TaxTMI 
TaxTMI 
2026 (7) TMI 742
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....laring total income of Rs. 1,86,73,080/-. During the course of reassessment proceedings, the Assessing Officer examined the assessee's investment in JM Equity Hybrid Fund/JM Balanced Fund - Direct Annual Plan Dividend Option. According to the Assessing Officer, information gathered by the Department during survey proceedings conducted under section 133A of the Act in the case of M/s JM Financial Asset Management Ltd. on 15.02.2021 revealed that the fund had manipulated its accounting methodology by classifying a portion of capital as distributable surplus and had artificially paid dividends to investors. The Assessing Officer was of the view that the dividend declared by the mutual fund was not out of realised profits but represented return of capital, thereby creating an artificial short-term capital loss in the hands of investors. 3. The Assessing Officer recorded that the assessee had purchased 3,12,194.635 units of JM Hybrid Fund - Direct Annual Plan Dividend Option on 19.03.2018 for a consideration of Rs. 1,00,00,000/-. Thereafter, dividend of Rs. 40,58,530/- was received on 22.03.2018 and a further dividend of Rs. 11,74,784/- was declared on 07.03.2019. The units were ....
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.... 94(7) of the Act, the conditions prescribed therein were not satisfied. It was further contended that the transaction was genuine and not a sham transaction as alleged. According to the assessee, no material or supporting evidence had been furnished by the Assessing Officer to substantiate the allegation of manipulation or violation of SEBI regulations, and the allegations were based merely on surmises and conjectures. 7. The assessee further submitted that the investment and redemption transactions had been undertaken through normal banking channels in an approved mutual fund and Securities Transaction Tax had been duly paid. It was pointed out that dividend distribution tax had been paid by the mutual fund under section 115R of the Act and, therefore, the dividend could not be treated as return of capital. The assessee also requested copies of the alleged SEBI order or material relied upon by the Department but the same were not furnished. It was further contended that the provisions of section 94(7) were not attracted and judicial precedents relied upon by the assessee supported the allowability of the claim of short-term capital loss. 8. The Assessing Officer rejected th....
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....he Jurisdictional Assessing Officer (JAO) be directed to delete the addition of Rs. 52,33,314/-. Ground No. 2 Without prejudice to the above ground, the Assessing Officer ("AO") has erred in computing the short term capital gain at Rs. 2,17,689 as against the short term capital loss of Rs. 50,15,625 as correctly claimed by the Appellant. The Appellant further submits that the claim of short-term capital loss of Rs. 50,15,625 has been computed strictly in accordance with the provisions of the Act and that the transactions are not hit by the provisions of section 94(7) of the Act, as the conditions prescribed therein are not satisfied and since the transaction is genuine the AO ought to have accepted appellant computation of short term capital loss of Rs. 50,15,625. The Appellant prays that the AO be directed to accept the claim for short-term capital loss of Rs. 50,15,625. The Appellant craves leave to, add to, alter or amend the above grounds of appeal or to add a new ground of appeal at any time before hearing of the appeal. 12. During the course of hearing before us, the learned Authorised Representative ("AR") reiterated the facts as borne ....
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....se notice dated 31.01.2025. Referring to the first part of the reply, the learned AR submitted that the assessee had categorically objected to the proposed addition on the preliminary ground that the show cause notice did not disclose the statutory provision under which the proposed variation was sought to be made. It was pointed out that the assessee was constrained to presume that the proposed adjustment was under section 94(7) of the Act, as the show cause notice referred to dividend stripping. Simultaneously, the assessee had specifically requested the Assessing Officer to disclose the precise statutory provision proposed to be invoked in case the addition was not intended to be made under section 94(7), so as to enable the assessee to furnish an effective legal response. The learned AR submitted that despite this specific request, the Assessing Officer neither disclosed the provision of law under which the addition was proposed nor dealt with this objection while completing the assessment. 15. Inviting our attention to the factual submissions contained in the reply, the learned AR submitted that the assessee had invested Rs. 1,00,00,000/- in JM Equity Hybrid Fund (formerly ....
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....ness of the transaction cannot be doubted and the loss cannot be ignored unless the transaction falls within the four corners of section 94(7). 18. Referring to the statutory requirements of section 94(7), the learned AR submitted that all the conditions contained therein are cumulative and not alternative. Examining the facts of the present case, it was submitted that, in respect of the dividend of Rs. 40,58,530/-, the record date was 22.03.2018 whereas the units were sold only on 18.03.2019, i.e., after about eleven months and twenty-five days. Consequently, the condition prescribed in clause (b) of section 94(7), namely, sale within nine months from the record date, was admittedly not fulfilled. Likewise, in respect of the dividend of Rs. 11,74,784/-, the relevant record date was 07.03.2019, whereas the units had been acquired on 19.03.2018, which was much beyond the period of three months preceding the record date. Thus, the condition contained in clause (a) of section 94(7) was also not satisfied. It was, therefore, submitted that since the statutory conditions were admittedly not cumulatively fulfilled, section 94(7) itself was inapplicable and, consequently, the Assessing....
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....tion. The Co-ordinate Bench further held that the benefit available under section 94(7) of the Act cannot be denied by branding the transactions as non-genuine merely because the assessee had received exempt dividend and suffered short-term capital loss on redemption of mutual fund units. 22. Per contra, the learned Departmental Representative strongly relied upon the assessment order and supported the addition made by the Assessing Officer. He further submitted that, since the learned CIT(A) has dismissed the appeal ex parte without adjudicating the issue on merits, the matter may be restored to the file of the learned CIT(A) for fresh adjudication in accordance with law after granting due opportunity of hearing to the assessee. 23. We have considered the rival submissions and perused the material available on record. The primary controversy arising for adjudication is whether the Assessing Officer was justified in reducing the dividend received by the assessee from the cost of acquisition of units of JM Equity Hybrid Fund and thereby recomputing the short-term capital loss of Rs. 50,15,625/- into short-term capital gain of Rs. 2,17,689/-, resulting in total addition of Rs. ....
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..... Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction... However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of Section 94(7). The object of Section 94(7) is to curb the short term losses." 27. The above ratio makes it clear that Parliament has not treated dividend stripping transactions as sham or bogus per se. The consequence can be applied only within the framework of section 94(7). If the conditions of section 94(7) are not satisfied, the loss cannot be disallowed merely because exempt dividend was received and loss arose on sale of units. 28. The Hon'ble Bombay High Court in Karan Maheshwari v. Assistant Commissioner of Income-tax [(2025) 176 taxmann.com 700 (Bom.)] dealt with substantially identical allegations relating to JM Financial Mutual Fund. The relevant paragraphs are reproduced below: "17. In the notice issued under section 148A(b), it is alleged that petitioner was one of the persons who claimed fictitious short term capital loss. There is nothing in the notice to indicate on what basis it is alleged that the short term ....
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....ourt in Karan Maheshwari and held that the allegations against JM Financial cannot, in the absence of material, be automatically fastened upon the investor. The Co-ordinate Bench recorded as under: "9. The Hon'ble High Court quashed the notice for the reason that the allegations are against JM Financial and do not implicate the assessee in any manner and that there is nothing to indicate that assessee had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss." 31. In the present case also, the Assessing Officer has proceeded substantially on the basis of general allegations arising out of survey proceedings in the case of JM Financial Asset Management Ltd. No material has been brought on record to show that the assessee was a party to any alleged manipulation by the mutual fund or that the assessee had knowingly participated in any sham arrangement. The assessee's transactions are not shown to be otherwise than through banking channels. The investment, dividend receipt and redemption of units are not disputed as factual events. 32. The learned CIT(A) dismissed the appeal ex parte without adjudicat....