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TMI Blog2019 (7) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and law, lack of knowledge with regard to the Share and Mutual Fund transactions as also being ignorant with regard to the binding Law of the Land. The disallowance of STCL, so made being contrary to the provisions of law and facts, kindly be allowed in full. 3. Rs. 14,42,282/-: The ld. CIT(A) erred in law as well as on the facts of the case in restricting the disallowance up to Rs. 1,00,000/- on account of Employee Benefit Expenses. The disallowance so made and confirmed, being contrary to the provisions of law and facts kindly be deleted full. 4. Rs. 8,13,000/-: The ld. CIT(A) erred in law as well as on the facts of the case in restricting the disallowance up to Rs. 50,000/- on account of other Expenses. The disallowance so made and confirmed, being contrary to the provisions of law and facts kindly be deleted full. 5. The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C and 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other expenses. Now the assessee is in further appeal before the ITAT. 4. We have considered the rival contentions and carefully gone through the orders of the authorities below. The relevant extract of the assessment order wherein the A.O. has made various allegations for disallowing short term capital loss and other expenses are as under: "During the year under consideration, the assessee has earned capital gain of Rs. 267936336/- on sale of immovable property and thereafter the assessee has taken loan of Rs, 50 Crore from M/s India Infoline Finance Ltd. on 17.10.2014 and on the same day purchased units of Mutual Funds of Rs. 50 Crore from JM Financial Mutual Fund and earned dividend of Rs. 10,33,53,421/- and Rs. 17,62,97,085. Soon after earning dividend, the redemption was taken on 26.03.2015 (i.e. a day after earning dividend). On verification of the data of the JM Financial Mutual Fund, it is found that the JM Financial Mutual Fund has not declared any dividend in the past years and the assessee has purchased mutual funds from this company. Further, the assessee has earned 56% dividend on the mutual funds. On perusal of the above facts, it appears that by all these ways the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the M/s J M Financial Mutual Funds and M/s Infoline Finance Limited by creating exempt income of Rs. 27,96,50,506/- from mutual fund just within a period of three to five months, this contention is further supported by the following facts: (i) Soon after earning second dividend of Rs. 17,62,97,085/- on 25.03.2015, the redemption was taken on 26.03.2015 so that short term capital loss can be created to set off the long term capital gain. (ii) The huge amount of loan of Rs. 50 crore was granted by M/s India Infoline Financial Ltd. without any proper securities on 17.10.2014 and on the same date units of mutual funds were purchased by the assessee. (iii) M/s India Infoline Financial Ltd., operating assessee's account for investing funds into JM Mutual Fund as a power of attorney holder. (iv) The company M/s JM Mutual Fund has not declared any dividend in past years before this year. (v) The company M/s JM Mutual Fund has declared first dividend of Rs. 10,33,53,421/- on 28.1.2015 soon after completing 3 months of purchasing the units of Mutual Fund on 17.10.2014. (vi) In no way, there are probabilities of earning 56% of dividends just within a period of three to fiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment of these vital facts. However, vide remand report dated 23/01/2019, the A.O. again repeated his allegations and findings as were recorded in the impugned assessment order. Without giving his comments, he also filed copies of notices issued u/s 133(6) of the Act and replies received from them. 6. By the impugned order, the ld. CIT(A) confirmed the action of the A.O. by observing that the assessee with the collusion of broker, (in this case it is IIFL) who not only provided services as broker/consultant but also provided the funds to the assessee for making the investments in the units of Mutual Funds promoted by JM Financial Mutual Fund had incurred short term loss on mutual funds. Referring Wikipedia, the ld. CIT(A) observed that IIFL along with few other top brokers have been accused of various irregularities. The ld. CIT(A) also stated in his order that Economic Offences Wing (EOW)-Mumbai and Serious Fraud Investigation Office (SFIO) have found the top 5 brokers including llFL guilty of misselling NSEL contracts, KYC manipulation, client code modification', benami transactions & infusion of black money through their NBFCs on the Exchange platform. The ld. CIT(A) furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction which comprises as under: (a) Copies of Audit Report along with Balance Sheet, Profit & Loss Account for AY 2015-16 (PBI 9-27) (b) Copies of transaction statement of JM Financial Mutual Fund w.r.t the subjected transaction. (PBI 225/28-30) (c) Copies of Sanction Letter from M/s India Infoline Finance Limited for Margin Finance (PBI 50-52) (d) Copies of Bank account statement of HDFC Bank from 15.09.2014 to 23.04.2015 (PBI 31-32) (e) Copy of Ledger Account of M/s India Infoline Finance Limited in assessee's books. (PBI 47-49) (f) Copy of Transaction Statement of M/s India Infoline Finance Limited from 01.03.2014 to 31.03.2015. (PBI 53-63) We found that for purchasing of mutual funds, the assessee has taken loan of Rs. 50.00 crores from IIFL which has been paid trhough HDFC bank Ltd. on dated 17.10.2014 in two part i.e. Rs. 42,85,00,000/- and Rs. 7,15,00,000/- totaling to Rs. 50,00,00,000/- (PBI 31-32) through JM financial Mutual Fund (in JM Balanced Fund). In this regard, we found that the assessee filed repayment schedule of IIFL vide letter dated 11.10.2017, which have all entries including interest due along with repayment detail. The assessee has also filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO. But it is not the case of the AO that the same very documents submitted / produced by the assessee before the AO were found wrong by the A.O. in any manner. (iii) Letter by M/s J.M. Financial dated 15.01.2018 (PBIII 589): Further vide letter dated 15.01.2018 by the J.M. Financial, they supplied various documents i.r.t. the subjected investment made by the assessee company being the Certificate from HDFC Bank Ltd. evidencing receipt of Rs. 50 Cr., evidencing payment of dividend by J.M. Financial to the assessee and a further certificate evidencing redemption payment (Net of STT). Thus, the very fact of receipt of the loan from IIFL through HDFC Bank and the fact of receipt of Dividend were all found correct facts and such contentions were again affirmed by a third party. (iv) Confirmation by HDFC Bank Ltd. dated 15.01.2018: (PBIII 590-592) Further vide letter dated 15.01.2018, vide three confirmations given by HDFC to the AO, the bank has confirmed the debit credit transactions entered with the assessee company and shown in the bank statement with narration, meaning thereby what the assessee stated before the AO has been affirmed and has not been found fault with / wrong. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for pledging of the shares of the company as security for the loan taken by them from the lender within 7 days of the creation of pledge in favour of IIFL and shall provide IIFL with the confirmation of disclosure. The Borrower further agrees that the same will be considered as one of the events of defaults, in the events of default, they fail to do so." It is thus, clear that the assessee has pledged (lien) his units as security for the loan." 16. The allegation of the A.O. that the assessee has concocted a story beautifully in connivance with the JMF-MF and IIFL attempted to prepare a colorable device just to set off the capital gains earned on sale of immovable property and also by claiming exemption on the dividend earned just within three to five months is baseless in so far as the IIFL has got nothing to do either with the present assessee or with the JM Financial or with the tax affairs of the present assessee i.e. neither for nor against the Income Tax Department. It was a commercial deal of getting a loan based on agreement between the parties i.e. the lender IIFL and the borrower assessee. Assuming it was so and IIFL knew the fact of declaration of high dividend, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to name a few. Such information is also available in the portfolio of the JM Financial taken from the Annual Report of the JM Financial for the FY 2014-15. The Audited Accounts and Annual Reports of both JMF-MF and IIFL have also been verified by us as placed on record. 20. We also observe that the ld. CIT(A) has referred to and heavily relied upon an article available on the website Wikipedia, wherein it was mentioned that IIFL has been accused of various irregularities. The ld. CIT(A) on his own obtained such article and made use of the same ex-parte against the assessee but at the same time she did not provide any opportunity to the assessee to explain the new material and even without confronting the assessee which was being used against the assessee. A blind use of such material was not sufficient in itself unless the contents of the material are tested and verified and found fit for the context for which, is being used and therefore, the same is not capable of being cited in a court of law. Moreover, the reliability of such material, which is admittedly a publicly editable site is highly under doubt. The Wikipedia aggregate the news/articles from various sources and the arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und Industry has consistently introduced several regulatory measures in order to protect the interest of investors. SEBI (Mutual Funds) Regulations, 1996, (r/w SEBI Act, 1992) is the principal regulation for Mutual Funds. The assessee invested in JM Balanced Fund which is a Balanced Fund Scheme ("Scheme") floated by JM Financial Mutual Funds. A Balanced Fund Scheme normally consist of the mutual funds based on equity and debt funds both. 23. We also observe that the mutual fund in which the assessee has invested was a Balanced Fund Scheme of JMF-MF where strategic allocations to both i.e. debt and equities, were made by the Funds Managers of the JMF-MF. The balanced funds have moderate risks because the debt portfolio of the Scheme provides the stability and the Equity provides the growth. In our country the SEBI has very strict regulations for Mutual Funds for the investor's protection. In Indian context right from the inception i.e. from the floating of a Scheme till carrying out the operations, there are involved as many as five different constituents, who are quite separate, distinct and independent from each other. Before a scheme is launched, the Mutual Fund is formed by a T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It carries the responsibility of investing and managing the investor's money. Professional Fund Managers are appointed by the AMC to ensure that the investor's corpus is invested in the profitable securities based on the risk appetite of the investor and according to objectives of Mutual Fund Scheme. 26. In the instant case, M/s JM Financial Asset Management Limited is the Asset Management Company for JM Financial Mutual Funds. The JM Financial Asset Management Limited is company incorporated under Companies Act, 1956 on dated 09.06.1994 which is a completely distinct entity from J M Financial. 27. In respect of the trustee, we observe that the appointment of Trustees is compulsorily required as per Regulation 7(e) of SEBI (Mutual Fund) Regulation, 1996. The Trust is headed by Trustees. The trustees hold the property of the Mutual Fund in the trust for the benefit of the unit holders and looks into the legal requirements of operating and functioning of the Mutual Fund. The Trustees also have the duty to monitor the actions of the AMC to ensure compliance with the SEBI Regulations and to see that the decisions of the AMC are not against the interest of the unit holders. Here, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation, interest and tax in three out of the immediately preceding five years, including the fifth year; 7(aa) the applicant is a fit and proper person;] (b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board; (c) the sponsor has contributed or contributes at least 40% to the net worth of the asset management company" The Sponsor fulfilled all the stipulated conditions for registration and was granted registration. As per information available about JM Financial Mutual Fund (source: website of JM Financial Mutual Fund) the Fund has successfully completed 179 schemes and is having Rs. 16,161 Crores worth of assets under its management, having huge 4 decades experience of working in investment management. 29. In view of the above, we can conclude that the Investment Making, Declaration of Dividend and all other decisions relating to investments of fund proceeds are taken by AMC. To ensure independence of AMC and its Fund Managers the Regulation 16(3) of SEBI (Mutual Funds) Regulations provides that no Asset Management Company and no director (including independent director), officer or employee of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on his whims and fancies. 31. We had also carefully gone through the reply given by JMF dated 04/01/2018 & 29.11.17 to AO's latter dated 28.12.2017 & 29.12.2017. The allegation of the A.O. was that the JM Financial Mutual Funds has not declared any dividend in the past year and the assessee had purchased mutual funds from this company. Further the assessee earned 52% dividend on the mutual funds. Similarly, the allegation of the ld. CIT(A) was that the investment was made in the mutual fund which had not declared any dividend since 2010 and suddenly after investment was made by the assessee it started paying dividend which was abnormally high as compared to its past history and not commensurate with its financial position. In this regard we observe that the dividend making decision can be taken by the fund only after duly considering all the regulatory requirements. The stringent provisions of Regulation 18(17) and 18(18) of SEBI (Mutual Fund) Regulation, 1996 requires that all the transactions carried out between the Mutual Funds, Asset Management Company and its associates are subject to quarterly review by the Trustees. The Trustees are also required to review the net worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utual funds would not have been able to declare any dividend at all. It was only keeping in mind the past track record, better performance and the good market movement in the Indian Capital Market that the AMC made investments in those companies and directors of the assessee company also having a vast experience, decided to invest in JM Mutual Fund. 34. We also observe as per material available on record that at the relevant point of time the Modi Government was hoping to come in the center which has directly influence the market sentiments and it started going up and witnessed a tremendous increase thereafter. For this reason, the said mutual fund could perform better. In the annual report 2014-15 of JMF-MF it is stated as under: "JM Balanced Fund is an open-ended balanced scheme with the investment objective to provide steady current income as well as long term growth of capital. The scheme invests 65-75% in equity while the balance is in debt. The normal plan of the scheme has outperformed its benchmark during FY 2014-15. The primary reason for outperformance has been low exposure to the expensive consumer and pharmaceutical sectors and higher exposure to quality blue chip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JMF, he should make direct enquiry from JMF. Moreover, the repeated contention of the AO of the conspiracy between the assessee and the mutual fund is further dispelled by the fact that even after the sale of the mutual fund by the assessee company, the said mutual fund declared yet another third dividend on 27th July,2015. Had there been a conspiracy why the assessee company should have lost the dividend and it could have arranged to claim prior to its sales. On this aspect, detailed submission was submitted by the assessee before the AO vide letter dated 28.12.2017, in para 9.1 which is as under: "9.1 As regard the observation that on verification from data from JM Mutual Funds it was found that it had not declared dividend in six years before this year and in the mutual funds purchased by the assessee from JMF it has declared dividend in this year. Therefore, even the very fact of purchase of mutual fund may be considered as doubtful. It is submitted that we are not aware what type of data was verified by your good self but otherwise also the assessee has got nothing to do with the said verification in as much as the fact remains that the assessee got dividend as declared by J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or interest, in the computation of the income chargeable to tax of such person. " 41. It is under this background only, with a view to curb the evasion of such short-term losses, Sec. 94(7) was inserted by the Finance Act, 2001 w.e.f. 01.04.2002, by providing certain minimum period of holding before and after the record date of dividend. Those, not fulfilling the conditions, shall loose the loss to the extent of amount of dividend however, for those not falling in the clutches of the provision, there is absolutely no further provision is made to doubt the claim of the short-term capital loss or the high amount of dividend in any manner whatsoever. The CBDT nowhere terms such transaction as sham or Bogus. Therefore, in this case, once the authorities below admittedly found, that subjected transaction completely falls out of the clutches of Sec. 94(7) i.e. the restrictions placed by the legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra). Hence, in the cases arising before 1st April, 2002, losses pertaining to exempted income cannot be disallowed." 43. In this reference, we will quote judgment of the Hon'ble Supreme Court in the case of Union of India Vs Azadi Bachao Andolan & Anr. 263 ITR 706 (SC) wherein the Hon'ble Court has held as under: "It has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company is concerned, we found that the directors of the assessee company had vast experience and expertise, therefore, while exploring the possibility of getting the better and the best result chose to invest in the JM Financial Mutual Fund. From the record we found that the assessee company itself has been acting as an investor for last several years. There apart, the directors and particularly Shri L N Bangur has been in the field of making investments right since 1966 and therefore, he is having a vast experience and rather an expertise in this field. Therefore, it is solely based on his studies, analysis of this field only that after carrying out an intensive study of all the relevant factors, the company decided to make investment in the JM Financial Mutual Fund with an expectation of the best ROI on the investment made by it. Getting on a return of income on the investment depending upon the quantum may create a doubt but it cannot be said that the assessee once made an investment in JM Financial Mutual Fund has not earned the quantum of the dividend as declared by it. It is only a co-incidence that the assessee, this year was having LTCG from the sale of building b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41,51,026/- 3615468/- 586340/- Similarly, in A.Y. 2012-13 & 2013-14 also, the assessee purchased/ invested and sold Shares and Mutual Funds. The Details are as under: STATEMENT OF MUTUAL FUNDS FOR THE YEAR ENDED AS ON 31.03.2013 (A.Y. 2013-14) Scrip Purchase (Rs.) Sales (Rs.) PBI IDFC Mutual Fund 5,23,67,972/- 1,75,00,000/- 200 Birla Sunlife 3,25,00,000/- 4,92,00,000/- 201-204 Birla Sunlife Savings Fund 2,00,00,000/- 2,00,12,066/- 205 Franklin Templeton 10,18,786/- - 206 Total 10,58,86,758/- 8,67,12,066/- STATEMENT OF SHARES FOR THE YEAR ENDED AS ON 31.03.2013 (A.Y. 2013-14) Scrip Opening Purchases Dividend Total Sale Closing Misc Shares 0/- 40,92,686/- 3,04,369/- 3,04,369/- 2,60,794/- 58,340/- Total 0/- 40,92,686/- 3,04,369/- 3,04,369/- 2,60,794/- 58,340/- Thus, from the perusal of above statements it is evidently clear that the assessee is regularly investing in the Shares & Mutual Funds. In support of the same the assessee had filed copies of Accounts of Shares & Mutual Fund before the lower authorities and also placed in paper book filed before us. Even the assessments of some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also observe that the assessee's investment in mutual fund was only 1.38% looking to the total size of fund of Rs. 3604.39 crores, therefore, to suspect that there was a connivance between the assesse company and other entities highly imaginary. 52. From the order of the lower authorities, we found that the AO has failed to bring any contrary evidence on records to disprove the contentions of the assessee and to falsify the evidences brought on record and to show the examples of other similarly placed investors if similar claim made was disallowed/denied. Perusal of the various grounds based on which, the AO denied the claim of exemption and disallowed the loss will show that the AO presumed that India Infoline was a concern like a very close of relative of the assessee firm to whom, the assessee was in a position to get the thing done in whatever manner it wanted. Interestingly (as per AO), M/s India Infoline already knew that the assessee had already sold property resulting into Long Term Capital Gain (LTCG) against which the assessee would need some Short-Term Capital Loss to be set off. Similarly, alleged that the assessee and M/s India Infoline entered into a conspiracy to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) in the impugned order also alleged that the entire transaction was a sham it is as neither the result of a coincidence nor of a genuine investment activity but were created through well planned and executed scheme in which the company and the brokers worked in tandem to achieve the predetermined objectives. In this regard we found that such an allegation is completely contrary to the observation of the Hon'ble Apex Court in the case of Walfort Share (supra), wherein, it was held as under: "Para-20 .......... However, after 1st April, 2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of s. 94(7). The object of s. 94(7) is to curb the short-term losses. Applying s. 94(7) in a case for the assessment year(s) falling after 1st April, 2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, 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. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and deliberated on these judicial pronouncements and found that these were rendered in altogether different legal and factual context and hence are completely distinguishable. In the case of Sumati Dayal and Durga Prasad More, there is no dispute on the proposition laid down. However, they are not at all applicable on the facts discussed above. The case of Mc. Dowell specifically dealt with by the Hon'ble Supreme Court in the case of Walfort Shares (supra). 59. In view of the above discussion and observation well supported by the documentary evidences placed on record, we do not find any merit in the disallowance of assessee's genuine claim of loss incurred on redemption of mutual funds. The A.O. is directed to delete the same and allow set off such loss against the long-term capital gains so earned. 60. The next grievance of the assessee relates to disallowance of Rs. 14,42,282/- on account of employee benefit expenses. In this regard we found that during the assessment proceedings the AO noted that the assessee has debited Rs. 15,42,282/- on account of Employee Benefit however, no business activity has been done by the assessee during the year under consideration. When asked, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses and the AO not having pointed out any personal user or diversion for non-business purposes, the subjected interest was fully allowable u/s 36(1)(iii) of the Act. 63. From perusal of note No. 8 annexed to the audited A&L account, we found that the head Employee Benefit Expenses consisted of Salary to staff of Rs. 4,92,000/-, Directors Remuneration including Meeting Fees of Rs. 5,47,000/-, Staff Welfare Expenses of Rs. 3,282/- and Gratuity & Bonus of Rs. 5,00,000/- totaling to Rs. 15,42,282/- as against Rs. 3,78,621/- claimed in the preceding year. The claim this year of course is on a higher side yet however, there are sufficient and justifiable reasons behind such an increase. The assessee has income of Rs. 59,02,21,502/- this year, as above, as against Rs. 11,29,188/- last year. Pertinently, this is a very old company of 1949 and a few employees are very-very old therefore, payment to them is certainly in the larger interest of the business. 64. Looking to the nature of expenses, we found that there is a long list of 9-10 borrowers. Every time, the employees have to give the cheque of loan amount and to collect the same back in case of refund after the expiry period. Again, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Donation (Already reduced in Computation PB 2) 51,000/- 6. Office Expenses 54,218/- 7. Legal Expenses 8,874/- 8. ROC filling Fee 3,200/- 9. Repair & Maintenance 4,64,860/- 10. Audit Fees 17,100/- 11. RIICO Charges 1,430/- 12. Misc. Expenses 15,855/- 13. Printing & Stationary 3,865/- Total 8,63,428/- 68. From the record we found that the assessee claimed expenses of Rs. 8,63,428/- [Rs. 18,38,428/- less Rs. 9,75,000/- (reduced from income in computation)] on total business income of Rs. 60,53,568/- this year as against expenses of Rs. 4,67,361/- claimed on total business of Rs.(-) 4,58,003/- in last year i.e. A.Y. 2014-15 in the preceding year. The claim made this year, was proportionately much lower because qua the business income such expenses stood at 14.26% only as against 102% claimed last year. Further, though there is some increase if only quantum is compared but there are sufficient and justifiable reasons behind such an increase. To achieve such a huge income the assessee has to incur such a meagre expense. Such expenses were mainly incurred on Travelling, Electric Expenses and Repair & Maintenance. No specific instance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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