 April 2002 and is enforceable only from AY 2002-03 onwards; it did not apply to AY 2001-02. And on Walfort Share and Stock Brokers, a loss on the purchase and sale of units is not expenditure incurred in relation to exempt income, so s.14A does not reach it either. This was decided by the High Court (R. Sudhakar J and R. Karuppiah J) and bears on section 94(7), section 14A, section 260A of the Income Tax Act 1961. It is reported as T.C.A. Nos. 1174 and 1175 of 2007 (High Court of Judicature at Madras). The two propositions have to be kept apart. The first is a pure commencement point and is now of narrow use, since the years it governs are long closed except in stray reassessment and appeal-effect matters. The second is the durable one: the department's habit of recasting a stripping loss as s.14A expenditure fails because a return of investment is not expenditure — and that reasoning is unaffected by the Finance Act 2022 Explanation, which is about whether exempt income arose, not about whether a loss is expenditure. The real point of s.94(7) for a live year is that it is a targeted and limited provision: it ignores the loss only up to the amount of the dividend or income received, and it bites only if all three of its conditions are satisfied on the record dates. Where any one condition fails, the loss survives in full. If it applies to you, the first step is this: Take the three s.94(7) conditions one at a time against the contract notes: acquisition within the specified period before the record date, sale or transfer within the specified period after it, and exemption of the dividend or income. Failure of any one takes the transaction out of the sub-section entirely.
Appeals under s.260A against the order of the Chennai Bench of the Tribunal dated 4 April 2007 in ITA Nos. 3323 and 3324/Mds/2004. The assessee had incurred a loss in the course of the purchase and sale of mutual fund units, having received dividend on those units before the loss arose. The Tribunal held that the business loss was an expenditure incurred for earning exempt dividend income and therefore not allowable under s.14A, and further held that the transaction of purchase and sale of units had not taken place. The questions admitted were whether the Tribunal was right in treating the loss as expenditure incurred for earning exempt dividend income under s.14A when the dividend income preceded the occurrence of the loss, and whether it was right in holding that the transaction had not taken place while at the same time holding the loss to be expenditure for earning dividend income. The assessment year before the Court was 2001-02. The matter was decided on 2015-02-02 by the High Court (R. Sudhakar J and R. Karuppiah J). On those facts the High Court held as follows. The appeals were allowed and the Tribunal's order set aside, with no order as to costs. Section 94(7) did not apply to AY 2001-02 because it came into effect only from 1 April 2002 and is enforceable from AY 2002-03 onwards; and on Walfort Share and Stock Brokers the Department's plea that the transaction attracted s.14A failed, so the assessee was entitled to claim the amount as business loss in the year in question.
Reading the sub-section, the Court held that s.94(7) was inserted to clarify how income is to be computed for the purpose of charging tax in the case of purchase and sale of securities or units within a specified period, and that the purport of its insertion is only to curb dividend stripping used as a colourable device. Since it came into effect on 1 April 2002 it is enforceable only from AY 2002-03 and could not govern AY 2001-02 (para 8). On the s.14A limb, the Court applied the Supreme Court's decision in CIT v. Walfort Share & Stock Brokers P. Ltd. that a pay-back does not constitute expenditure incurred within s.14A and that a return of investment cannot be construed as expenditure, and held that the Department's plea that the transaction attracted s.14A failed. In the words reproduced by the source cited on this page: "The said Section 94 (7) having come into effect from 1.4.2002, the same will be enforceable only from the assessment year 2002-2003 onwards. In the present case, the assessment year pertains to 2001-2002." The decision followed or applied Commissioner of Income Tax v. Walfort Share & Stock Brokers P. Ltd. — applied.
It was decided by the High Court on 2015-02-02 and is reported as T.C.A. Nos. 1174 and 1175 of 2007 (High Court of Judicature at Madras). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 94(7), section 14A, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed and the Tribunal's order set aside, with no order as to costs. Section 94(7) did not apply to AY 2001-02 because it came into effect only from 1 April 2002 and is enforceable from AY 2002-03 onwards; and on Walfort Share and Stock Brokers the Department's plea that the transaction attracted s.14A failed, so the assessee was entitled to claim the amount as business loss in the year in question. It arises in Deductions & Disallowances, Capital Gains Exemptions, How Tax Law Is Read and Capital Gains matters, on section 94(7), section 14A, section 260A of the Income Tax Act 1961, and was decided by R. Sudhakar J and R. Karuppiah J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the current statutory text of s.94(7) for your year before arguing the periods — the holding period after the record date is not the same for securities and for units, and it was changed after the sub-section was first enacted. Do not take it from the department's archived section pages (see editor note). If the loss exceeds the dividend, insist that only the amount up to the dividend is ignored; the excess is allowable. Where the officer has instead invoked s.14A against the loss, answer with Walfort as applied here: a pay-back or return of investment is not expenditure incurred.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns nothing for this judgment, and a second search on the party name returns only six documents, most of them unrelated Madras litigation involving firms of similar name. The one tax decision that mentions it, DCIT, Corporate Circle-1, Coimbatore v Bannari Amman Sugars Ltd (Chennai Tribunal, 25 April 2023), does not treat it: the reference sits in the Revenue's ground of appeal complaining that 'the CIT(A) erred in placing reliance in the case of Patco investment & Consultancy Services (P) Ltd to delete the disallowance made u/s 14 A', and the Tribunal's own reasoning at paras 6 to 9 decides the section 14A point on the nexus between expenditure and exempt income without mentioning Patco or the Finance Act 2006 amendment at all. That is a ground of appeal, not an application. No decision applying, affirming, overruling or doubting the judgment was found and no Supreme Court challenge is traceable. A practitioner should note the Revenue's standing objection that the section 14A limb of the judgment concerns an assessment year before the Finance Act 2006 insertion of section 14A(2) and (3), which limits its usefulness for later years; the section 94(7) limb, which turns on the provision's own commencement from assessment year 2002-03, is unaffected. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two points about the sources behind this page. The passage summarising s.94(7) at paragraph 7 of the judgment could not be reproduced word for word from the copy available, so paragraph 8, and not paragraph 7, is the paragraph quoted here. The consequence is that the description of the post-record-date periods — three months for securities and nine months for units — is not asserted anywhere in this entry, and a reader who needs those periods must take them from the section as it stood for his own year rather than from this page. Separately, and this matters for anyone checking the section, the departmental text of s.94 that is readily available is out of date in two different ways. One version carries only sub-sections (1) to (6) and is footed 'As amended by the Finance Act, 1989'. Another carries sub-section (7) in its original 2001 form, with three months after the record date for units as well as for securities, and carries no sub-section (8) at all. Neither may be used to state the current position, and neither is used here. The decision itself is narrow. It holds that s.94(7) operates only from assessment year 2002-03, which is the year from which it was brought into force, and it says nothing about how a dividend-stripping loss falls to be treated for an earlier year under any other provision. Nor does it decide anything about s.14A, which is tagged on this page because it was raised alongside; the reasoning on the s.94(7) question stands on its own commencement point. A reader arguing an earlier year should therefore rely on this decision for the commencement proposition and build the rest of the case elsewhere. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed and the Tribunal's order set aside, with no order as to costs. Section 94(7) did not apply to AY 2001-02 because it came into effect only from 1 April 2002 and is enforceable from AY 2002-03 onwards; and on Walfort Share and Stock Brokers the Department's plea that the transaction attracted s.14A failed, so the assessee was entitled to claim the amount as business loss in the year in question.
TaxSphere, “Patco Investment & Consultancy Services Pvt Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/patco-investment-94-7-applies-only-from-ay-2002-03/ (validity last checked 2026-09-08)
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I bought mutual fund units just before the record date, took the tax-free dividend and sold them ex-dividend at a loss — can the department disallow that loss for a year before section 94(7) came in?
I bought mutual fund units, took the dividend the same day and booked a short-term loss. The department calls it fictitious and has reopened. Can it?
The officer went straight to the Rule 8D formula without saying what was wrong with my own s.14A working. Is that a good ground?
I said I incurred no expenditure to earn my dividend income, and the officer simply applied rule 8D and disallowed a large sum. Can he go straight to the formula?
