TaxTMI 
TaxTMI 
2026 (6) TMI 728
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....tice u/s. 148A on 12.03.2022 by the Jurisdictional Assessing officer ('JAO'). The assessee replied to the notice and submitted the related documents. The reassessment proceedings were initiated by issuing notice u/s. 148 of the Act dated 28.03.2022. Based on the information that J.M.Financial Asset Management Limited had manipulated the accounting methodology of JAM balanced fund annual dividend option regular scheme to artificially inflated distributable surplus. A portion of the capital has been classified as distributable surplus and dividend has been paid out. The investors have invested in the fund in order to reduce their tax liability by claiming short term capital loss and exempt income. The revenue seeks to classify the investment as a sham transaction devised to claim fictitious short term capital loss and dividend income. 3. The assessee had invested in the said mutual fund scheme floated by JM Financial. The allegation was that the assessee has received dividend from this mutual fund amounting to Rs. 40,51,573/- which has allegedly been paid in violation of the accounting norms. In the re-assessment proceeding it was proposed to deny the exemption u/s. 10(35)....
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....be eligible for carry forward and accordingly the AO is directed to take necessary action for AY 2019-20 as per law. 5. Aggrieved by the order of the ld.PCIT the assessee is on appeal before us by raising the following concise grounds of appeal: "1. The order of the Principal Commissioner of Income Tax is erroneous, arbitrary and against the settled principles of law. 2. The exercise of jurisdiction under Section 263 by the Principal Commissioner of Income tax where he does not agree with the opinion of the assessing officer is impermissible. 3. The Principal Commissioner of Income Tax has characterized the investment in JM Financial Mutual Fund by the Appellant as a sham transaction devised to evade tax without presenting any evidence to show that the Appellant has connived with JM Financial Mutual Fund in distribution of dividend in violation of SEBI regulations. 4. The exemption of dividend income or the capital loss arising from transfer a unit of mutual fund cannot be denied when the special provision enacted for curbing tax avoidance through dividend stripping, Section 94(7), is not attracted. 5. The of denial of exemption provi....
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....ot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one of the views, with which the ld.PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. Therefore, the ld.AR stated that the ld.PCIT has failed to appreciate that the principle laid down in the case of Malabar Industrial co.(Supra) has been followed by the Hon'ble Supreme Court in the case of CIT Vs. Max India Ltd. (2007) 295 ITR 282 and CIT Vs. Amitabh Bachchan (2016) 384 ITR 200. 10. The ld.AR also submitted that the ld.PCIT has failed to appreciate that the Hon'ble Rajasthan High Court in the case of CIT Vs. Chambal Fertilizers & Chemicals Ltd. (2014) 360 ITR 225 has held that the law is well settled that the ld.PCIT cannot invoke the powers to correct each and every mistake or error committed by the AO. Every loss to the Revenue, cannot be treated as prejudicial to the interest of the Revenue and if the Assessing Officer has adopted one of ....
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....d in devising a sham transaction. 15. The ld.AR brought to our notice that the ld.PCIT has failed to appreciate that the assessee, during the period between 12.03.2018 and 26.03.2018, had invested Rs. 14,59,48,428/- in mutual funds including Rs. 1,00,00,000/- in the fund under question. The assessee regularly invests in mutual funds as part of its investment strategy and has not participated knowingly in any sham transaction to evade tax. 16. The ld.AR argued that the ld.PCIT has failed to appreciate that proceedings in some form had been initiated against most of the investors in the JM Financial Mutual Funds on the allegation of knowingly involving themselves in sham transactions to evade tax. The proceedings have been set aside by the various high courts, including the jurisdictional high court, and various tribunals. In support of the same the ld.AR stated that the ld.PCIT has failed to appreciate that in the case of Karan Maheshwari Vs. ACIT (2025) 176 Taxmann.com 700, wherein re-assessment proceedings initiated against the petitioner based on the very same survey conducted in the premises of JM Financial Mutual Fund and the allegation was that the petitioner had knowing....
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....ion 94(7) of the Act has been specifically enacted to deal with the cases of dividend stripping. The provisions get attracted in a situation where the assessee acquires a unit of a mutual fund within a period of three months prior to the record date (for dividend declaration) and subsequently sells or transfers the units acquired within a period of nine months after the record date and such dividend distributed on the mutual fund units is exempt, then the loss arising from the sale of units, to the extent of such dividend shall be ignored for the purposes of computing total income. Therefore, the ld.AR stated that the ld.PCIT has failed to appreciate that the assessee purchased the units on 20.03.2018, the dividend was declared on 22.03.2018 and the units were sold on 08.03.2019. Since, the units were sold after a period of 9 months from the record date for payment of dividend, the provisions of Section 94(7) of the Act would not be attracted and therefore the claim of capital loss cannot be denied. 21. In view of the above the ld.AR argued that the ld.PCIT has failed to test the transaction on the applicable provision of Section 94(7) of the Act but has directed to tax the divi....
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....ined the nature of the investment made in the mutual fund scheme. The assessee had furnished all relevant documents including details of investment, dividend received, holding pattern, mutual fund transactions and explanations regarding the genuineness of the investment activity. Thereafter, the AO completed the reassessment u/s. 147 of the Act on 28.03.2023 after arriving at a categorical conclusion that the assessee had not claimed any short-term capital loss during the relevant assessment year and further that the assessee was regularly engaged in investment activities in several mutual funds aggregating to approximately Rs. 19 crores and therefore the transaction could not be characterized as sham in nature. 27. Thus, from the reassessment order as well as the material placed before us, it is evident that the AO had consciously examined the very issue for which the reassessment proceedings were initiated and thereafter taken a plausible view based on the facts and evidences available on record. Once an enquiry has been conducted by the AO and a view has been taken after due application of mind, the revisional jurisdiction u/s. 263 of the Act cannot be invoked merely because ....
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....ations by the mutual fund. 32. The allegation regarding payment of dividend out of capital is essentially an allegation against the mutual fund and not against the assessee-investor. Even assuming for the sake of argument that there was violation of SEBI regulations by the mutual fund, the same by itself cannot automatically lead to the conclusion that every investor in the scheme had participated in a sham transaction. 33. We further find considerable force in the contention of the ld.AR that similar reassessment proceedings initiated against various investors in JM Financial Mutual Fund schemes have consistently been quashed by various High Courts and coordinate benches of the Tribunal on the ground that there was no material to establish conscious participation by the investors in any sham arrangement. The Hon'ble Madras High Court in the case of Spencer and Company Ltd. Vs. ACIT held that there was no material evidence to establish that the assessee had received anything other than dividend income from the mutual fund scheme. Similarly, the Hon'ble Bombay High Court in the case of Karan Maheshwari Vs.ACIT held that allegations against JM Financial did not implicate the as....