TaxTMI 
TaxTMI 
2025 (8) TMI 348
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....e Ld. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74, 033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, without considering the fact that during the survey proceedings conducted by DGIT (Inv.) Mumbai, on M/s. JM Financial Asset Management Ltd, it was found that JM Balance Fund Quarterly Dividend Plan of JM Financial had manipulated accounting methodology, so as to artificially inflate the distributable surplus and thereafter artificial payout to the investor in the form of dividend? 3. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74,033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, without considering the fact that, only dividend received by the unit holders from the equity based mutual fund are eligible for exemption, whereas dividend received from a Sham transaction generated using colorable devices and capital loss being artificial, where arrangement were created fictitious loss to the beneficiary investor is not eligible for set off? 4. Whether on the facts and circumstance of the case and in....
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....ey have artificially manipulated the distributable surplus which was paid to the investors in the form of dividend. On verification of the income tax return of the assessee, it was found that assessee had claimed loss under the head of equity/derivative to the tune of Rs. 3,68,74,023/-. The AO further stated that as per the investigation report of the DDIT, the investor in order to reduce their tax liability entered into sham transactions and received dividends and short term capital loss. Therefore, the AO stated that in such cases the dividend is not eligible for deduction u/s 10(35) of the Act and short term capital loss is also not eligible for adjustment with other capital gains being generated on account of some transactions. On the basis of above information, a notice u/s 148A(b) of the Act was issued on 22.03.2022 asking the assessee to show cause as to why a notice u/s 148 of the Act should not be issued on the basis of the aforesaid referred information. However, the assessee has failed to make any compliance within the stipulated time, therefore, a notice u/s 148 of the Act was issued on 13.04.2022. During the course of assessment in response to the show cause notice iss....
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....ss to the extent of dividend received of Rs. 3,41,02,141." 3. However, the AO had not agreed with the submission of the assessee and stated that assessee has invested in mutual fund on 14.10.2014 and sold the mutual fund on 26.03.2015 within a period of 4.5 month and received huge dividend on investment which was not acceptable. The AO explained that the assessee has received income to the amount of Rs. 1,42,93,175/- on 28.01.2015 and Rs. 2,43,80,858/- on 15.03.2015 totaling to Rs. 3,86,74,033/-. The assessee had invested Rs. 7 crore on 14.10.2014 and sold mutual fund on 26.03.2015 for consideration of Rs. 3,58,97,499/- and claimed short term capital loss to the tune of Rs. 3,41,02,141/- from mutual fund purchases from JM Financial. The assessing officer referred the Circular No. SEBI/IMD/CIR No 18/198647/2010 dated 15.03.2010 relating to non-availability of Unit Premium Reserve which is part of the sale price of the unit is not attributable to realized gain and same cannot be used to pay dividend. The AO stated that JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus. In the process, the SEBI guidelines have been flouted b....
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....ly 2 investors in the Plan. While the NAV was Rs 26.99 but taking the advantage of low AUM, the distributable surplus of the plan was rigged to Rs 16.76 by realizing profitable open positions. Needless to mention that the said investments had been made long back, resulting into substantial appreciation. It is to be noted that it won't be easy, if fund's AUM is large. 5.3. During the period from 24/04/2015 to 15/06/2015, mutual fund received an inflow of Rs. 19.18 Crores and the closing AUM as on 14/06/2015 stood at Rs. 18.89 crores. 5.4. Further the Plan received huge trench of inflow of Rs. 2719.33 crores between 15/06/2015 to 18/06/2015 i.e in a span of just 4 days. Further, a dividend of Rs 4.75 per unit was distributed on 18/06/2015 i.e 17.85%. 5.5. The Plan received another inflow of Rs. 2259.28 Crores between 20/06/2015 to 27/12/2015 i.e in a span of just 6 months. A dividend of Rs. 4 per NAV was distributed to the unit holders on 27/12/2015 which is around 18.68%. 5.6. Further, the plan received an inflow of Rs 4698.28 Crores between 28/12/2015 to 30/03/2016. A dividend of Rs. 6 per NAV was distributed to the unit holders on 30/03/2016 whi....
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....nt instead of UPR (Unit Premium Reserve), which is strictly against the guidelines specified by SEBI. Immediately after the dividend was declared, since there was not enough money to distribute, the capital amount introduced by the clients was distributed back to them in the form of tax-free dividend. Balance amount was redeemed at a loss, since the NAV fell and the investors booked short-term capital loss which looked genuine but was an actually fictitious and preplanned loss. (8) The investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and Short-Term Capital Loss and the instant assessee too is one of such investors. As a result, the dividend is not eligible for deduction u/s 10(35) of the I.T. Act and shortterm capital loss is also not eligible for adjustment with other capital gains, being generated on account of sham transactions. In fact, being distributed out of capital itself, such dividend should be reduced from the cost of investment with resulting reduction in short term capital loss. (9) The amount of capital loss has been either adjusted against long term capital gain or business income or carri....
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....,80,858/- earned 25.03.2015 Mutual Fund sold It is seen from the above tabular chart that the provisions of section 94(7) are not applicable to the present case, as the units of the fund were purchased on 14.10.2014 i.e. more than 3 months prior from date of declaration of dividend. Therefore, the first conditions related to purchase of units within three months prior to record date is not satisfied. Therefore, it appears that the provisions of dividend stripping under section 94(7) of the Act are not applicable in the instant case. 5.1.4 Further, a perusal of the provisions of section 10(35), which reads as under: Section 10(35) - Any income by way of, (a) income received in respect of the units of a Mutual Fund specified under clause (23D); or (b) income received in respect of units from the Administrator of the specified undertaking; or (c) income received in respect of units from the specified company: Provided that this clause shall not apply to any income arising from transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund, as the case may be. ....
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....ds, 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 entire loss as fictitious or only a fiscal loss. After 1st April, 2002, losses over and above the dividend received will not be ignored under s. 94(7). If the argument of the Department is to be accepted, it would mean that before 1st April, 2002 the entire loss would be disallowed as not genuine but, after 1st April, 2002, a part of it would be allowable under s. 94(7) which cannot be the object of s. 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. .......... " 5.1.7 Further, it is noticed that similar view has also been taken by the Hon'ble Jaipur Tribunal in case of Agencies Rajasthan (P.) Ltd. Vs. ITO (109 taxmann.com 139) where during assessment year 2015-16, the assessee company had taken loan of Rs. 50 crore from IIFL. Out of loan amount, the assessee purchased certain units of mutual funds of Rs. 50 crore from JM Balanced Fund and earned dividend of certain amount on same. The assessee after earning divid....
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....o deny the claims made by the assessee. An utter disregard shown by the revenue when the legislature in its wisdom, being fully aware of the fact that some of the assessees might make use of the transactions to their benefit and plan their affair, put some restriction by the prospective amendment by introduction of Section 94(7) w.e.f. 1st April, 2002 but when the case of the assessee do not fall/suffers from those restrictions, it has to be inferred that the assessee could not have been denied that benefit as claimed." 5.1.8 Considering the decision of the Hon'ble Bombay High Court in the case of Karan Maheshwari Vs. ACIT (WPL 37211 of 2011) wherein the Petitioner sold units of JM Financial Mutual Fund and incurred a short term capital loss. The Petitioner also earned certain dividend income from its investment in JM Financial Mutual Fund. Both the transactions were duly shown in the return of income for AY 2016-17. Thereafter, notice under section 148A(b) of the Act was issued stating that the assessee has received dividend income and claimed fictitious losses in JM Equity Fund. The Hon'ble Bombay High Court set aside the reopening as it was based upon allegations agains....
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....und that JM Balanced Fund-Annual Dividend Option Regular Scheme (the Plan) of JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus ........". In the next paragraph, it says "....... investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and short term capital loss ....... The assessee is one the persons who claimed fictitious short term capital loss In the next paragraph, it says "....... the assessee is one of the beneficiaries, who have received dividend and claimed fictitious losses in equity / derivative trading in JM Equity Hybrid Fund-Quarterly Dividend of JM Financial Asset Management Limited, to the tune of Rs. 3,41,12,651/- during the F.Y. 2015-16 relevant to the A.Y. 2016-17 .......". Therefore, the Assessing Officer is also not clear whether the assessee had booked loss or claimed dividend in the JM Balanced Fund - Annual Dividend Option Regular scheme or JM Equity Hybrid Fund Quarterly Dividend. This also indicates non application of mind by the Assessing Officer. 20 For all these reasons above, notice dated 20th August 2022 u....