DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-5, PUNE vs. SACHIN PUKHARAJ OSWAL, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “B”, PUNE BEFORE SHRI R. K. PANDA, VICE PRESIDENT AND SHRI VINAY BHAMORE, JUDICIAL MEMBER आयकर अपील सं. / ITA No.2903/PUN/2025 िनधा�रण वष� / Assessment Year : 2018-19 DCIT, Circle-5, Pune. Vs. Sachin Pukharaj Oswal, 2702, Anmol Prestige, Govind Shroff Marg, Off. S.V. Road, Goregaon West, Mumbai- 400104. PAN : AAEPO8648N Appellant Respondent C. O. No.27/PUN/2026 (Arising out of ITA No.2903/PUN/2025) िनधा�रण वष� / Assessment Year : 2018-19 Vs. Sachin Pukharaj Oswal, DCIT, Circle-5, Pune. 2702, Anmol Prestige, Govind Shroff Marg, Off. S.V. Road, Goregaon West, Mumbai- 400104. PAN : AAEPO8648N Appellant Respondent Revenue by : Shri Umesh Phade Assessee by : Shri Ronak Doshi (Virtual) Date of hearing : 13.05.2026 Date of pronouncement : 05.08.2026

2 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 आदेश / ORDER PER VINAY BHAMORE, JM: This appeal filed by the Revenue is directed against the order dated 19.09.2025 passed by Ld. CIT(A)/NFAC for the assessment year 2018-19. The assessee has also filed Cross Objection bearing C.O. No.27/PUN/2026. 2. First we shall take up the Cross Objection filed by the assessee for adjudication. C.O. No.27/PUN/2026 – By Assessee : 3. The assessee has raised the following grounds in cross objection :- “1. On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") erred in initiating re-opening proceeding by passing order under section 148A(d) of the Income-tax Act, 1961 ("the Act") along with notice u/s.148 dated March 31, 2022 and in passing the order u/s 147 read with sections 144 and 144B of the Act dated March 27, 2023; 2. The Cross-Objector submits that, for the various proposition in law, the reopening/ re-assessment initiated is bad in law and without jurisdiction and hence ab-initio void. 3. The Cross objector therefore prays that the consequentially reopening be held as bad-in-law and order passed under section 147 read with sections 144 and 144B of the Act dated March 27, 2023 be quashed.”

3 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 4. Facts of the case, in brief, are that the assessee is an individual and furnished his return of income on 25.09.2018 by declaring income of Rs.90,23,840/- after claiming exemption of Rs.40,51,573/- u/s 10(35) of the IT Act regarding dividend amount received from J. M. Finance Asset Management Limited. On the basis of information during survey conducted in the case of J. M. Finance Asset Management Limited, the case of the assessee was reopened u/s 147 of the IT Act and notice u/s 148 of the IT Act was issued on 31.03.2022 after following the procedure laid down in section 148A(b)/(d) of the IT Act. The assessee furnished return on 20.04.2022 in response to notice u/s 148 of the IT Act and claimed exemption u/s 10(35) of the IT Act for dividend of Rs.40,51,573/- received from J. M. Finance Asset Management Limited. Subsequently, notice u/s 143(2) and 142(1) respectively were issued to the assessee. After considering the reply and submissions of the assessee, the Assessing Officer vide order dated 27.03.2023 completed the assessment proceedings u/s 147 r.w.s. 144 r.w.s. 144B of the IT Act by determining the income of the assessee at Rs.1,30,75,413/- as against the income of

4 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 Rs.90,23,840/- returned by the assessee. The above assessed income includes addition of Rs.40,51,573/- on account of disallowance of exemption claimed u/s 10(35) of the IT Act regarding dividend income. 5. Being aggrieved with the above assessment order, the assessee preferred an appeal before Ld. CIT(A)/NFAC. Since the assessee has not furnished any submissions, Ld. CIT(A)/NFAC decided the appeal on the basis of assessment order, statement of facts and grounds of appeal and allowed the exemption u/s 10(35) of the IT Act claimed by the assessee regarding dividend income received from J. M. Finance Asset Management Limited by observing as under :- “5. Decision I have carefully perused grounds of appeal, statement of facts, assessment order, and other details/evidences on records. 5.1. Grounds 3 and 4 Vide these grounds, the Appellant has objected to the addition of Rs. 40,51,573/- by not allowing the exemption claimed u/s 10(35) of the Act. The AO has not allowed the exemption of Rs. 40,51,573/- claimed u/s 10(35) of the Act on the ground that the dividend received by the Appellant from JM Equity Hybrid Fund is on the basis of sham transactions between the Appellant and JM Equity Hybrid Fund. In this regard, relevant part of the assessment order is reproduced below: “4.6.4 During the course of survey action, u/s.133A of the I.T. Act, 1961 in the case of M/s. JM Financial Asset Management

5 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 Limited statement of the key persons such as Shri Sanjay Chhabaria, fund manager, Shri Suvendu Rakshith, the head of sales team, Mrs. Diana D’sa, the Compliance Head, JM AMC responsible for the management of the mutual fund was recorded and these persons in their statements have categorically admitted that due process as mandated by the SEBI has not been followed by them. 4.6.5 In view of the above, it is clear that by deploying unfair and manipulative methods, the mutual fund house has rigged up the distributable surplus, in a planned manner. While accounting the breakup of NAV on the date of investments, the fund house credits the IER (Income Equalization Reserve) account instead of UPR (Unit Premium Reserve), which is strictly against the guidelines specified by SEBI. After the dividend is declared, since there is not enough money to distribute, the capital amount introduced by the clients is distributed back to them in the form of tax-free dividend. 4.6.6 The assessee, in order to reduce his tax liability, entered into these sham transactions and received dividend of Rs. 40,51,573/- in the financial year 2017- 18 from JM Equity Hybrid Fund. In the view of the above facts and the violations of the guidelines led down by the SEBI, it is evident that the dividend is not eligible for deduction u/s 10(35) of the I.T. Act. The whole transaction was nothing but a make-believe arrangement. The activities undertaken by the assessee cannot be said to be in the nature of business or investment. The facts of this case are sufficient to establish the non-genuine nature of the transaction. It is a well-settled proposition of law that bogus, sham or nongenuine transactions cannot form the basis for claiming exemption. They have to be ignored and this is what needs to be done. In this case the dividend distributed by JM Equity Hybrid Fund is in contravention to the SEBI guidelines and hence does not qualify for claim of exemption u/s 10(35) of the IT Act. 4.6.7 On the facts and in the circumstances of the case, this is a case of colorable device adopted by the assessee by which he claims to have earned tax-free dividend. The entire story when seen in the context of incriminating material found during search and survey indicates sham nature of the transactions. The transactions are pre-determined and planned in a way to steer clear of the provisions of section 10(35) of IT Act. Assessee has tried to clothe the transactions the entire

6 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 transaction with legitimacy. But when, one looks in the surrounding circumstances to find out the reality of the transactions, one cannot escape the naked truth about the sham nature of the transaction. The assessee, in order to evade payment of taxes on the aforesaid income, entered into a sham transaction with M/s JM Mutual Fund by which had earned tax- free dividend. The aforesaid transaction has been found to be sham and accordingly, the claim of the assessee for earning dividend income is rejected. 4.6.8 The written reply dated 20.03.2023 of the assessee against the Show Cause Notice dated 16.03.2023 and issues based submission during the course of VC dated 23.03.2023 were also considered and point wise discussion has been made in Para 4.3 of this ILDP as above. After considering all the facts of the case, the reply of assessee is not found tenable and the same is rejected. In view of the above detailed discussion, facts and circumstances of the case, the amount of Rs. 40,51,573/- deduction u/s 10(35) is hereby disallowed and added to the total income of the assessee for the assessment year 2018- 19and penalty proceeding u/s 270A(9) is initiated for under reporting the income is in consequence upon the misreporting thereof.” In this regard, I find that on identical facts, Hon’ble Jurisdictional ITAT Pune has decided the issue in favour of the assessee in the case of Giriraj Enterprises vs DCIT, ITA No.427/Pune/2024 dated 17/10/2024. Relevant part of the decision is reproduced hereunder; 3. The Assessing Officer noted that a Survey action u/s 133A of the Act was conducted in the case of M/s. JM Financial Asset Management Limited ("JM Financial") situated at 7th & 8th Floor, Appa Saheb Marathe Marg, Cynergy, Prabhadevi, Mumbai, during which it was found that JM Balanced Fund - Dividend Option Regular scheme by JM Financial had manipulated accounting methodology so as to artificially inflate the distributable 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 pay out to the investors in the form of dividend. According to the Assessing Officer, although dividend received by the unit holders from the equity based mutual fund is exempt from taxation u/s 10(35) of the Act, however, these provisions cannot be applied to sham transactions. He was of the opinion

7 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 that the dividend received was not on account of appreciation of the investment but is return of a part of the capital itself, as such, it cannot qualify as dividend. Therefore, such dividend needs to be reduced from the cost of investment and accordingly, the capital loss would also be reduced. In view of the above, the Assessing Officer called for the necessary details in respect of the transactions with JM Financial. The Assessing Officer also asked the assessee to explain as to why certain capital loss should not be disallowed and the dividend income should not be taxed accordingly. ……………. 16. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case on the basis of information with him that J M Financial had artificially manipulated accounting methodology so as to artificially inflate the distributable surplus and on the basis of violation of SEBI guidelines and on the basis of statements of some of the employees came to the conclusion that the said mutual fund has rigged up the Balance Sheet to declare higher dividend. The transactions have been arranged and therefore, the dividend is not eligible for exemption and the loss claimed is a sham transaction. We find in appeal, the CIT(A) relying on the decision of the Hon‟ble Calcutta High Court in the case of PCIT vs. Swati Bajaj (supra) and the decision of the Pune Bench of the Tribunal in the case of Abhishek Ashok Lohade vs. ITO (supra) sustained the addition made by the Assessing Officer. It is the submission of the Ld. Counsel for the assessee that the addition made by the Assessing Officer relying on the statements of some of the employees of J M Mutual Fund which were not provided to the assessee and where the opportunity of cross examination was not given, is not justified. It is also his argument that the assessee has invested in the said units without any knowledge of the alleged manipulation by J M Mutual Fund and in absence of any evidence with the Assessing Officer that the assessee was a party to the alleged manipulation carried out by J M Mutual Fund, no addition can be made. 17. We find some force in the above arguments of the Ld. Counsel for the assessee. It is an admitted fact that the assessee

8 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 had made investment of Rs.5 crores on 16.10.2014 and another sum of Rs.5 crores on 17.10.2014 in J M Balance Mutual Fund Dividend Option Scheme. Thereafter, the assessee received dividend of Rs.2,06,68,835/- on 29.01.2015 and thereafter, sold all the units on 29.01.2015 for a consideration of Rs.8,99,93,198/- and the loss of Rs.1,00,06,802/- was claimed as the business loss by the assessee. 18. We find an identical issue had come up before the Hon‟ble Bombay High Court in the case of Karan Maheshwari vs. ACIT (supra). In this case also, the assessee had invested in J M Balance Fund and received dividend and thereafter units were sold which resulted in a loss. The case of the assessee was reopened u/s 148 of the Act. When the assessee challenged the validity of reopening of assessment, the Hon‟ble Bombay High Court held that the assessee was a small fry in the larger scheme of things and in fact, a victim of the alleged fraud by J M Financial. It was further held that the statements of the key management personnel of the Mutual Fund were recorded and there is nothing to indicate that the assessee was a party to the alleged sham mutual fund. The Hon‟ble High Court further held that the allegation of the Assessing Officer that J M Balance Fund had manipulated the accounting methodology so as to artificially inflate the distributable surplus were against J M Mutual fund and not against the assessee. Accordingly the reopening of assessment was held to be invalid. The relevant observations of the Hon‟ble High Court read as under: …………….. 19. We find the Mumbai „G‟ Bench of the Tribunal in the case of Goldiam International Ltd. vs. DCIT (supra) under identical circumstances has deleted the addition by observing as under: "017. Even on the merits of the case, the facts clearly shows that assessee purchased JM balanced fund mutual fund on 17/6/2015 and the record date of dividend was 18/6/2015 as per the notice dated 13 June 2015 that a dividend of 4.75 per unit is to be declared. The assessee purchased mutual fund of 300 lakhs (11,36,316.29 units). The assessee earned dividend on 18/6/2015 of 5,397,502/-. Further on December 21, 2015, and notice was issued by the mutual fund for declaration of dividend of Rs. 4 per unit. The record date was fixed on 26 December 2015. In both the notices issued by mutual fund clearly state that "after payment of dividend, the

9 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 power unit NAV of the dividend options of the scheme will fall to the extent of the payout and statutory levies (if applicable)." Therefore, naturally if anybody is selling after the dividend earned by the unit holder the redemption value will fall. Assessee sold all those mutual funds on 28/3/2016 at redemption amount of 19,434,337/-, which resulted into a short-term capital loss. Thus, the assessee acted on a publicly available notice issued by the mutual fund, both the notices are placed before us, it cannot be said that transaction entered into by the assessee is fictitious or sham. With respect to the applicability of provisions of section 94 (7) of the act, the lower authorities have also accepted that the assessee fulfils the condition by which the transaction 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." 20. We find Jaipur Bench of the Tribunal in the case of Agencies Rajasthan Pvt.(supra) under identical circumstances has also deleted the addition on account of loss from sale of units of JM Mutual Fund. We further find merit in the arguments of the Ld. Counsel for the assessee that there was no mention of any of the statements, which is the basis for the addition, in the notice issued u/s 142(1) of the Act. Therefore, there was no occasion on the part of the assessee to request for cross examination. 21. We find the Hon'ble Supreme Court in the case of Andaman Timber Industries vs. CCE (supra) has held that the addition made by placing reliance on the statement of third party without giving any opportunity to cross examine, is not sustainable in law. In the present case, the addition was made by the Assessing Officer on the basis of statements of some of the employees of JM Mutual Fund which were never brought to the notice of the assessee. Therefore, addition made by placing

10 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 reliance on these statements are against the principles of natural justice. 22. So far as the various decisions relied upon by the CIT(A) are concerned, those are all relate to the issue of penny stock and therefore, those decisions which are based on the facts in those particular cases, are distinguishable and not applicable to the facts of the present case. 23. In view of the above discussion, we are of the considered opinion that the Ld. CIT(A) was not justified in upholding the action of the Assessing Officer in denying set off of the business loss of Rs.1,00,06,802/- and confirming the addition of Rs.2,06,68,835/-. The grounds raised by the assessee are accordingly allowed. Thus, in view of facts of the case as discussed hereinabove and respectfully following the decision of Hon’ble Jurisdictional ITAT Pune in the case of Giriraj enterprises (supra), I hold that the AO has erred in not allowing the exemption of Rs. 40,51,573/- claimed by the Appellant u/s 10(35) of the Act. Accordingly, the disallowance of Rs. 40,51,573/- is directed to be deleted. Grounds are, thus, allowed. 5.2. As regards Ground 5, the same pertains to levy of interest u/s 234C. This being consequential in nature, does not require any independent adjudication and hence, dismissed. 5.3. As regards Ground 6, since the Appellant has not added, altered, amended and deleted any of the grounds, the ground is dismissed as not pressed. 5.4. As regards Grounds 1 and 2, since relief has been allowed to the Appellant, these grounds are rendered academic in nature, thus, not requiring any adjudication. 6. In the result, the Appeal is partly allowed.” 6. It is the above order against which the Revenue is in appeal before this Tribunal as well as the assessee is also in cross objection.

11 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 7. We have heard Ld. Counsels from both the sides and perused the material available on record including the paper books furnished by the assessee. It is the contention of the assessee that on the basis of public advertisement, the investment was made and the dividend were paid through banking channel and even dividend distribution tax was also paid by J.M. Finance Asset Management Limited. It was also the contention of the assessee that statements of persons from J. M. Financial were neither provided to the assessee nor opportunity of cross examine such statements recorded during survey u/s 133A of the IT Act was provided to the assessee. It is also the contention that no violation of any law by the investor i.e. the assessee & on the basis of an allegation about violation of some law by J. M. Mutual Fund any action should have been taken against the J. M. Mutual Fund & how it can be interpreted that the dividend received by the assessee is sham transaction. In support of its contention, the assessee relied on various judgements and decisions, particularly on the judgement passed by Hon’ble Bombay High Court in the case of Karan Maheshwari vs. Assistant Commissioner of Income-tax [2025] 176

12 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 taxmann.com 700 (Bombay) [08-03-2024] (SLP filed by the Revenue against this judgement is dismissed on 17.07.2025) involving identical issue of taxability of dividend declared by J.M. Financial Asset Management Limited wherein reopening proceedings u/s 147 and notice u/s 148 was quashed by observing as under :- “16. It is thus clear that petitioner is only a small fry in the larger scheme of things and in fact himself a victim of the alleged fraud of JM Financial and again being victimised by the Assessing Officer. Even in the order where it is mentioned that statement of the key management personnel of the mutual fund was recorded, there is nothing to indicate that petitioner was part of the alleged sham mutual fund. Infact in paragraph 7.4 of the impugned order referred to by Mr. Singh, in the statement of Mr. Suvendu Rakshith, it is recorded that the sales team had been passing on the hints to the distributors about the prospective dividend distribution, much in advance, "to lure" the prospective clients. Admittedly petitioner was not a distributor and was only a client. 17. In the notice issued under Section 148A(b) of the Act, 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] 22 Taxman 11/154 ITR 148 (SC). Paragraphs 18 and 20 of the judgment of the Apex Court in Commissioner of Income Tax v. Walfort Share & Stock Brokers (P). Ltd. [2010] 192 Taxman 211/326 ITR 1 (SC) read as under :

13 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 18. The next point which arises for determination is whether the "loss" pertaining to exempted income was deductible against the chargeable income. In other words, whether the loss in the sale of units could be disallowed on the ground that the impugned transaction was a transaction of dividend stripping. The AO in the present case has disallowed the loss of Rs. 1,82,12,862 on the sale of 40% tax-free units of the mutual fund. The AO held that the assessee had purposely and in a planned 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 taxfree 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 received was tax-free is the position recognized under Section 10(33) of the Act. 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. With regard to the ruling in McDowell & Co. Ltd. v. Commercial Tax Officer [154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [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).

14 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed. 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. Applying Section 94(7) in a case for the assessment year(s) falling after 1.4.2002, 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. After 1.4.2002, losses over and above the dividend received will not be ignored under Section 94(7). If the argument of the Department is to be accepted, it would mean that before 1.4.2002 the entire loss would be disallowed as not genuine but, after 1.4.2002, a part of it would be allowable under Section 94(7) which cannot be the object of Section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, Section 14A was inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over 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)

15 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 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 his view that there has been escapement of income of the assessee from assessment in the particular year. It is settled law that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would suggest escapement of the income of the assessee from assessment. The powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The live link or close nexus should be there between the information before the Income Tax Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income of the assessee. The relevant paragraphs of Income Tax Officer v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) read as under : As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief 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 the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action cannot be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

16 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 The powers of the Income-tax Officer to reopen assessment though wide 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 quasijudicial 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 the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs. (emphasis supplied) It is also trite law that while the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the Income Tax Officer in coming to the belief, the Court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which the Assessing Officer is required to entertain the belief before he can issue notice under Section 148 of the Act. If there is no rational or intelligible nexus between the reasons and the belief, the exercise undertaken by the Income Tax Officer can be interfered with. 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

17 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 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. Infact in the notice, in the first paragraph, it says ". In the course of survey it was found that JM Balanced Fund-Annual Dividend Option Regular Scheme (the Plan) of JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus..........". In the next paragraph, it says "........investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and short term capital loss...... The assessee is one the persons who claimed fictitious short term capital loss.......". In the next paragraph, it says "......... 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........". 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 FundQuarterly Dividend. This also indicates non application of mind by the Assessing Officer. 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.” 8. We find force in the argument of Ld. Counsel of the assessee since the facts of above case of Karan Maheshwari (supra) are identical to the instant case in hand and the party declaring the

18 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 dividend is also the same & identical issue of taxability of dividend declared by J.M. Financial Asset Management Limited in re- assessment proceedings was under consideration and Hon’ble Court quashed the notice issued u/s 148 of the IT Act, since the allegations were made against J.M. Financial and there was nothing to indicate that the petitioner had participated knowingly in sham transactions to reduce his tax liability or to earn dividend and the petitioner based on public announcement invested in the mutual fund and that the petitioner received tax free dividend cannot be held against the petitioner. We also find that coordinate bench of this Tribunal in the case of Varun Jain vs. ACIT in Cross Objection No.14/PUN/2025 order dated 07.05.2025 involving the similar issue of taxability of dividend declared by J.M. Financial has declared the re-assessment order u/s 147 r.w.s. 144B as bad in law by following the judgement passed by Hon’ble Bombay High Court in the case of Karan Maheshwari (supra). 9. Considering the totality of the facts of the case and respectfully following the above judgement of Hon’ble Bombay High Court in the case of Karan Maheshwari (supra), we are of the

19 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 considered opinion that the impugned notice dated 31.03.2022 issued u/s 148 of the IT Act is bad in law and accordingly, the notice u/s 148 and impugned consequential reassessment order dated 27.03.2023 passed u/s 147 r.w.s. 144 r.w.s. 144B of the IT Act are quashed. Thus, the grounds raised in the cross objection are allowed. 10. In the result, the Cross Objection filed by the assessee in C.O. No.27/PUN/2026 is allowed. ITA No.2903/PUN/2025 – By Revenue : 11. The Revenue has raised the following grounds of appeal :- “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing exemption of Rs.40,51,573/- u/s 10(35) of the Income-tax Act, 1961 in respect of dividend received from M/s JM Financial Equity Hybrid Fund without appreciating the fact that the said dividend was distributed in blatant violation of SEBI guidelines contained in Circular No. SEBI/IMD/CIR No. 18/198647/2010 dated 15.03.2010 and was not paid out of legitimately realisable/distributable surplus but out of Unit Premium Reserve/unit capital, which is expressly prohibited. 2. On to the facts and circumstances of the case and in law, the Ld. CIT(A) failed appreciate the categorical admissions recorded during the survey u/s 133A on 15.02.2021 in the case of JM Financial Asset Management Ltd. by key persons (Shri Sanjay Chhabaria, Fund Manager; Shri Suvendu Rakshith, Head of Sales; Mrs. Diana D'sa, Compliance Head) that due process mandated by SEBI was not followed, distributable surplus was artificially inflated on the instructions of the CEO, and Unit Premium Reserve was wrongly

20 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 credited to Income Equalisation Reserve to enable unlawful dividend distribution. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in granting exemption u/s 10(35) by adopting a purely technical view and ignoring the substance of the transaction, i.e., the dividend was nothing but return of the assessee's own capital (invested on 20.03.2018 for Rs. 1 crore and Rs. 40,51,573/- returned as "dividend" within two days on 22.03.2018), engineered through a planned manipulation of NAV and unlawful distribution of 1,081.14 crores as dividend on 22.03.2018 (40% of fresh inflows received in just six days), resulting in an abrupt fall of NAV from 32.50 to 22.34 immediately after the payout. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has wrongly placed reliance on the decision of the Coordinate Bench in Giriraj Enterprises and other cases, which are clearly distinguishable as those cases did not involve proven manipulation of accounts, violation of mandatory SEBI guidelines, and distribution of dividend out of Unit Premium Reserve/unit capital instead of realisable profits; the ratio of Hon'ble Allahabad High Court in CIT v. Dhampur Sugar Mills Ltd. (1973) Tax LR 531 requiring a pragmatic and realistic view of income supports the Revenue's stand that such artificially created "dividend" cannot be treated as genuine income exempt u/s 10(35). 5. The appellant craves leave to add, amend and alter any of the above grounds of appeal.” 12. Since we have already allowed the cross objection filed by the assessee and quashed the notice u/s 148 of the IT Act as well as reassessment order dated 27.03.2023, the appeal filed by the Revenue becomes infructuous, hence dismissed as such. 13. In the result, the appeal filed by the Revenue in ITA No.2903/PUN/2025 is dismissed.

21 ITA No.2903/PUN/2025 C.O. No.27/PUN/2026 14. To sum up, the appeal filed by the Revenue is dismissed and the Cross Objection filed by the assessee is allowed, as indicated above. Order pronounced on this 05th day of August, 2026. Sd/- Sd/- (R. K. PANDA) (VINAY BHAMORE) VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; �दनांक / Dated : 05th August, 2026. Sujeet/DOC Sujeet Kumar Digitally signed by Sujeet Kumar Sharma Sharma Date: 2026.08.06 12:27:47 आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : +05'30' अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The Pr. CIT concerned. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “B” ब�च, 4. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 5. आदेशानुसार / BY ORDER, // True Copy // Assistant Registrar आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.