JUDGMENT judgment of court was delivered by R. Sudhakar J.-Aggrieved by order of Tribunal in dismissing appeal filed by it, assessee is before this court by filing present appeal. This court, vide order dated September 24, 2007, while admitting appeal, framed following substantial questions of law for consideration: "(1) Whether, on facts and in circumstances of case, Tribunal was right in law in holding that business loss incurred in course of purchase and sale of mutual fund units is expenditure incurred for earning exempt dividend income and, hence, not allowable under section 14A of Income-tax Act,1961 ignoring fact that dividend income preceded occurrence of loss? and (2) Whether, on facts and in circumstances of case, Tribunal was right in holding that transaction of purchase and sale of units had not taken place without appreciating evidence produced and after holding that loss on sale of shares is expenditure for earning dividend income?" appellant-assessee is engaged in business of trading in stocks and shares. appellant-assessee, for assessment year 2001-02, filed its return of income on October 22, 2001, declaring loss of Rs. 43,67,910. return was processed under section 143(1) of Income-tax Act (for short "the Act") on October 17, 2002. Notice under section 142(1) was issued calling for certain information and same was furnished. In return, assessee claimed dividend of Rs. 98,47,325 as exempt under section 10(33) of Act. assessee received dividends from various companies on mutual fund units. dividend includes dividend of Rs. 40,22,988 received from Sun F and C Mutual Fund units and dividend of Rs. 58,06,451 received from J. M. Mutual Fund units along with other dividends, which were claimed to be exempt under section 10(33) of Act. Notice was issued on assessee and in response to said notice, particulars sought for were provided by assessee. From narration of details as culled out by Assessing Officer, it appears that following transaction took place, as could be seen from assessment order and for better clarity, said portion of assessment order is extracted hereinbelow: "The assessee claims to have accepted loan of Rs. 2 crores from M/s. Kotak Mahindra Finance Ltd., vide agreement dated December 14, 2000. assessee filed copy of said loan agreement. agreement is undated and is signed by assessee only. assessee also executed power of attorney in favour of M/s. Kotak Mahindra Finance Ltd., enabling latter to bid/apply or subscribe mutual fund units, to pay monies due on bid/application, to make application for redemption, to receive dividend, to receive consideration consequent on sale. Record date for distribution of dividend in case of Sun F and C Mutual Fund was December 18, 2000. M/s. Kotak Mahindra Finance Ltd., purchased 11,49,425 units of Sun F and C Mutual Fund on December 18, 2000, at Rs. 17.40 for total consideration of Rs. 2 crores M/s. Kotak Mahindra Finance Ltd. directly paid purchase consideration to mutual fund. Thus, M/s. Kotak Mahindra Finance Ltd. purchased units-cum-dividend price of Rs. 17.40. On record date, dividend at Rs. 3.50 per unit amounting to Rs. 40,22,988 was to be received by M/s. Kotak Mahindra Finance Ltd. units were purchased with dividend reinvestment option, hence dividend of Rs. 40,22,988 was reinvested at Rs.13.60 per unit equivalent to 295,807 units. Immediately one day after record date on December 19, 2000, all units were redeemed at Rs. 13.44 per unit. On redemption M/s. Kotak Mahindra Finance Ltd., received Rs. 1,54,00,947 (excluding dividend) directly from mutual fund. Thus, mutual fund units were purchased-cum-dividend at Rs. 17.40 and redeemed ex-dividend at Rs. 13.44. Thus, in transaction M/s. Kotak Mahindra Finance Ltd. incurred loss of Rs. 3.96 per unit. This loss is claimed by assessee as its trading loss. assessee neither received cash of Rs. 2 crores nor redemption amount of Rs. 1.54 crores, excluding dividend. Not dividend of Rs. 40,22,988 was received by assessee. loan account with M/s. Kotak Mahindra Finance Ltd., was squared up by assessee by paying balance due. assessee received incentive of Rs. 2,70,000 from M/s. Kotak Securities for making alleged investment. assessee claims to have paid interest of Rs. 28,110 towards loan. details of expenditure or loss claimed by assessee is worked out as under: Expenditure/Loss claimed - Sun F and C Mutual Fund Units - Open dividend reinvested Total expenditure incurred on purchase of 1445233.265 units (Rs.) Purchase price 1149425.287 units 2,00,00,000 Less: Total consideration received (excluding 1,56,70,947 dividend) 43,29,053 Add: Interest paid 28,110 Total expenditure claimed 43,57,163 total consideration realised on sale of these units Units @ (Rs.) 295807.978 13.44 39,75,659 1149425.287 13.44 1,54,48,276 Redemption amount 1,94,23,935 Less: Dividend received 40,22,988 Add: Incentive received 2,70,000 Total consideration received 1,56,70,947 assessee neither received cash of Rs. 2 crores nor redemption amount of Rs. 1.54 crores excluding dividend. Nor dividend of Rs. 40,22,988 was received by assessee though assessee was not involved in transaction, it claimed to have received dividend of Rs. 40,22,988. assessee also claimed expenditure/loss of Rs. 43,57,163 as being part of its trading operations." Accordingly, claim of expenditure/loss in purchase and sale of units was disallowed by Assessing Officer. Against said order, assessee preferred appeal to Commissioner of Income-tax (Appeals), who dismissed same confirming order of Assessing Officer, which on appeal to Tribunal, was held against assessee and, hence, assessee-appellant is before this court by filing present appeal. Learned counsel appearing for assessee points out that in respect of assessment year in question, i.e., 2001-02, in light of new provisions as contained in section 94(7) of Act, which was brought in by Finance Act, 2001, with effect from April 1, 2002, decision of Supreme Court in case of CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), is squarely applicable. Learned counsel for assessee relied on abovesaid decision to contend that buying and selling of units resulting in inflow of dividends and at same time business loss on sale of units after record date could not be equated to transaction in terms of section 94(7) of Act, which came into effect from April 1, 2002, since assessment year pertaining to present case is 2001-02. Per contra, stand of Department is that transaction in present case would fall under section 14A of Act and, therefore, in view of concurrent findings rendered by authorities below, no interference is warranted with impugned order. Heard learned counsel appearing for appellant-assessee and learned standing counsel appearing for respondent-Department and also perused documents available in typed set of documents as also judgment relied on by learned counsel for appellant-assessee. core issue that arises for consideration in present appeal is "whether section 14A of Act is invokable by Department in transaction in issue?" Sub-section (7) of section 94 of Income-tax Act was inserted, vide Finance Act, 2001, with effect from April 1, 2002. For better clarity, sub-section (7) of section 94 of Income-tax Act is extracted hereunder: "94. (7) Where- (a) any person buys or acquires any securities or unit within period of three months prior to record date; (b) such person sells or transfers; (i) such securities within period of three months after such date; or (ii) such unit within period of nine months after such date; (c) dividend or income on such securities or unit received or receivable by such person is exempt, then, loss, if any, arising to him on account of such purchase and sale of securities or unit, to extent such loss does not exceed amount of dividend or income received or receivable on such securities or unit, shall be ignored for purposes of computing his income chargeable to tax." From reading of above section, it is clear that sub-section (7) of section 94 was inserted to clarify position as to how computation of income to be made for purpose of charging tax in case of purchase and sale of securities or units within specified period. purport of insertion of sub-section (7) of section 94 is only to curb dividend stripping, which is used as colourable device. said section 94(7) having come into effect from April 1, 2002, same will be enforceable only from assessment year 2002-03 onwards. In present case, assessment year pertains to 2001-02. Therefore, it is clear that section 94(7) would not be applicable to case on hand, as said section itself has come into force only on April 1, 2002, i.e., and is not enforceable for previous assessment year, viz., 2001-02. In above backdrop, it is brought to notice of court by learned counsel for appellant decision of Supreme Court in case of CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), wherein identical issue fell for consideration. In said case, Supreme Court, while negativing stand of Department that transaction in said case would fall under section 14A, distinguished stand of Department, in bringing case under section 14A, holding that loss in sale of units could be disallowed on ground that impugned transaction was transaction of dividend stripping and, therefore, it was alleged to be colourable device. Supreme Court, in said decision, held as follows (page 15): "The main issue involved in this batch of cases is-whether in dividend stripping transaction (alleged to be colourable device by Department) loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under section 10(33), disallowable under section 14A of Act? According to Department, differential amount between purchase and sale price of units constituted'expenditure incurred' by assessee for earning tax-free income, hence, liable to be disallowed under section 14A. As result of dividend pay-out, according to Department, NAV of mutual fund, which was Rs. 17.23 per unit on record date, fell to Rs. 13.23 on March 27, 2000 (the next trading date) and, thus, Rs. 4 per unit, according to Department, constituted'expenditure incurred' in terms of section 14A of Act. In its return, assessee, thus, claimed dividend received as exempt under section 10(33) and also claimed set off for loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. insertion of section 14A with retrospective effect is serious attempt on part of Parliament not to allow deduction in respect of any expenditure incurred by assessee in relation to income, which does not form part of total income under Act against taxable income (see Circular No. 14 of 2001, dated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to extent they are relatable to earning of taxable income. In many cases nature of expenses incurred by assessee may be relatable partly to exempt income and partly to taxable income. In absence of section 14A, expenditure incurred in respect of exempt income was being claimed against taxable income. mandate of section 14A is clear. It desires to curb practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at same time avail of tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. 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 Act. In past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce tax payable on non-exempt income by debiting expenses, incurred to earn exempt income, against taxable income. basic principle of taxation is to tax net income, i.e., gross income minus expenditure. On same analogy exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is purport of section 14A. In section 14A, first phrase is 'for purposes of computing total income under this Chapter' which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. next phrase is,'in relation to income which does not form part of total income under Act'. It means that if income does not form part of total income, then related expenditure is outside ambit of applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, income has to be brought under one of five heads. Sections 15 to 59 lay down rules for computing income for purpose of chargeability to tax under those heads. Sections 15 to 59 quantify total income chargeable to tax. permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of above heads and is chargeable to tax. If income like dividend income is not part of total income, expenditure/deduction though of nature specified in sections 15 to 59 but related to income not forming part of total income could not be allowed against other income includible in total income for purpose of chargeability to tax. theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that 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 debits in real sense. pay-back does not constitute an'expenditure incurred' in terms of section 14A. Even applying principles of accountancy, pay-back in strict sense does not constitute an'expenditure' as it does not impact profit and loss account. Pay-back or return of investment will impact balance-sheet whereas return on investment will impact profit and loss account. cost of acquisition of asset impacts balance- sheet. Return of investment brings down cost. It will not increase expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read words'expenditure incurred' in section 14A in context of scheme of Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the'total income' for purpose of chargeability to tax. As stated above, scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/ expenditure. 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. deduction for expenditure or loss which is not within prohibition must be allowed if it is on facts of case proper debit item to be charged against incomings of business in ascertaining true profits. return of investment or pay-back is not such debit item as explained above, hence, it is not'expenditure incurred' in terms of section 14A. Expenditure is pay-out. It relates to disbursement. pay-back is not expenditure in scheme of section 14A. For attracting section 14A, there has to be proximate cause for disallowance, which is its relationship with tax exempt income. Pay-back or return of investment is not such proximate cause, hence, section 14A is not applicable in present case. Thus, in absence of such proximate cause for disallowance, section 14A cannot be invoked. In our view, return of investment cannot be construed to mean'expenditure' and if it is construed to mean'expenditure' in sense of physical spending still expenditure was not such as could be claimed as 'allowance' against profits of relevant accounting year under sections 30 to 37 of Act and, therefore, section 14A cannot be invoked. Hence, two asset theory is not applicable in this case as there is no expenditure incurred in terms of section 14A." Supreme Court, in above decision, further fortified this issue by stating that such transaction was curbed by introduction of section 94(7) in Finance Act, 2001, with effect from April 1, 2002, relevant to assessment year 2002-03. In view of abovesaid decision of Supreme Court, plea of Department that transaction would attract section 14A of Act fails and this court holds that assessee is entitled to claim amount as business loss during assessment year in question. substantial questions of law are answered accordingly. In result, appeals are allowed setting aside order of Tri bunal. However, in circumstances, there shall be no order as to costs. *** Patco Investment and Consultancy Services P. Ltd. v. Assistant Commissioner of Income-tax