TaxTMI 
TaxTMI 
2025 (8) TMI 1178
X X X X Extracts X X X X
X X X X Extracts X X X X
.....94(7)(E) Net loss claimed in return (F=D-E) Loss disallowed by AO (G=lower of Column (F)&(B) CMS Computer Ltd 1,50,00,00,000 80,96,00,896 77,24,81,242 72,75,18,758 29,92,12,840 42,83,05,918 42,83,05,918 2015 Grover Family Trust 16,50,00,000 4,63,79,164 10,90,98,636 5,59,01,364 5,59,01,364 4,63,79,164 Total 48,42,07,282 47,46,85,082 3. Since the facts and findings recorded by the authorities below in both the cases are identical, for the sake of ready reference appeal of M/s.CMS Computers Ltd., is taken as a lead matter and our finding given therein will apply mutatis mutandis in the appeal of 2015 Grover Family Trust. 4. The assessee, a limited company, filed its return of income on 17.10.2016 and a revised return on 09.03.2017, declaring a total income of Rs.15,00,90,979/-. The return was originally processed under section 143(3) on 01.09.2018 determining total income at Rs.15,53,22,394/-. Subsequently, based on information arising out of a survey in the case of JM Financial Asset Management Ltd. as well as a survey at the assessee's own premises, the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....00,000 3,654,115 8,595,650 44,04,350 8. Thereafter, he has discussed modus operandi in his detailed order and certain statements of the employees of JM balanced fund and also have discussed the SEBI report. He has highlighted the summary of the findings of the Investigation Wing in the following manner:- "6.11 Summary of findings: 6.11.1 The modus operandi identified as per the findings during the course of survey action as well as post survey inquires is being summarized as under: i. JM Financial Asset Management Company, internally creates and floats few schemes with their employees as subscribers to the scheme ii. While the scheme has only 2 or maximum 3 subscribers (all of whom are internal employees/associate companies) with minimum investment amounts, the IER is increased over a long period of time to show huge distributable surplus, the ratio of which is applied to all the inflow of funds iii. Once a significant IER is created on a small AUM base, the sales team reaches out to other distributors/NHIs/Big Corporates with the plan of providing fictitious STCL and distributing dividend (exempt from täxation) which wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e I.T. Act and short-term capital loss is also not eligible for adjustment with other capital gains, being generated on account of sham transaction. 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. Finally, the ld. AO had disallowed the short term capital loss of Rs.42.84 Crores which were set off against long term capital gain of Rs.52.82 Crores. In sum and substance, the finding of the ld. AO can be summarized in the following manner:- i. Ld.AO alleged that during the survey in case of JM Financials, it was found that JM Balanced Fund Annual Dividend Option Regular Plan of JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus. It was alleged by department that the dividend received by the investors from the said Plan was out of sham transactions generated from colorable devices. ii. Ld AO has stated that the said fund has violation the SEBI circular No. SEBI/IMD/CIR No 18/198647/2010 which instructs the fund houses that the unit premium reserve shall be treated at par with Unit Capital and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ains is computed by reducing cost of acquisition and expenditure incurred on transfer from sales consideration. Considering the provisions of the said section and the facts of the present case, it is seen that the assessee's computation of short-term capital loss by reducing the cost of investment i.e. Rs.150 crores from sales consideration of Rs.77,24,81,241/- appears to be in line with the provisions of the Act. Also, I find that the AO has not disputed the amount of such cost or sales consideration, thus doubting the short-term capital loss arising from such figures is not correct. Further, it is not the case of the AO that the appellant has violated the provisions of section 94(7) of the Act. Further, it is noted that the appellant is a regular investor and has also incurred losses of Rs.7,25,636/- in BOI AXA Equity Mutual Fund which has not been doubted by the AO. It is also noted that the appellant has also received dividend of Rs. 18,68,861/- from Infosys Limited, Bharat Electronic Limited & BOI AXA Equity Mutual Fund. This shows that the investment in JM financial fund is not an isolated transaction. In the assessment order, it is noted that AO has heavily....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is engaging IIFL wealth management to obtain advise on investing in mutual fund which would be tax effective cannot be doubted. There is no evidence bought on record by the AO that the appellant, IIFL and JM Financials have worked in collusion to obtain illegal tax benefit. Further, it is important to note that there is no SEBI enquiry raised on the JM Financials which has been bought on record by the AO to establish his allegation. It is also noted that the said fund is still active in the market and has given overall return of 11.51% against the benchmark return of 11.33% as reflected in the annual report of JM Financials for FY 2014-15. It is also noted that an investor makes investment after analysing the performance and publicly available data of the Mutual Fund. The assessee has shown that the said scheme is an open-ended scheme floated by the Mutual Fund, so any person can enter the scheme at the price available in the open market and exit the scheme at any time at the market price. Therefore, the chances of assessee being specifically being involved in the alleged pre-planned transaction gets reduce in the absence of clear evidences bought on record by the AO. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hus, doubting the short-term capital loss arising from such figures is not correct. Further, id. CIT(A) noted that it is not the case of the AO that the assessee has violated the provisions of section 94(7) of the Act. In this regard, Id. CIT(A) has relied upon the CBDT Circular No.14/2001 and decision of Supreme Court in the case of Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR 233 (SC). (iv) Ld.CIT(A) observed that assessee is a regular investor in shares and securities including the mutual funds. Ld.CIT(A) noted that in the same year, assessee has also incurred losses of Rs.7,25,636/-in BOI AXA Equity Mutual Fund which has not been doubted by the AO. Further, LD.CIT(A) also noted that assessee has received dividend of Rs. 18,68,861/- from Infosys Limited. Bharat Electronic Limited & BOI AXA Equity Mutual Fund. This shows that the investment in JM financial fund is not an isolated transaction. (v) With regards to findings of id AD based on the survey in case IM Financial Asset Management Limited. Ld.CIT(A) observed that Id. AO has failed to bring on record any SEBI enquiry or order on JM Financials which supports the allegations of the Id AO. (vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... through proper banking channels. The assessee is a regular investor and has invested in similar funds. Units have been sold through proper and approval channels and the fund has been approved by SEBI. Moreover, the said fund is still active as on date and has been debarred by SEBL Ld.AO has not bought on record any evidence which could show that SEBI has suspended the said fund from operations. Therefore, the allegation of the violation of SEBI guidelines stated by AO does not holds true (xii) Ld.CIT(A) also noted that there are several balances and checks provided by the Statute and several independent Government and Semi Government bodies to ensure the bonafide, genuineness of the Scheme floated by a Mutual Fund. Therefore, unless a very specific allegation supported by direct and cogent evidence by SEBI, allegations made by AO is merely on suspicion (xiii) Ld CIT(A) has also relied on the decision of Mumbai Tribunal in the case of M/s. Goldiam International Ltd. Vs. DCIT in ITA No. 3218/Mum/2023 dated 05.04.2024, wherein similar facts involving JM Financials, Hon'ble Tribunal has held that it is natural for NAV to drop after dividend declaration and invest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....33A and the statement of Shri Mahesh Idnani, Senior Vice President of CMS Computers Ltd., to suggest that the investment was made on the advice of IIFL Wealth Management with the approval of Ms. Aarti Grover, promoter of the group, and was not bona fide. The Assessing Officer interpreted these facts to mean that the assessee's knowingly participated in a premeditated scheme to obtain an undue tax advantage. 16. On a careful analysis, we find that such an inference is not borne out by cogent and corroborative evidence. The transactions of purchase and redemption are supported by unimpeachable documentary evidence including mutual fund folio statements and bank statements and have been duly recorded in the regular books of account. The computation of short-term capital loss has been carried out strictly in accordance with section 48 of the Act, wherein the cost of acquisition and expenses on transfer are deducted from the full value of consideration. Significantly, the Assessing Officer has not disputed either the cost of acquisition or the redemption value. Further, the assessee's have themselves disallowed, under section 94(7), the loss to the extent of the dividend component, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... scheme posted an overall annual return of 11.51% for FY 2014-15, slightly outperforming its benchmark of 11.33%. There is no material brought on record to suggest that SEBI has suspended, penalised, or debarred this scheme during or after the relevant period. In the absence of any regulatory censure or penal action, it is unsafe to characterise the scheme as inherently sham. 21. It is trite law that suspicion, however strong, cannot take the place of proof. The burden lies squarely upon the Revenue to establish, by direct, cogent, and credible evidence, that a transaction is colourable or devoid of commercial substance. In the present cases, that burden has not been discharged. What emerges instead is that the investments were genuine, made through proper banking channels, duly reflected in the books, and supported by contemporaneous documentation. 22. The legal position is also well settled. In CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR 233 (SC), the Hon'ble Supreme Court held that a transaction otherwise in accordance with law cannot be disregarded merely because it results in a tax advantage, unless it is devoid of commercial purpose and is a mere facade.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n that case are instructive, and for ready reference, we reproduce the relevant discussion therein as under: "3. Facts in brief are that assessee is an individual and is director of M/s. Goldiam International Ltd., Golden Jewellery and other entities. He has filed the return of income on 12/08/2016 declaring total income of Rs.5,77,50,560/-. In his case, original assessment was completed u/s. 143(3) on 28/12/2017 and total income was assessed at Rs.5,82,31,560/-. The assessee's case was reopened u/s.148 on the basis of some information received through insight portal, i.e., survey u/s.133A of the Income Tax Act, 1961, was conducted on 15.02.2021 in the case of M/s. JM Financial Asset Management Limited ("JM Financial"), Mumbai. In the course of survey, it was found that JM Balanced Fund- Annual Dividend Option Regular Plan (the "Plan") of 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 a portion of capital as distributable surplus and thereafter artificial payout to the investor in the form of dividend. 4. It was a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourable nature of transaction. Accordingly, notice u/s.148 was issued on 29/06/2021." 26. The findings of the Tribunal is as under:- 9. We have heard both the parties at length and also perused the relevant finding given in the impugned orders. The case of the department before us is that denial of exemption of dividend income u/s.10(35) and claim of set off of short term capital loss is based on - * Firstly, survey action carried out in the case of J.M Financial Asset Management Ltd., which revealed that J.M Financial Asset Management Ltd., has manipulated accounting methodology to artificially inflate distributable profits which lead to the conclusion by the ld. AO that dividend received by the investors from the said fund was out of sham transaction; * Secondly, ld. AO has relied heavily upon SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 which instructed that the Unit Premium Reserve shall be treated at par with unit capital and cannot be utilized to declare dividends and the mutual fund houses cannot distribute dividends from Unit Premium Reserve. Ld. AO has also referred to some statement recorded by various employees of J.M Financial Asset ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. " "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, 2001w.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 be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been done for the purpose of providing tax benefit to the asset in other investors. There is no whisper that J.M. Financial Management Ltd., have provided excess dividend to the assessee nor provided tax benefit. There is no live link nexus between the statement and the assessee. Thus, ld. CIT (A) has rightly held that there is no substance in relying upon such statement. 15. Another fact which has been noted by the ld. CIT (A) is that there is no SEBI enquiry raised on J.M. Financial Management Ltd. It is a matter of fact that the said fund is still active in the market and has given early return of 11.51% against the benchmark return of 11.33% as reflected in the annual report of J.M. Financial Management Ltd., for A.Y.2014-15. Thus, when assessee has made investment in open-ended scheme floated by the Mutual Fund and assessee has made investment as per the price available in the open market and has exited at the time based on market price, then it cannot be said that assessee was involved in alleged pre-planned transaction. 16. Ld. CIT (A) has also relied upon the co-ordinate Bench decision of the ITAT, Mumbai in the case of Goldiam International Ltd. Vs. DCIT ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which are as under:- "4. The facts leading to the filing of this appeal may be summed up thus (a) The assessee had purchased 35 lakh units of UTI from Peerless General Finance & Investment Co. Ltd "Peerless") on 29th May, 1989 at the rate of Rs. 14.75 per unit for a total consideration of Rs 5,16,25,000. Those very units were sold back to Peerless on 31st July, 1 of Rs. 4,55,00,000, 989/ TAX DEPA the rate of 13 per unit for the aggregate consideration (b) While the units were purchased cum-dividend, as the booking closing date was 30th June, 1989 and the shares were purchased on 29th May, 1989, those units having been sold after the book closure, i.e., on 31st July, 1989, were sold ex-dividend. The assessee also received dividend at the rate of 18 per cent on those units, which worked out to be Rs. 63 lakh. Thus, in connection with the aforesaid transaction, the assessee incurred a loss of Rs. 63,84,000 which is the subject matter of dispute .............................. 9. After hearing the learned counsel for the parties and after going through the aforesaid decision of the Supreme Court, we find that it is now clear that the fact tha....