TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 348
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....(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 law, the Ld. CIT(A) has erred in allowing the exemption u/s 10(35)....
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....tors 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 issued to the assessee, in its reply the assessee submitted as under: "3.3 Synopsis of ....
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....ual 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 by the JM Mutual Fund by classifying portion of capital as distributable surplus and thereafter artificially pay out to the investor in the form of dividend. Therefore, the divi....
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....o 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 which is around 40%. During the F.Y. 2015-16 (which is the year under consideration in the instant case), the total dividend distributed through plan was around Rs 3563.09 Crores. 5.7. After the payout of 3 dividends, the unit ....
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.... 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 carried forward for future adjustment. In some cases, the benefit of the exempt dividend received has been taken in the computation of MAT. Even though dividend is received during AY 2016-17, fictitious loss generated on redemption of mutual fund units might have set off during next Assessme....
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....in 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. In view of the above, as per the provisions of section 10(35) which clearly speaks that, if an assessee has earned dividend from a mutual fund, the same is exempt under section 10(35) of the Act. The statute does not provide for reclassification of such dividend as capital gain. 5.1.5 It is noticed from the record that during the course of reassessment proceedings, the appellant has furnished all....
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....e 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 dividend, sold the units of mutual fund and had suffered a loss of Rs. 24.04 crores. This loss was set off against capital gain earned by assessee during year from sale of immovable property. The assessee had also claimed the said dividend income as exempt under section 10(33) of the Act. The Assessing Officer observed that appellant had concocted a story in connivance with JM Balanced Fund and IIFL and attempted to prepare a colorable device just to set ....
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....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 against JM Financial which do not implicate petitioner in any manner. The High Court observed that there is nothing to indicate that petitioner had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short term capital loss. The relevant extract of the judgement is as under: "It is thus clear that petitioner is only a small fry in the larger scheme of things and in fact himself a victim of the alleged fraud of JM Fin....
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....graph, 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 under Section 148A(b) of the Income Tax Act, 1961 (the Act), order dated 30th September 2022 under Section 148A(d) of the Act and notices dated 30th September 2022 and 7th October 2022 under Section 148 of the Act are hereby quashed and set aside...." 6. In view of the above, it is noticed that there is no evidence that the appellant has indulged actively in a manipulation for which action is taken by SEBI or for that matter any other agency. Since, the appellant is a mere investor, it is squarely cov....