TaxTMI 
TaxTMI 
2019 (7) TMI 863
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....e lower authorities proceeded completely on misconception of facts and law, lack of knowledge with regard to the Share and Mutual Fund transactions as also being ignorant with regard to the binding Law of the Land. The disallowance of STCL, so made being contrary to the provisions of law and facts, kindly be allowed in full. 3. Rs. 14,42,282/-: The ld. CIT(A) erred in law as well as on the facts of the case in restricting the disallowance up to Rs. 1,00,000/- on account of Employee Benefit Expenses. The disallowance so made and confirmed, being contrary to the provisions of law and facts kindly be deleted full. 4. Rs. 8,13,000/-: The ld. CIT(A) erred in law as well as on the facts of the case in restricting the disallowance up to Rs. 50,000/- on account of other Expenses. The disallowance so made and confirmed, being contrary to the provisions of law and facts kindly be deleted full. 5. The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C and 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such inte....
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....ed Rs. 1.00 lacs out of disallowance of employee benefit expenses and Rs. 50,000/- on account of other expenses. Now the assessee is in further appeal before the ITAT. 4. We have considered the rival contentions and carefully gone through the orders of the authorities below. The relevant extract of the assessment order wherein the A.O. has made various allegations for disallowing short term capital loss and other expenses are as under: "During the year under consideration, the assessee has earned capital gain of Rs. 267936336/- on sale of immovable property and thereafter the assessee has taken loan of Rs, 50 Crore from M/s India Infoline Finance Ltd. on 17.10.2014 and on the same day purchased units of Mutual Funds of Rs. 50 Crore from JM Financial Mutual Fund and earned dividend of Rs. 10,33,53,421/- and Rs. 17,62,97,085. Soon after earning dividend, the redemption was taken on 26.03.2015 (i.e. a day after earning dividend). On verification of the data of the JM Financial Mutual Fund, it is found that the JM Financial Mutual Fund has not declared any dividend in the past years and the assessee has purchased mutual funds from this company. Further, the assessee has ear....
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....ble as the facts and circumstances of the assessee's case prima-facie indicates that there is attempt by the assessee to evade tax through a pre-planned conspiracy in connivance with the M/s J M Financial Mutual Funds and M/s Infoline Finance Limited by creating exempt income of Rs. 27,96,50,506/- from mutual fund just within a period of three to five months, this contention is further supported by the following facts: (i) Soon after earning second dividend of Rs. 17,62,97,085/- on 25.03.2015, the redemption was taken on 26.03.2015 so that short term capital loss can be created to set off the long term capital gain. (ii) The huge amount of loan of Rs. 50 crore was granted by M/s India Infoline Financial Ltd. without any proper securities on 17.10.2014 and on the same date units of mutual funds were purchased by the assessee. (iii) M/s India Infoline Financial Ltd., operating assessee's account for investing funds into JM Mutual Fund as a power of attorney holder. (iv) The company M/s JM Mutual Fund has not declared any dividend in past years before this year. (v) The company M/s JM Mutual Fund has declared first dividend of Rs. 1....
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....ces were issued U/s 133(6) of the Act to M/s JM Financial Mutual Funds, HDFC Bank Ltd, IIFL, SEBI, JM Financial Trustee Co. Ltd.. We found that favourable replies were given by all these institutions, however, the A.O. kept a complete silence on the development of these vital facts. However, vide remand report dated 23/01/2019, the A.O. again repeated his allegations and findings as were recorded in the impugned assessment order. Without giving his comments, he also filed copies of notices issued u/s 133(6) of the Act and replies received from them. 6. By the impugned order, the ld. CIT(A) confirmed the action of the A.O. by observing that the assessee with the collusion of broker, (in this case it is IIFL) who not only provided services as broker/consultant but also provided the funds to the assessee for making the investments in the units of Mutual Funds promoted by JM Financial Mutual Fund had incurred short term loss on mutual funds. Referring Wikipedia, the ld. CIT(A) observed that IIFL along with few other top brokers have been accused of various irregularities. The ld. CIT(A) also stated in his order that Economic Offences Wing (EOW)-Mumbai and Serious Fraud Investigation....
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....urther loss incurred on such deals was adjusted against the long term capital gain from the sale of immovable property. 10. We had carefully gone through the various documentary evidences filed before the lower authorities in support of the genuineness of the transaction which comprises as under: (a) Copies of Audit Report along with Balance Sheet, Profit & Loss Account for AY 2015-16 (PBI 9-27) (b) Copies of transaction statement of JM Financial Mutual Fund w.r.t the subjected transaction. (PBI 225/28-30) (c) Copies of Sanction Letter from M/s India Infoline Finance Limited for Margin Finance (PBI 50-52) (d) Copies of Bank account statement of HDFC Bank from 15.09.2014 to 23.04.2015 (PBI 31-32) (e) Copy of Ledger Account of M/s India Infoline Finance Limited in assessee's books. (PBI 47-49) (f) Copy of Transaction Statement of M/s India Infoline Finance Limited from 01.03.2014 to 31.03.2015. (PBI 53-63) We found that for purchasing of mutual funds, the assessee has taken loan of Rs. 50.00 crores from IIFL which has been paid trhough HDFC bank Ltd. on dated 17.10.2014 in two part i.e. Rs. 42,85,00,000/- and Rs. 7,15,00,000....
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.... 04.01.2018 by HDFC Bank addressed to the AO u/s 133(6), the fact was clearly mentioned that the said account was operated by the POA namely M/s India Infoline Finance Ltd. and justification of the assessee as to why the IIFL was given the POA. The copies of the Bank Account, Account opening Form etc. were also given by the Bank to the AO. But it is not the case of the AO that the same very documents submitted / produced by the assessee before the AO were found wrong by the A.O. in any manner. (iii) Letter by M/s J.M. Financial dated 15.01.2018 (PBIII 589): Further vide letter dated 15.01.2018 by the J.M. Financial, they supplied various documents i.r.t. the subjected investment made by the assessee company being the Certificate from HDFC Bank Ltd. evidencing receipt of Rs. 50 Cr., evidencing payment of dividend by J.M. Financial to the assessee and a further certificate evidencing redemption payment (Net of STT). Thus, the very fact of receipt of the loan from IIFL through HDFC Bank and the fact of receipt of Dividend were all found correct facts and such contentions were again affirmed by a third party. (iv) Confirmation by HDFC Bank Ltd. dated 15.01.2018: (PBII....
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..... The sanction letter of IIFL itself shows the security towards loan as under: 10. Diversified Securities approved and acceptable by IIFL. The List of acceptable security can change anytime at the sole discretion of IIFL. 12. The Borrower agrees and covenant that the Borrower being the promoter of company shall disclose to the company as well as the Exchanges for pledging of the shares of the company as security for the loan taken by them from the lender within 7 days of the creation of pledge in favour of IIFL and shall provide IIFL with the confirmation of disclosure. The Borrower further agrees that the same will be considered as one of the events of defaults, in the events of default, they fail to do so." It is thus, clear that the assessee has pledged (lien) his units as security for the loan." 16. The allegation of the A.O. that the assessee has concocted a story beautifully in connivance with the JMF-MF and IIFL attempted to prepare a colorable device just to set off the capital gains earned on sale of immovable property and also by claiming exemption on the dividend earned just within three to five months is baseless in so far as the IIFL has got not....
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....m 2013 to year 2018. These facts speak of very high of the subjected mutual fund and doesn't need any further certification. This report further shows that the investment made by the mutual fund were also in the most reputed industries/companies which find place in the list of Nifty 50 and Sensex viz. HDFC Ltd, Reliance Industries Ltd, HDFC Bank Ltd, TCS, Infosys, ITC, ICICI Bank Ltd to name a few. Such information is also available in the portfolio of the JM Financial taken from the Annual Report of the JM Financial for the FY 2014-15. The Audited Accounts and Annual Reports of both JMF-MF and IIFL have also been verified by us as placed on record. 20. We also observe that the ld. CIT(A) has referred to and heavily relied upon an article available on the website Wikipedia, wherein it was mentioned that IIFL has been accused of various irregularities. The ld. CIT(A) on his own obtained such article and made use of the same ex-parte against the assessee but at the same time she did not provide any opportunity to the assessee to explain the new material and even without confronting the assessee which was being used against the assessee. A blind use of such material was not suffici....
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....ting bodies have to ensure that only bonafide schemes are floated by the renowned Mutual Funds, wherein there are absolutely no chance of the public being defrauded. In the instant case, it is not denied that the subjected Scheme has also been floated after observing all the formalities, getting approvals, under supervision and so on. Furthermore, the SEBI, the regulatory authority for Indian Mutual Fund Industry has consistently introduced several regulatory measures in order to protect the interest of investors. SEBI (Mutual Funds) Regulations, 1996, (r/w SEBI Act, 1992) is the principal regulation for Mutual Funds. The assessee invested in JM Balanced Fund which is a Balanced Fund Scheme ("Scheme") floated by JM Financial Mutual Funds. A Balanced Fund Scheme normally consist of the mutual funds based on equity and debt funds both. 23. We also observe that the mutual fund in which the assessee has invested was a Balanced Fund Scheme of JMF-MF where strategic allocations to both i.e. debt and equities, were made by the Funds Managers of the JMF-MF. The balanced funds have moderate risks because the debt portfolio of the Scheme provides the stability and the Equity provides the ....
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....ated in any manner with, the sponsor or any of its subsidiaries or the trustees. The Chairman of the asset management company is not a trustee of any mutual fund and AMC has a net worth of not less than 50 Crore Rupees. The AMC is an entity registered under the Companies Act to manage the money invested in the mutual fund and to operate the schemes of the Mutual Fund as per the Mutual Funds Regulations, 1996. It carries the responsibility of investing and managing the investor's money. Professional Fund Managers are appointed by the AMC to ensure that the investor's corpus is invested in the profitable securities based on the risk appetite of the investor and according to objectives of Mutual Fund Scheme. 26. In the instant case, M/s JM Financial Asset Management Limited is the Asset Management Company for JM Financial Mutual Funds. The JM Financial Asset Management Limited is company incorporated under Companies Act, 1956 on dated 09.06.1994 which is a completely distinct entity from J M Financial. 27. In respect of the trustee, we observe that the appointment of Trustees is compulsorily required as per Regulation 7(e) of SEBI (Mutual Fund) Regulation, 1996. The Trust is ....
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....track record‖ shall mean the sponsor should- (i) be carrying on business in financial services for a period of not less than five years; and (ii) the net worth is positive in all the immediately preceding five years; and (iii) the net worth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and (iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year; 7(aa) the applicant is a fit and proper person;] (b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board; (c) the sponsor has contributed or contributes at least 40% to the net worth of the asset management company" The Sponsor fulfilled all the stipulated conditions for registration and was granted registration. As per information available about JM Financial Mutual Fund (source: website of JM Financial Mutual Fund) the Fund has successfully completed 179 schemes and is having Rs. 16,161 Crores worth of assets under its management, having huge 4 dec....
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....nternal audit system. 30. In view of above discussion, we observe that there are several balances and checks provided by the Statute and several independent Government and Semi Government bodies and experts have been introduced to ensure the bonafide, genuineness of the Scheme floated by a Mutual Fund. Therefore, unless a very specific allegation supported by a direct and cogent evidence is brought on record, nobody can make allegations merely on suspicion on his whims and fancies. 31. We had also carefully gone through the reply given by JMF dated 04/01/2018 & 29.11.17 to AO's latter dated 28.12.2017 & 29.12.2017. The allegation of the A.O. was that the JM Financial Mutual Funds has not declared any dividend in the past year and the assessee had purchased mutual funds from this company. Further the assessee earned 52% dividend on the mutual funds. Similarly, the allegation of the ld. CIT(A) was that the investment was made in the mutual fund which had not declared any dividend since 2010 and suddenly after investment was made by the assessee it started paying dividend which was abnormally high as compared to its past history and not commensurate with its financial positio....
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....uence or to get the dividend declared at his own wishes. The earnings of the Mutual Fund are directly based upon the type/nature of the investment made by the Mutual Fund. Needless to say, that the declaration of the dividend by the companies depends upon the several factors and market sentiments. It has to be kept in mind that it is not guaranteed that there will always be a profit but the companies might have also sustained huge losses with the result that the mutual funds would not have been able to declare any dividend at all. It was only keeping in mind the past track record, better performance and the good market movement in the Indian Capital Market that the AMC made investments in those companies and directors of the assessee company also having a vast experience, decided to invest in JM Mutual Fund. 34. We also observe as per material available on record that at the relevant point of time the Modi Government was hoping to come in the center which has directly influence the market sentiments and it started going up and witnessed a tremendous increase thereafter. For this reason, the said mutual fund could perform better. In the annual report 2014-15 of JMF-MF it is st....
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.... 19300 19.3% 29.03.2005 2.5000 25% 18.11.2003 1.0000 10% 09.09.2003 1.0000 10% 23.02.2001 0.1000 1% 23.01.2001 0.1000 1% 23.12.2000 0.1000 1% 23.11.2000 0.1000 1% 23.10.2000 0.1000 1% 23.09.2000 0.1000 1% 05.04.199 1.4000 14% 01.04.1998 0.9000 9% Thus, there was nothing abnormal if the same mutual fund after a long gap of more than ten years could declare a dividend of 52%. If the A.O. has any doubt with regard to rate of dividend so declared by JMF, he should make direct enquiry from JMF. Moreover, the repeated contention of the AO of the conspiracy between the assessee and the mutual fund is further dispelled by the fact that even after the sale of the mutual fund by the assessee company, the said mutual fund declared yet another third dividend on 27th July,2015. Had there been a conspiracy why the assessee company should have lost the dividend and it could have arranged to claim prior to its sales. On this aspect, detailed submission was submitted by the assessee before the AO vide letter dated 28.12.2017, in para 9.1 which is as under: "9.1 As regard the observati....
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....in a loss which could be set off against other income of the year. At the same time, the dividends received would be exempt from tax under s. 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 losses, the Act has inserted a new sub-s. (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, and sells or transfers the same within a period of three 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 chargeable to tax of such person. " 41. It is under this background only, with a view to curb the evasion of such short-term losses, Sec. 94(7) was inserted by the Finance Act, 2001 w.e.f. 01.04.2002, by providing certain minimum period of holding before and after the reco....
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.... "We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of s.94(7) vide Finance Act, 2001 w.e.f. 1st April, 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 assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under s. 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 the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India vs. Azadi Bachao Andolan & Anr (2003) 184 CTR 450,263 ITR 706 (SC) it has been held that a citizen is 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 no....
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.... have been around the industry for a long time and have the academic credentials to back it up. The biggest advantage of mutual funds is diversification. Diversification is the idea of spreading out money across many different types of investments. When one investment is down another might be up. Diversification reduces risk tremendously. There are different kinds of mutual funds to cater to varied investment objectives such as - Growth Funds, Income Funds, Balanced Funds, and Liquid Assets Funds, also known as Money Market Funds. 46. So far question of vast experience and expertise of the directors of the assessee company is concerned, we found that the directors of the assessee company had vast experience and expertise, therefore, while exploring the possibility of getting the better and the best result chose to invest in the JM Financial Mutual Fund. From the record we found that the assessee company itself has been acting as an investor for last several years. There apart, the directors and particularly Shri L N Bangur has been in the field of making investments right since 1966 and therefore, he is having a vast experience and rather an expertise in this field. Therefore....
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.... 0/- 4,215/- 2,23,488/- 2,23,685/- 0/- Sundaram Asset Management 0/- 2,16,797/- 0/- 2,16,797/- 1,67,089/- 0/- Franklin Templeton 10,18,786/- 0/- 20,620/- 10,39,406/- 10,33,899/- 0/- IDFC Dynamic Mutual Fund 0/- 50,00,000/- 0/- 50,00,000/- 50,40,940/- 0/- TOTAL 3,65,48,311/- 60,16,797/- 6,32,061/- 4,31,97,168/- 4,31,03,931/- 0/- STATEMENT OF SHARES FOR THE YEAR ENDED AS ON 31.03.2014 (A.Y. 2014-15) Scrip Opening Purchases Dividend Total Sale Closing Misc Shares 58,340/- 40,92,686/- 0.00 41,51,026/- 3615468/- 586340/- Total 58,340/- 40,92,686/- 0.00 41,51,026/- 3615468/- 586340/- Similarly, in A.Y. 2012-13 & 2013-14 also, the assessee purchased/ invested and sold Shares and Mutual Funds. The Details are as under: STATEMENT OF MUTUAL FUNDS FOR THE YEAR ENDED AS ON 31.03.2013 (A.Y. 2013-14) Scrip Purchase (Rs.) Sales (Rs.) PBI IDFC Mutual Fund 5,23,67,972/- 1,75,00,000/- 200 Birla Sunlife 3,25,00,000/- 4,92,00,000/- 201-204 Birla Sunlife Savings Fund 2,00,00,000/- ....
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....sessee and did not pursue the matter any further but in respect of some AYs the matter was taken up in appeal before the High Court but without any success. That being so, the Revenue could not be allowed to flip-flop on the issue further." (ii) Sardar Kehar Singh v/s CIT (1991) 92 CTR 88/195 ITR 769 (Raj). 50. It is also pertinent to bring on record that there is no loss to the revenue in so far as the Mutual Fund has already paid Dividend Distribution Tax on the declaration of such dividend. There apart, the assessee has also paid STT on these transactions as evident from the statement of JM Financial Mutual Fund on the subjected transaction hence there has been no loss to revenue. Interestingly DDT is paid twice for firstly by investee companies and secondly by JMF to investor. 51. We also observe that the assessee's investment in mutual fund was only 1.38% looking to the total size of fund of Rs. 3604.39 crores, therefore, to suspect that there was a connivance between the assesse company and other entities highly imaginary. 52. From the order of the lower authorities, we found that the AO has failed to bring any contrary evidence on records to disprove the contenti....
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....ar that the huge dividend which is exempt under section 10 was earned by the assessee within a very short period of time by investing in a mutual fund whose fundamentals, did not support such a huge dividend. In this regard we observe that this allegation of the ld. CIT(A) is factually incorrect. There is no iota of evidence brought by the AO or CIT(A) on record to prove IIFL as indulging in providing bogus capital gain/losses etc. In any case, at least in context of the assessee there is no such evidence referred to or whispered by the authorities below even remotely. Such an allegation is nothing more than a suspicion. We found that similar allegations were also raised by the revenue before the Hon'ble Supreme Court in the case of Walfort Share (supra) but rejected by the Hon'ble Supreme Court. 55. The ld. CIT(A) in the impugned order also alleged that the entire transaction was a sham it is as neither the result of a coincidence nor of a genuine investment activity but were created through well planned and executed scheme in which the company and the brokers worked in tandem to achieve the predetermined objectives. In this regard we found that such an allegation is completely....
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....ch deals was claimed adjusted against the long-term capital gain from the sale of immovable property. The detailed Analysis discussed by us hereinabove firmly establish the events in the instant case. In this regard we observe that again such an allegation is a case of Walfort Shares (Supra) have already dealt with by the Hon'ble Apex Court. 57. From the order of the ld. CIT(A), we observe that while concluding that these financial transactions were sham ones and this entire edifice was only a colourable device manufactured for evading due taxes. He relied on the following judicial pronouncements: i) ITAT Delhi in the case of Hersh Win Chadha Vs DCIT (l.T.A.Nos.3098 to 3098 & 3107/Del/2005). (ii) Sumati Dayal Vs CIT (214 ITR 801) (iii) Durga Prasad More Vs CIT (vi) McDowell Vs CTO 58. We had carefully gone through and deliberated on these judicial pronouncements and found that these were rendered in altogether different legal and factual context and hence are completely distinguishable. In the case of Sumati Dayal and Durga Prasad More, there is no dispute on the proposition laid down. However, they are not at all applicable on the facts di....
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....56/- was also declared. To carry out the activities at such a large scale, one certainly needs some persons to manage the show. The observation of the paper formalities, accounting and banking transaction and receiving/delivery of the papers/documents, consultation with counsel and other government agencies/investment advisors, was not possible in absence of employees. Otherwise also, out of the salary paid of Rs. 10 lac, remuneration paid to the extent of Rs. 5.47 lac related to the directors only. Such expenditure thus having been incurred exclusively for business purposes was fully allowable. It is not the case of the A.O. that any personal element was involved in these expenses. We also found that the same A.O. was also assessing these incomes as business income only. Moreover, the borrowed funds having been utilized wholly and exclusively for business purposes and the AO not having pointed out any personal user or diversion for non-business purposes, the subjected interest was fully allowable u/s 36(1)(iii) of the Act. 63. From perusal of note No. 8 annexed to the audited A&L account, we found that the head Employee Benefit Expenses consisted of Salary to staff of Rs. 4,....
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....s made in the A.Y. 2014-15 while finalizing the scrutiny assessment U/s 143(3) of the Act. Keeping in view the totality of the facts and circumstances of the case vis a vis observation of the A.O., we restrict the disallowance to the extent of 10% of the expenditure so incurred amounting to Rs. 15,42,282/-. Accordingly, the A.O. is directed to restrict this disallowance to Rs. 1,54,228/-. 66. The A.O. has also disallowed Rs. 8,13,000/- on account of other expenses. By the impugned order, the ld. CIT(A) allowed expenses up to Rs. 50,000/-. 67. We have considered the rival contentions and found that following expenditure was incurred by the assessee during the year: S.No. Particulars Amount 1. Travelling Expenses 1,19,218/- 2. Electric & Water Exp 1,02,485/- 3. Postage, Telegram & Telephone 19,134/- 4. Membership Fees and Subscription 2,189/- 5. Donation (Already reduced in Computation PB 2) 51,000/- 6. Office Expenses 54,218/- 7. Legal Expenses 8,874/- 8. ROC filling Fee 3,200/- 9. Repair & Maintenance 4,64,860/- 10. Audit Fees 17,100/- 11. RIICO Charges 1,430/- 12....