SHRESTH ENCLAVE ADVISORY PVT. LTD.,CHENNAI vs. PCIT, , CHENNAI-

The brief facts of the case as emanating from the records are that the assessee is a private limited company, filed its return of income for the A.Y. 2018-19 u/s.139(1) of the Act on 24.09.2018 declaring a total income of Rs.2,02,01,161/-. The re-assessment proceedings were initiated by issuing notice u/s.148A on 12.03.2022 by the Jurisdictional Assessing officer ('JAO'). The assessee replied to the notice and submitted the related documents. The reassessment proceedings were initiated by issuing notice u/s.148 of the Act dated 28.03.2022. Based on the information that J.M.Financial Asset Management Limited had manipulated the accounting methodology of JAM balanced fund annual dividend option regular scheme to artificially inflated distributable surplus. A portion of the capital has been classified as distributable surplus and dividend has been paid out. The investors have invested in the fund in order to reduce their tax liability by claiming short term capital loss and exempt income. The revenue seeks to classify the investment as a sham transaction devised to claim fictitious short term capital loss and dividend income.

The assessee had invested in the said mutual fund scheme floated by JM Financial. The allegation was that the assessee has received dividend from this mutual fund amounting to Rs.40,51,573/- which has allegedly been paid in violation of the accounting norms. In the re-assessment proceeding it was proposed to deny the exemption u/s.10(35) of the Act for the dividend received. The re-assessment proceeding was completed by passing an order u/s.147 on 28.03.2023 by the AO and concluding that the assessee had not claimed capital loss during the assessment year and that the assessee had not only invested in JM Financial Mutual Fund during the year but had also made other investments in mutual funds amounting to Rs.19.00 Crores. The AO came to a conclusion that the investment made by the assessee was genuine and not a sham transaction as originally alleged. Thus, the re-assessment order dated 28.03.2023 was passed without making any additions or modifications.

Later the ld.PCIT issued a show cause notice dated 07.02.2025 requiring the assessee to show cause as to why the re- assessment order dated 28.03.2023 should not be revised u/s.263 of the Act. The assessee furnished its reply to the show cause notice on 11.02.2025. Subsequently, the impugned order u/s.263 of the Act was passed on 26.03.2025 by arriving at the following conclusions:

Aggrieved by the order of the ld.PCIT the assessee is on appeal before us by raising the following concise grounds of appeal:

The ld.AR for the assessee assailing the action of the ld.PCIT submitted the order u/s.263 of the Act is erroneous, arbitrary and against the settled principles of law. The invocation of jurisdiction u/s.263 of the Act on the basis of change of opinion is impermissible. Further the ld.AR stated that the ld.PCIT has failed to appreciate that the AO in the re-assessment proceedings had thoroughly examined the issue and concluded that the assessee was not involved in a sham transaction. The conclusion was arrived at by the AO after finding that the assessee had not only invested in the mutual fund in question but has invested Rs.19.00 Crores in other mutual funds as well.

The ld.AR argued that ld.PCIT has failed to appreciate that the AO had made enquiries into the issue at hand, i.e., the genuinity of the assessee in making the investment. The conclusion of the ld.PCIT that the AO did not examine the issue for which the assessment was reopened is baseless and incorrect.

Further, the ld.AR contended that the ld.PCIT has come to an incorrect conclusion that it not a case of change of opinion or substitution of opinion but a case of no opinion expressed by the AO on the issue. He stated that the ld.PCIT has invoked his powers u/s.263 of the Act in a case where he does not :-5-:

The ld.AR further contended that the ld.PCIT has failed to appreciate that the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT (2000) 109 ITR 83 has held that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the AO. Therefore, every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one of the views, with which the ld.PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. Therefore, the ld.AR stated that the ld.PCIT has failed to appreciate that the principle laid down in the case of Malabar Industrial co.(Supra) has been followed by the Hon’ble Supreme Court in the case of CIT Vs. Max India Ltd. (2007) 295 ITR 282 and CIT Vs. Amitabh Bachchan (2016) 384 ITR 200. 10. The ld.AR also submitted that the ld.PCIT has failed to appreciate that the Hon’ble Rajasthan High Court in the case of CIT Vs. Chambal Fertilizers & Chemicals Ltd. (2014) 360 ITR 225 has held that the law is well settled that the ld.PCIT cannot invoke the powers to correct each and every mistake or error committed by the AO. Every loss to the Revenue, cannot be treated as prejudicial to the interest of the Revenue and if the Assessing Officer has adopted one of the course permissible under the law or where two views are possible and the AO has taken one view which the ld.PCIT does not agree, it cannot be treated as an order erroneous and prejudicial to the interest of the Revenue, the AO exercises quasi-judicial power vested in him and if he exercises such powers in accordance with law, arrives at a just conclusion such conclusion cannot be termed to be erroneous only because the ld.PCIT does not feel satisfied with the conclusion.

He further argued that the ld.PCIT has failed to appreciate that the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. (1993) 203 ITR 108 has held that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the ld.PCIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the ld.CIT for that of the ITO.

The ld.AR contended that the revenue has not brought out any evidence to establish that the assessee had direct knowledge of the possible dividend payout before investment in the mutual fund. Further he stated that the ld.PCIT has failed to appreciate that alleged violation of Securities and Exchange Board of India regulations regarding distribution of dividend out capital and not out of investment surplus is an allegation against JM Mutual Fund and the assessee had nothing do with the said offence or violation.

The ld.AR also submitted that the ld.PCIT has failed to appreciate that the assessee was a genuine investor in the mutual fund based on the recommendation made by its investment advisors. The investment was made by the assessee through banking channels, and the dividend was also received through banking channels. The assessee had no part to play in the alleged violation of SEBI regulations. Further, he also stated that the assessee had no control over JMFL towards distribution of dividend or in the alleged manipulation of the distributable surplus.

The Principal Commissioner of Income Tax failed to appreciate that there is no evidence to substantiate the claim that the assessee had information about the impending dividend distribution and that the assessee had connived with JM Financial Mutual Fund in devising a sham transaction.

The ld.AR brought to our notice that the ld.PCIT has failed to appreciate that the assessee, during the period between 12.03.2018 and 26.03.2018, had invested Rs.14,59,48,428/- in mutual funds including Rs.1,00,00,000/- in the fund under question. The assessee regularly invests in mutual funds as part of its investment strategy and has not participated knowingly in any sham transaction to evade tax.

The ld.AR argued that the ld.PCIT has failed to appreciate that proceedings in some form had been initiated against most of the investors in the JM Financial Mutual Funds on the allegation of knowingly involving themselves in sham transactions to evade tax. The proceedings have been set aside by the various high courts, including the jurisdictional high court, and various tribunals. In support of the same the ld.AR stated that the ld.PCIT has failed to appreciate that in the case of Karan Maheshwari Vs. ACIT (2025) 176 Taxmann.com 700, wherein re-assessment proceedings initiated against the petitioner based on the very same survey conducted in the premises of JM Financial Mutual Fund and the allegation was that the petitioner had knowingly participated in the alleged sham transaction, the Hon’ble Bombay High Court held that 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.

Further the ld.AR relied on the decision of the Hon’ble Madras High Court in the case of Spencer and Company Ltd Vs. ACIT (2024) 169 taxmann.com 221, wherein again the re- assessment proceedings initiated based on the survey conducted on JM Financial Mutual Fund was challenged, it was held that there is no material evidence to establish the aspect that the petitioner has received the amount other than in the form of dividend. The similar view has been adopted in the following cases wherein proceedings have been initiated based on survey action in the premises of JM Financial Mutual Fund:

In respect of the merits of the issue the ld.AR submitted that the exemption of dividend income or the capital loss arising from transfer of a unit of mutual fund cannot be denied when the special provision enacted for curbing tax avoidance through dividend stripping is not attracted. The ld.PCIT has failed to appreciate that the Hon’ble Supreme Court in the case of Kishinchand :-9-:

In view of the above the ld.AR argued that the ld.PCIT has failed to test the transaction on the applicable provision of Section 94(7) of the Act but has directed to tax the dividend income under income from other sources and deny the claim of capital loss without any authority of law. The only justification for such action is the baseless characterization of the transaction as a sham transaction.

The ld.AR also submitted that the denial of exemption provided u/s.10(35) of the Act will result in double taxation of the dividend income. The exemption provided for dividend income received from units of a mutual fund u/s.10(35) of the Act is because such dividend income has already suffered tax in the form of dividend distribution tax u/s.115R of the Act in the hands of the Mutual Fund. Therefore, the ld.AR argued that the ld.PCIT has failed to appreciate that the dividend income received by the assessee had already suffered tax u/s.115R of the Act. Hence, the denial of exemption u/s.10(35) would result in double taxation. Even in the case of dividend stripping, Section 94(7) of the Act denies the benefit of the capital loss to the extent of exempt dividend income and does not deny the exemption on dividend income.

Further, the ld.AR submitted that the ld.PCIT has erroneously issued directions to the AO in respect of capital loss arising in AY 2019-20 in proceedings which has been initiated u/s.263 of the Act to revise the re- assessment order for AY 2018-19. The ld.PCIT has failed to appreciate that the direction in relation to AY 2019-20 can be issued by invoking section 263 of the Act in respect of an assessment order passed for AY 2019-20. :-10-:

Per contra, the ld.DR for the revenue supported the order of the ld.PCIT and submitted that the transactions entered into these purchase of mutual funds by other entities also found to be sham and hence prayed for dismissing the appeal of the assessee.

We have heard the rival submissions, perused the material available on record and carefully gone through the impugned order passed u/s.263 of the Act as well as the reassessment order passed u/s.147 of the Act.

At the outset, it is an undisputed fact that the reassessment proceedings were initiated on the basis of information received in respect of investments made in JM Financial Mutual Fund and the alleged claim of exempt dividend income coupled with capital loss arising out of the said investment. During the reassessment proceedings, the AO had issued notices, called for details from the assessee and examined the nature of the investment made in the mutual fund scheme. The assessee had furnished all relevant documents including details of investment, dividend received, holding pattern, mutual fund transactions and explanations regarding the genuineness of the investment activity. Thereafter, the AO completed the reassessment u/s.147 of the Act on 28.03.2023 after arriving at a categorical conclusion that the assessee had not claimed any short-term capital loss during the relevant assessment year and further that the assessee was regularly engaged in investment activities in several mutual funds aggregating to approximately Rs.19 crores and therefore the transaction could not be characterized as sham in nature.

Thus, from the reassessment order as well as the material placed before us, it is evident that the AO had consciously examined the very issue for which the reassessment proceedings were initiated and thereafter taken a plausible view based on the facts and evidences available on record. Once an enquiry has been conducted by the AO and a view has been taken after due application of mind, the revisional jurisdiction u/s.263 of the Act cannot be invoked merely because the ld.PCIT holds a different opinion on the same set of facts.

The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT has categorically held that for invoking jurisdiction u/s.263 of the Act, the twin conditions namely (i) the order of the AO should be erroneous, and (ii) it should be prejudicial to the interests of the Revenue, must coexist simultaneously. It has further been held that where two views are possible and the AO has adopted one permissible view, the order cannot be treated as erroneous merely because the Commissioner does not agree with such view. The said principle has consistently been reiterated by the Hon’ble Apex Court in the cases of CIT Vs. Max India Ltd. and CIT Vs. Amitabh Bachchan.

Further, the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. has held that the Commissioner cannot substitute his own judgment for that of the AO when the AO has acted in accordance with law and adopted one of the permissible views. Similarly, the Hon’ble Rajasthan High Court in the case of CIT Vs. Chambal Fertilizers & Chemicals Ltd. has held that every loss of revenue cannot be treated as prejudicial to the interests of the Revenue so as to justify invocation of section 263 of the Act.

In the present case, the ld.PCIT has primarily proceeded on the premise that the investment made by the assessee in JM Financial Mutual Fund constituted a sham transaction intended to evade tax. However, except relying upon allegations levelled against JM Financial Mutual Fund regarding alleged violation of SEBI norms in declaration of dividend, no independent material has been brought on record to establish that the assessee had knowingly participated in any colourable device or colluded with the mutual fund in manipulation of distributable surplus.

It is noticed that the assessee had invested only Rs.1 crore in the impugned mutual fund scheme while simultaneously making investments aggregating to Rs.14.59 crores in various other mutual funds during the same period as part of its regular investment activities. The investments were routed through proper banking channels and the dividend was also received through

The allegation regarding payment of dividend out of capital is essentially an allegation against the mutual fund and not against the assessee-investor. Even assuming for the sake of argument that there was violation of SEBI regulations by the mutual fund, the same by itself cannot automatically lead to the conclusion that every investor in the scheme had participated in a sham transaction.

We further find considerable force in the contention of the ld.AR that similar reassessment proceedings initiated against various investors in JM Financial Mutual Fund schemes have consistently been quashed by various High Courts and coordinate benches of the Tribunal on the ground that there was no material to establish conscious participation by the investors in any sham arrangement. The Hon’ble Madras High Court in the case of Spencer and Company Ltd. Vs. ACIT held that there was no material evidence to establish that the assessee had received anything other than dividend income from the mutual fund scheme. Similarly, the Hon’ble Bombay High Court in the case of Karan Maheshwari Vs.ACIT held that allegations against JM Financial did not implicate the assessee in any manner and there was no material to indicate knowing participation in any sham transaction. Similar views have also been expressed in the cases of Pranav Ramesh Parikh Vs. DCIT, Varun Jain Vs.

We also find merit in the argument advanced by the ld.AR regarding applicability of section 94(7) of the Act. The legislature has consciously enacted specific anti-avoidance provisions u/s.94(7) dealing with dividend stripping transactions. As per the said provision, the loss arising from transfer of units is to be ignored only when the units are sold within nine months from the record

We also find force in the contention of the assessee that denial of exemption u/s.10(35) of the Act would result in double taxation inasmuch as the dividend distributed by the mutual fund had already suffered dividend distribution tax u/s.115R of the Act in the hands of the mutual fund. Even in cases covered u/s.94(7) of the Act, the statute merely restricts the capital loss to the extent of exempt dividend income and does not deny the exemption available u/s.10(35) of the Act.

Further, we find that the ld.PCIT travelled beyond the scope of jurisdiction vested u/s.263 of the Act by issuing directions in respect of Assessment Year 2019-20 while exercising revisional powers in relation to Assessment Year 2018-19. Such directions are clearly beyond the statutory scope of proceedings initiated for the impugned assessment year and therefore cannot be sustained.

Considering the totality of facts and circumstances of the case, we are of the considered opinion that the reassessment order passed by the AO u/s.147 of the Act was neither erroneous nor prejudicial to the interests of the Revenue. The AO had conducted enquiry on the very issue for which reassessment was initiated and thereafter adopted a plausible view permissible in law. Therefore, the assumption of revisional jurisdiction by the ld.PCIT u/s.263 of the Act is unsustainable in the eyes of law.

Accordingly, we set aside the impugned order passed by the ld.PCIT u/s.263 of the Act dated 26.03.2025 and restore the reassessment order passed u/s.147 of the Act dated 28.03.2023. Thus, the grounds raised by the assessee are allowed.

In the result, the appeal of the assessee stands allowed.