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TMI Blog2024 (3) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... bout 13th June 2015 JM Financial Mutual Fund had made a public announcement stating that its trustees had approved the declaration of dividend for all persons holding JM Balanced Fund - (Direct) Quarterly Dividend Option units as of the record date which had been fixed at 18th June 2015. Taking note of this public notice, petitioner invested an amount of Rs. 1,10,00,000/- and acquired 4,16,649.306 units on 17th June 2015. Subsequently on 25th August 2015 petitioner invested an amount of Rs. 6,00,00,000/- and acquired 27,96,707.343 units. 6. During the previous year relevant to Assessment Year 20162017 petitioner received dividends of Rs. 19,79,084/- on 18th June 2015, Rs. 1,28,53,426/- on 26th December 2015 and Rs. 1,92,80,140/- on 30th March 2016 aggregating to Rs. 3,41,12,650/-. On 31st March 2016 petitioner transferred the units for a consideration of Rs. 3,61,19,053/- and thereby incurred a short-term capital loss on the sale of the units. After considering the aforesaid dividend earned and the short-terms capital loss incurred, petitioner determined his total income for Assessment Year 20162017 at Rs. 66,44,040/- and filed return of income accordingly on 4th August 2016. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table surplus. In the process, the SEBI guidelines have been flouted by the J M Mutual Fund by classifying a portion of capital as distributable surplus and thereafter artificial payout to the investor in the form of dividend. As per the information received, the investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and Short-Term Capital Loss. As a result, the dividend is not eligible for deduction u/s 10(35) of the 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. The assessee is one the persons who claimed fictitious short-term capital loss. As per the information, 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 as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness being conducted by JM Financial, (iii) As an investor, petitioner was neither aware nor had any control over activities by JM Financial. (iv) The notice of reopening assessment was barred by limitation. Thus it is petitioner's case that without providing him with any information as requested, the department proceeded to pass the impugned order dated 30th September 2022. 11. Mr. Gautam Thacker contended that firstly, petitioner cannot be held to be responsible for any transaction or violation of law by JM Financial. Petitioner was merely an investor in the mutual fund and had neither any control nor any knowledge of any activities, illegal, or otherwise being conducted by JM Financial. It is not even so alleged in the notice. Secondly, petitioner had made investments through banking channels that are reflected in its books of account and there is no reason to believe the same to be anything less than genuine. Thirdly, the notice and the order, impugned herein, are based merely on information allegedly received from the DDIT (Inv)-3(1), Mumbai, and petitioner's implication in the matter is purely based on conjectures and surmises. Fourthly, the information provided i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has not been made available to petitioner. Petitioner has admittedly been found blameworthy of acts which he has not been permitted to defend on merits. Petitioner was not given an opportunity to meet and explain his actions based on information withheld from him on one hand but used against him on the other. 14. Without providing any information, as sought for by petitioner, the impugned order dated 30th September 2022 under Section 148A(d) of the Act has been passed. In the order, things which have not been made available to petitioner has been relied upon. 15. It is the contention of department that between 23rd April 2015 and 15th June 2015 the mutual fund received an inflow of Rs. 19.18 Crores. Thereafter between 15th June 2015 and 18th June 2015 there was an inflow of Rs. 2719.33 Crores in the mutual fund. Between 20th June 2015 to 27th December 2015 a further inflow of Rs. 2259.28 Crores was made in the mutual fund and between 28th December 2015 to 30th June 2016 there was a further inflow of Rs. 4698.28 Crores into the mutual fund. In this, petitioner's investment was only Rs. 1,10,00,000/- on 17th June 2015 and Rs. 6,00,00,000/- on 25th August 2015. 16. It is thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner entered into a pre-meditated transaction of buying and selling units yielding exempted income with the full knowledge about the guaranteed fall in the market value of the units and the payment of tax-free dividend, hence, disallowance of the loss. xxxxxxxxxxxxx 20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding 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 Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by SEBI for last couple of years. If Section 94(7) would have been brought into effect from 1.4.1962, as in the case of Section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to Section 94(7) only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to Sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why Section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002. (emphasis supplied) 18. It is settled law that the reasons for the formation of the belief that there has been escapement of income must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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