Dividend stripping rules apply only through specific statutory conditions, preventing dividend from being treated as return of capital otherwise.

Dividend-stripping losses can be denied only within the specific statutory framework of section 94(7), and dividend cannot be recharacterised as return of capital unless that provision applies. The text explains that the conditions under section 94(7) are cumulative, including the prescribed purchase and sale timing requirements, and that failure to satisfy those conditions prevents reduction of dividend from the cost of acquisition of units. It also states that general allegations based on survey material are insufficient without material linking the taxpayer to a sham arrangement. The subject-matter emphasises that dividend stripping is not treated as sham per se and that any denial of loss must rest on the statute.

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Issues: Whether the dividend received from JM Equity Hybrid Fund could be treated as return of capital and reduced from the cost of acquisition of units, thereby recomputing the assessee's short-term capital loss into short-term capital gain, in the absence of any specific statutory provision and without satisfaction of the conditions of section 94(7) of the Income-tax Act, 1961.

Analysis: The assessee had specifically objected that the show cause notice and assessment order did not identify the statutory provision under which the adjustment was made. The Assessing Officer proceeded on general allegations arising from survey material concerning JM Financial Asset Management Ltd., but no material was brought to show that the assessee knowingly participated in any sham arrangement. The Tribunal noted that section 94(7) is the specific anti-dividend-stripping provision and that its conditions are cumulative. On the facts, the purchase and sale dates did not satisfy the statutory time-limits for both dividends. The Tribunal also relied on the principle that dividend stripping transactions are not sham per se and that losses can be ignored only within the framework of section 94(7).

Conclusion: The adjustment made by treating the dividend as return of capital was unjustified, and the disallowance of short-term capital loss together with the recomputed short-term capital gain could not be sustained.

Final Conclusion: The assessee succeeded on merits, and the addition arising from the dividend-stripping adjustment was deleted.

Ratio Decidendi: A dividend-stripping loss can be denied only when the specific statutory conditions of section 94(7) are satisfied; in the absence of that provision's applicability and without material linking the assessee to any sham transaction, dividend received cannot be recharacterised as return of capital.

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