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TMI Blog2025 (5) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) is correct in allowing's the assessee's claim of divided income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when the dividend received is not on account of appreciation of the investment but represents income of the assessee from unexplained sources and, as such, the same cannot qualify as dividend on account of the sham transactions entered into by the assessee using colorable devices?" 3 "3. Whether in the facts and circumstances of the case and in law, the Id. CIT(A) is correct in allowing's the assessee's claim of divided income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when it was found during the course of Survey action conducted w/s 133A of the Act by the DDIT, Unit-3(1), Mumbai on 15.02.2021 that JM Financial in its scheme "JM Balanced Fund -Quarterly Dividend Plan" had manipulated accounting methodology so as to artificially inflate the distributable surplus and in the process the SEBI guidelines have been floated by the JM M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y may adjust it with capital gains from other investments. The dividend being sham and capital loss being artificial is not eligible for set off. 5. Further, ld. AO noted that SEBI vide its Circular No. SEBI/IMD/CIR No 18 / 198647/2010 dated March 15, 2010, had clearly instructed the fund houses that 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. It can distribute only from surplus generated by realizing the gains on investments or dividends received from equity markets which it had invested. That means it has to invest and make a profit to distribute. However, said direction of the SEBI has not been followed by the mutual fund, as first it has artificially rigged the distributable surplus and then applied said ratio to future allotted units (before the planned dividend distribution date). Thus, ld. AO observed that it can be deduced that deploying unfair and manipulative methods, the mutual fund house has rigged up the distributable surplus in a planned manner and strictly against the guidelines specified by the SEBI. He further observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted while computing short term capital gains from other modes. Similarly, dividend income of Rs. 1,83,65,846/- has been claimed as exempt u/s 10(35) of the Act. However, ld. AO in light of information received based on survey action carried out in the case of J.M. Financial Asset Management Ltd. u/s.133A on 15/02/2021 and SEBI Circular observed that the short term capital loss is fictitious which cannot be allowed to be set off and claimed a dividend exempt is also not allowable. He has also made reference to statement of various persons during survey proceedings in case of J.M. Financials. Accordingly, AO taxed the dividend income of Rs. 1,83,65,846/- as income from undisclosed sources and disallowed the short term capital loss of Rs. 1,99,36,352/-. 8. The ld. CIT (A) though upheld the reopening u/s.148, however, on merits he has given relief by allowing the dividend income to be exempt and set off of short term capital loss. His detailed reasonings and the conclusion drawn by him shall be discussed hereinafter in forthcoming paragraphs. 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax." 11. From the perusal of the aforesaid provision, it is clear that loss incurred on account of issue of dividend has not been considered as non-genuine and the same shall be disallowed only when the record date falls within the period as stipulated u/s.94(7). This proposition has been upheld by the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR 233 (SC) wherein the Hon'ble Supreme Court held as under:- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,27,67,171/- which has not been doubted by the AO. This shows that the investment in JM Financial Mutual Fund is not an isolated transaction. 13. Another important fact here is that nowhere the ld. AO has brought on record any SEBI enquiry in the case of J.M. Financial Asset Management Ltd., to support his finding given by him. His entire order is based on the premise of SEBI Circular which was general and not particularly applicable for J.M. Financial Asset Management Ltd., Nowhere, there is any material that assessee was involved in manipulation done by J.M. Financial Asset Management Ltd. 14. Ld. CIT (A) has also considered various statements of employees of J.M. Financial Asset Management Ltd., which has been relied upon by the ld. AO, however, none of the employees were admitted that any manipulation has 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion insecurities cannot be considered for avoidance of tax. Assessee purchased such securities and 17/6/2015 when the record date was 18 June 2015 and securities were sold on 28/3/2016. The lower authorities have denied the exemption of dividend income and allowability of capital loss despite transaction is not falling under section 94 (7) of the act holding it to be sham and fictitious transaction is devoid of any merit. Accordingly on the merits also, orders of the lower authorities are reversed and ground number 4-7 of the appeal are allowed." 16. The ld. CIT(A) has also relied upon various other co-ordinate Bench decision and also the judgment of the Hon'ble Calcutta High Court in the case of Eveready Industries India Ltd. vs. CIT reported in 334 ITR 413. The relevant finding of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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