COLVYN JAMES HARRIS ,MUMBAI vs. DCIT, CIRCLE 42(2)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH MUMBAI BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER & SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 8925/Mum/2025 (Assessment Year: 2019-20) Colvyn James Harris DCIT Circle-42(2)(1) 1103-B, 11th Floor, Kautilya Bhawan, BKC Vivarea Tower, Sane Vs. Mumbai-400 051 Guruji Marg, Jacob Circle, Mumbai – 400 011 PAN/GIR No. ABRPC4477B (Applicant) (Respondent) Assessee by Shri Fenil Bhat, Ld. AR Revenue by Shri V. S. Mahajan, Ld. DR Date of Hearing 06.05.2026 Date of Pronouncement 08.07.2026 आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: This appeal has been preferred by the assessee against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as "the CIT(A)"], for the Assessment Year 2019-20, arising out of the assessment order passed by the Assessment

2 ITA No. 8925/Mum/2025 Colvyn James Harris Unit, Income Tax Department under section 147 read with section 144B of the Income-tax Act, 1961 [hereinafter referred to as "the Act"]. The assessment was completed pursuant to the notice issued under section 148 of the Act. Facts of the Case 2. The brief facts giving rise to the present appeal are that the assessee filed his return of income in response to the notice issued under section 148 of the Act on 12.04.2023 declaring 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

3 ITA No. 8925/Mum/2025 Colvyn James Harris received on 22.03.2018 and a further dividend of Rs.11,74,784/- was declared on 07.03.2019. The units were redeemed on 18.03.2019 at Rs.15.9656 per unit for Rs.49,84,375/-. According to the Assessing Officer, after reducing the dividend amounts from the original investment, the net cost of acquisition worked out to Rs.47,66,686/-, resulting in short-term capital gain of Rs.2,17,689/- instead of the short-term capital loss of Rs.50,15,625/- claimed by the assessee. 4. The Assessing Officer observed that the survey conducted under section 133A in the case of JM Financial Asset Management Ltd. disclosed that the mutual fund had violated the SEBI guidelines by utilising Unit Premium Reserve instead of realised profits for declaration of dividends, thereby artificially inflating distributable surplus. It was further observed that the key managerial personnel of the fund admitted during survey proceedings that SEBI guidelines relating to declaration of dividend had not been followed and that advance information regarding dividend declaration had been circulated amongst distributors. According to the Assessing Officer, the assessee had entered into a pre-planned arrangement with the mutual fund to receive tax exempt dividend and generate artificial short-term capital loss for set off against other capital gains. 5. The Assessing Officer further held that dividends can be declared only out of distributable surplus generated from realised gains and not out of Unit Premium Reserve. According to him, the dividend received by the assessee was merely return of capital

4 ITA No. 8925/Mum/2025 Colvyn James Harris and not genuine dividend eligible for exemption under section 10(35) of the Act. The Assessing Officer concluded that the entire arrangement constituted a colourable device adopted for tax avoidance. The Assessing Officer also referred to alleged action taken by SEBI against JM Financial Asset Management Ltd. and relied upon an Economic Times news report regarding SEBI proceedings. 6. During the reassessment proceedings, the assessee filed detailed written submissions in response to the show cause notices dated 31.01.2025 and 17.02.2025 and also participated in the hearing through video conference on 13.02.2025. The assessee contended that the show cause notice did not specify the statutory provision under which the proposed adjustment was sought to be made and, therefore, appropriate submissions could not be made. It was submitted that if the proposed addition was intended to be made under section 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

5 ITA No. 8925/Mum/2025 Colvyn James Harris 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 the submissions of the assessee. He held that the assessee's explanation could not be accepted as the addition was being made by recomputing the short-term capital gain on the premise that the dividend represented return of capital. The Assessing Officer observed that the assessee had understated income during the relevant previous year and recomputed the capital gains by reducing the dividend received from the cost of acquisition. Consequently, the claim of short-term capital loss of Rs.50,15,625/- was disallowed and an addition of short-term capital gain of Rs.2,17,689/- was made. The total addition thus amounted to Rs.52,33,314/-. Penalty proceedings under section 270A of the Act for mis- reporting of income were also initiated. 9. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). The assessee challenged the additions on merits and reiterated that the transactions were genuine and were not hit by section 94(7) of the Act. It was also

6 ITA No. 8925/Mum/2025 Colvyn James Harris contended that the Assessing Officer had wrongly treated exempt dividend as return of capital without any statutory authority and had merely relied upon alleged survey findings and media reports. The assessee also sought deletion of the additions made by the Assessing Officer.

Ground No. 1 The Commissioner of Income Tax (Appeals) [herein after referred to as CIT(A)] passed an ex-parte order dismissing the appeal of the appellants. The Appellants submit that since they had requested for an adjournment, the CIT(A) has erred in passing an ex-parte order without giving a further opportunity to the appellants without considering detailed submission available on records and merits of the case and therefore the said order being against the principle of natural justice is bad in law. The appellants therefore pray that the order be set-aside and remanded back to the CIT (A) for adjudicating on merits. The Appellants pray that the 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

7 ITA No. 8925/Mum/2025 Colvyn James Harris 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 out from the assessment records and invited our attention to paragraphs 6.3.1 to 6.3.6 of the assessment order. It was submitted that the Assessing Officer himself has proceeded on the premise that the mutual fund had allegedly manipulated its accounting methodology by classifying a portion of capital as distributable surplus and, therefore, the dividend received by the assessee represented return of capital and not genuine dividend. However, despite recording elaborate factual allegations in the aforesaid paragraphs, the Assessing Officer has nowhere specified the statutory provision of the Act under which the impugned addition has been made. It was contended that even in the show cause notices issued during the assessment proceedings, the Assessing Officer had failed to indicate the specific provision under which the proposed variation was sought to be made, compelling the assessee to specifically request the Assessing

8 ITA No. 8925/Mum/2025 Colvyn James Harris Officer to disclose the relevant statutory provision. The AR submitted that in the absence of a clear statutory foundation for the addition, the entire assessment suffers from a fundamental legal infirmity and cannot be sustained in law. 13. The learned AR further submitted that although the Assessing Officer has repeatedly referred to the alleged violation of SEBI guidelines by JM Financial Asset Management Ltd., the survey conducted under section 133A of the Act in the case of the mutual fund, and the alleged manipulation of distributable surplus, the addition has ultimately been made merely by treating the dividend received by the assessee as return of capital and recomputing the cost of acquisition without identifying any charging or disallowance provision under the Act authorising such adjustment. It was submitted that the Assessing Officer has also not invoked section 94(7) of the Act, despite the assessee specifically addressing the applicability of the said provision in its replies before the Assessing Officer. According to the learned AR, once the statutory provision itself has not been identified, the addition cannot be sustained merely on the basis of general allegations regarding colourable devices or alleged violation of SEBI regulations. 14. The learned AR invited our specific attention to the detailed reply dated 06.02.2025 filed before the Assessing Officer during the reassessment proceedings in response to the show cause notice dated 31.01.2025. Referring to the first part of the reply, the learned AR submitted that the assessee had categorically

9 ITA No. 8925/Mum/2025 Colvyn James Harris 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 JM Balanced Fund) on 19.03.2018, received dividends of Rs.40,58,530/- on 22.03.2018 and Rs.11,74,784/- on 07.03.2019, and redeemed the units on 18.03.2019, resulting in a short-term capital loss of Rs.50,15,625/-. The Assessing Officer, however, proposed to reduce the cost of acquisition by the aggregate dividend of Rs.52,33,314/- and consequently recomputed the transaction into a short-term capital gain of Rs.2,17,689/-. It was submitted that the entire computation of

10 ITA No. 8925/Mum/2025 Colvyn James Harris the short-term capital loss was in accordance with the provisions of the Act and the Assessing Officer had no authority in law to alter the cost of acquisition in the manner adopted. 16. The learned AR further submitted that the Assessing Officer's allegation that the transaction was fictitious, pre- planned or a sham transaction in violation of SEBI guidelines was wholly unsupported by any material. It was pointed out that the transactions were carried out through recognised banking channels, the investment was made in an approved mutual fund, Securities Transaction Tax had been duly paid on redemption of the units and Dividend Distribution Tax had also been paid by the mutual fund under section 115R of the Act. It was, therefore, submitted that the dividend could not be characterised as return of capital merely on the basis of assumptions regarding alleged violations by the mutual fund. The learned AR submitted that the allegations of manipulation of SEBI regulations were founded only on conjectures and surmises, without any material establishing that the assessee had participated in or was even aware of any such alleged violation. 17. The learned AR further submitted that, even assuming, without admitting, that the transaction was pre-planned, no disallowance could be made dehors the provisions of section 94(7) of the Act, which is the specific statutory provision enacted by Parliament to deal with dividend stripping. Reliance was placed on the decision of the Hon'ble Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. v. CIT [(2010) 326 ITR 1 (SC)] to

11 ITA No. 8925/Mum/2025 Colvyn James Harris contend that after insertion of section 94(7), losses arising from dividend stripping can be ignored only if the statutory conditions prescribed therein are cumulatively satisfied. The learned AR submitted that the Hon'ble Supreme Court has categorically held that, even if the transaction is pre-planned, the genuineness 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 Officer could not

12 ITA No. 8925/Mum/2025 Colvyn James Harris disregard the short-term capital loss by resorting to general allegations of dividend stripping or colourable device. 19. The learned AR further placed reliance upon the judgment of the Hon'ble Bombay High Court in Karan Maheshwari v. Assistant Commissioner of Income-tax [(2025) 176 taxmann.com 700 (Bom.)], wherein the reopening proceedings initiated on identical allegations relating to dividend stripping in JM Mutual Fund schemes were quashed. 20. The learned AR accordingly submitted that the reassessment order proceeds on an inconsistent foundation. On one hand, the Assessing Officer refrained from invoking section 94(7), while on the other hand he effectively sought to deny the loss by applying the very principles underlying that provision without satisfying its statutory preconditions. It was therefore prayed that the addition of Rs.52,33,314/-, resulting in re- computation of the transaction into a short-term capital gain of Rs.2,17,689/-, be deleted in its entirety. The learned AR further submitted that the above judgment of the Hon'ble Bombay High Court has subsequently attained finality, inasmuch as the Special Leave Petition preferred by the Revenue against the said judgment has been dismissed by the Hon'ble Supreme Court vide order dated 17.07.2025 in Assistant Commissioner of Income- tax, Mumbai v. Karan Maheshwari [(2025) 176 taxmann.com 1003 (SC)]. It was therefore contended that the legal principles laid down by the Hon'ble Bombay High Court continue to hold the field and fully support the case of the assessee.

13 ITA No. 8925/Mum/2025 Colvyn James Harris 21. The learned AR also placed reliance upon the decision of the Coordinate Bench in ACIT v. Subhkam Ventures (I) Pvt. Ltd. (ITA Nos. 5657/Mum/2024, 5620/Mum/2024 & 5622/Mum/2024, order dated 20.05.2025), wherein, while dealing with identical additions arising out of investments in JM Mutual Fund schemes, the Tribunal, after considering the judgment of the Hon'ble Bombay High Court in Karan Maheshwari and the decision of the Hon'ble Supreme Court in CIT v. Walfort Share & Stock Brokers (P.) Ltd., held that merely because a survey had been conducted in the case of JM Financial and certain statements had been recorded from its employees, the transactions entered into by the investors could not be treated as sham in the absence of any material linking the assessee with the alleged manipulation. 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

14 ITA No. 8925/Mum/2025 Colvyn James Harris 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.52,33,314/-. 24. At the outset, we find that the assessee, during the assessment proceedings, had specifically objected that the show cause notice did not indicate the statutory provision under which the proposed adjustment was sought to be made. The assessee had, therefore, stated that, on the basis of the allegation of dividend stripping, he presumed that the proposed adjustment was under section 94(7) of the Act, and if the adjustment was not proposed under section 94(7), the Assessing Officer should provide the details of the provision intended to be invoked. Despite such specific request, the Assessing Officer has not referred to any specific provision under which the dividend received by the assessee could be treated as return of capital and reduced from the cost of acquisition. 25. Section 94(7) of the Act is a specific statutory provision dealing with dividend stripping. The assessee demonstrated before the Assessing Officer that all the conditions of section

15 ITA No. 8925/Mum/2025 Colvyn James Harris 94(7) were not cumulatively satisfied. In respect of the dividend of Rs.40,58,530/-, the record date was 22.03.2018 and the units were sold on 18.03.2019, which was beyond nine months from the record date. In respect of dividend of Rs.11,74,784/-, the record date was 07.03.2019 and the units were purchased on 19.03.2018, which was beyond three months prior to the record date. Thus, the conditions prescribed under clauses (a) and (b) of section 94(7) were not cumulatively satisfied.

“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 taxfree dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department... The assessee had made use of the said provision of the Act. That such 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... 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

16 ITA No. 8925/Mum/2025 Colvyn James Harris 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.

“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 capital loss claimed was fictitious. Petitioner had, based on public announcement, invested in the mutual fund. The fact that petitioner received tax free dividend fund cannot be held against petitioner. The fact that petitioner had suffered a loss also cannot be held against petitioner. Even assuming that the transaction was pre-planned, there is nothing to impeach the genuineness of the transaction. Petitioner was free to carry on his business which he did within the four corners of law. Mere tax planning without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of the Apex Court in McDowell & Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148.” “19. In the notice issued under Section 148A(b) of the Act, the Assessing Officer alleges that JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus and the investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and short term capital loss. These are allegations against JM Financial and do not implicate petitioner in any manner. There is nothing to indicate that petitioner had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short term capital loss... Therefore, the Assessing Officer is also not clear whether the assessee had booked loss or claimed dividend in the JM Balanced Fund - Annual Dividend Option Regular scheme or JM Equity Hybrid Fund Quarterly Dividend. This also indicates non application of mind by the Assessing Officer.”

17 ITA No. 8925/Mum/2025 Colvyn James Harris “20. For all these reasons above, notice dated 20th August 2022 under Section 148A(b) of the Income Tax Act, 1961 (the Act), order dated 30th September 2022 under Section 148A(d) of the Act and notices dated 30th September 2022 and 7th October 2022 under Section 148 of the Act are hereby quashed and set aside.” 29. The Hon’ble Supreme Court dismissed the SLP filed by the Revenue against the above judgment in Assistant Commissioner of Income-tax, Mumbai v. Karan Maheshwari [(2025) 176 taxmann.com 1003 (SC)].

“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

18 ITA No. 8925/Mum/2025 Colvyn James Harris 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 adjudicating the matter on merits. Ordinarily, where the first appellate authority has not decided the matter on merits, the issue may be restored. However, in the present case, all relevant facts are already available on record, the issue is purely covered by statutory interpretation and binding judicial precedents, and both parties have addressed us on merits. Therefore, no useful purpose would be served by remanding the matter to the learned CIT(A). 33. Respectfully following the ratio laid down by the Hon’ble Supreme Court in Walfort Share & Stock Brokers (P.) Ltd., the judgment of the Hon’ble Bombay High Court in Karan Maheshwari, and the Coordinate Bench decision in Subhkam Ventures (I) Pvt. Ltd., we hold that the Assessing Officer was not justified in treating the dividend of Rs.52,33,314/- as return of capital and reducing the same from the cost of acquisition in the absence of any specific statutory provision and in the absence of satisfaction of the conditions prescribed under section 94(7) of the Act. 34. Accordingly, the addition of Rs.52,33,314/-, comprising disallowance of short-term capital loss of Rs.50,15,625/- and recomputation of short-term capital gain of Rs. 2,17,689/-, is

19 ITA No. 8925/Mum/2025 Colvyn James Harris deleted. The grounds raised by the assessee are allowed on merits.

Order pronounced in the open court on 08.07.2026.

Sd/- Sd/- (ANIKESH BANERJEE) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 08/07/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : अपीलार्थी / The Appellant 1. प्रत्यर्थी / The Respondent. 2. 3. संबंधित आयकर आयुक्त / The CIT(A) आयकर आयुक्त(अपील) / Concerned CIT 4. धिभागीय प्रधतधिधि, आयकर अपीलीय अधिकरण, मुम्बई/ DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. 6. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai