DCIT, MUMBAI vs. LALITA KOTHARI, MUMBAI

Per Bench:

The present appeals filed by the revenue arises out of separate orders passed by CIT(A) 48, Mumbai for assessment years2018-19 & 2019-20. 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

by the Assessing Officer on account of dividend income claimed as exempt under Section 10(35) of the Income Tax Act, 1961, without appreciating that the dividend received by the assessee was not a genuine market derived return but an artificial distribution from the Unit Premium Reserve (UPR), violating SEBI guidelines and resulting in cm undue tax benefit to the assessee ii
On the facts and circumstances of the case and in law, the Ld.
CIT('A,) has erred in deleting the disallowance of the short-term capital loss of Rs.50,83,214/- without considering that the loss was not genuine but a contrived result of a manipulative scheme designed to exploit tax benefits. The Ld.CIT(A) failed to appreciate that the capital loss was artificially; created through the manipulation of mutual fund structures.
iii On the facts and circumstances of the case and in law, the Ld.
CIT('A,) has ignored the findings of the survey conducted under Section 133A of the Act, which clearly established that JM
Financial Mutual Fund had manipulated its accounting practices to inflate distributable surplus and mislead investors.
iv On the facts and circumstances of the case and in law, the Ld.
CIT(A,) failed to appreciate the relevance of statements from key personnel of JM Financial, which clearly demonstrated that the mutual fund's actions were deliberately structured to benefit investors like the assessee through artificial dividends and engineered losses.”
Brief facts of the case are as under:
3. All the assessee is before this Tribunal are individuals and had income under various heads. The assessee also invests regularly in equity mutual funds and PMS etc., over the past years. The Assessee is said to be a regular investor in mutual fund for earning regular income in the form of dividend. During assessment year 2018-19, JM Balanced Fund issued a public notice in the newspaper on 18/03/2018, calling upon investments and declared dividend at Rs.13 per unit. Relying on 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

the notice published in the newspaper, the assessee invested
Rs.1 crore on 20/03/2018 through normal banking channels.
3.1 JM Balance Fund subsequently declared dividend on 22/03/2018
(relevant assessment
2018-19) and assessee received dividend of Rs.40,45,559.22/-. Subsequently, during assessment year 2019-20 dividend of Rs.11,71,029.44 was declared on 07/03/2019, after one year of the investment. The assessee redeemed the entire
Rs.3,11,196.863
units on 11/03/2019 for a value of ₹49,16,785.96 on which STD of ₹49
was also paid.
3.2 It is submitted that, in the present case, original assessment was completed u/s. 143(3) on 28/12/2017 and total income was assessed at Rs.5,82,31,560/-The assessee's case was reopened u/s.148A, and as per procedure laid down under section 148A, order under section 148A(d) was passed on 20/03/2023. 3.3 In the order passed under section 148A(d), the Ld.AO relied on the information received through insight portal, i.e., survey u/s.133A of the Income Tax Act, 1961, conducted on 15.02.2021
in the case of M/s. JM Financial Asset Management Limited ("JM
Financial"), Mumbai, it was found that JM Balanced Fund-
Annual Dividend Option Regular Plan (the "Plan") of JM Financial manipulated accounting methodology so as to artificially inflate the distributable surplus. It was found that in this process, the SEBI guidelines were flouted by the JM Financial by classifying portion of capital as distributable surplus and thereafter artificial payout to the investor in the form of dividend. It was also communicated to the Ld.AO that though dividend received by the 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

unit holders from the equity based mutual fund is exempt from taxation u/s 10(35) of the Act, however, the same cannot be applied as said provisions are for genuine investments in market regulated mutual funds. On detailed investigation, the DDIT (Inv.) concluded that, the dividend received was from sham transaction generated using colorable devices. The dividend received is not on account of appreciation of the investment but is return of a part of the capital itself and hence it can't qualify as dividend. It is nothing but a make-believe arrangement to create fictitious loss to the beneficiary investor so they may adjust it with capital gains from other investments. The dividend being sham and capital loss being artificial is not eligible for set off.
3.4 During the assessment proceeding, Ld.AO noted that SEBI vide its Circular No. SEBI/IMD/CIR No 18 / 198647/2010 dated
15/03/2010, 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.
And that it can distribute only from surplus generated by realizing the gains on investments or dividends received from equity markets which it had invested. Meaning thereby, mutual fund has to invest and make profit to distribute. However, said direction of the SEBI was not followed by the mutual fund, as first it artificially rigged the distributable surplus and then applied said ratio to future allotted units (before the planned dividend distribution date).
3.5 TheLd.AO thus observed that the mutual fund deployed unfair and manipulative methods, to rig distributable surplus in 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

a planned manner that was against the guidelines specified by the SEBI. He further observed that as per the SEBI, investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and Short-Term Capital Loss and therefore, the dividend is not eligible for deduction u/s 10(35) of the Act and short-term capital loss is also not eligible for adjustment with other capital gains.
3.6 The Ld.AO noted that the assessee was a beneficiary of this scam by adopting modus operandi mentioned hereinabove, assessee claimed short term capital loss along with claim of dividend income which is a colourable nature of transaction.
3.7 The assessee was thus issued notice under section 148 on 20/03/2023. In response, assessee filed its return of income on 10/04/2023 that was same as the original return of income.
Subsequently, notice under section 143(2) was issued on 19/05/2023. 3.8 Before the Ld.AO, the assessee submitted that in the course of her regular investment activity, units of mutual fund namely
JM Balanced Fund- Quarterly Dividend Plan of Rs.1,00,00,000/- was made on 20/03/2018 floated by JM Financials. It was submitted that during the period of holding the assessee received dividend income of Rs.52,16,588/-. It was submitted that the said mutual fund was redeemed on 11/03/2019(during assessment year
2019-20) for a consideration of Rs.49,16,785.96/- that resulted in short term capital loss of Rs.
50,83,214/-. It is was submitted that the dividend income of Rs.52,16,588/-was claimed as exempt u/s 10(35) of the Act.
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

2018 19
ITA/2996
/MUM/20
25
20.03.2018
1,00,00,000
23.03. 2018
40,45,559.2
2J
2
2019-20
ITA/298S
/MUM/20
25
07.03. 2019
11,71,029.0
0
11.03.2019 49,16,785. 95
50,83,214
Total
1,00,00,000
52,16,588
3
Kanta G.
Kothari
2018-19
ITA/2998
/MUM/20
25
20.03.2018
1,00,00,000
23.03. 2018
40,45,559.2
2

4
2019 20
ITA/2999
/MUM/20
25

2019-20
ITA/3000
/MUM/20
25

8
2019-20
ITA/3002
/MUM/20
25

1,50,00,000

78,24,883
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

Aggrieved by the order of the Ld.CIT(A).AO, the assessee preferred appeal before the Ld.CIT(A).
4. The Ld.CIT(A) upheld the reopening u/s.148.However, on merits gave relief by allowing dividend income to be exempt and set off of short term capital loss by observing as under:
“6.11 I find it necessary to consider the intent of the legislation with respect to loss incurred in case of issue of dividend as considered in section 94(7) of the Act. The memorandum notes for bringing out the said section into statute as published in the CBDT Circular No.14/2001, the relevant extracts (Para 56.2 and 56.3 reproduce) are as under:
“56.2 The existing provisions did not cover a case where a person buys securities (including units of a mutual fund) shortly before the record date fixed for declaration of dividends, and sells the same shortly after the record date. Since the cum-dividend price at which the securities are purchased would normally be higher than the exdividend price at which they are sold, such transactions would result in a loss which could be set off against other income of the year. At the same time, the dividends received would be exempt from tax under s. 10(33). The net result would be the creation of a tax loss, without any actual outgoings.
56.3 With a view to curb the creation of such short-term losses, the Act has inserted a new sub-s. (7) in the section to provide that where any person buys or acquires securities or units within a period of three months prior to the record date fixed for declaration of dividend or distribution of income in respect of the securities or units, and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or interest, in the computation of the income chargeable to tax of such person. ”
6.12 On perusal of the above 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). The position has been also been upheld by Supreme Court in the case of Walfort Share & Stock
Brokers (P) Ltd. (2010) 41 DTR 233 (SC)wherein it was held as under:
“The real objection of the Department appears to be that the assessee is getting taxfree 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
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine.
We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of s.94(7) vide Finance
Act, 2001 w.e.f. 1st April, 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 s. 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. vs. CTO (1985) 47 CTR (SC)
126: (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India vs. Azadi Bachao Andolan& Anr (2003)
184 CTR 450,263 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). Hence, in the cases arising before 1st April,
2002, losses pertaining to exempted income cannot be disallowed.”
6.13 Thus, it is clear that the loss incurred cannot be held as non genuine merely because of issue of dividend by the JM Financial fund if the holding period is not covered by section 94(7). Coming to the validity of the assessee’s claim regarding the short-term capital loss/profit, it is noted that the appellant had made an investment of Rs.1,00,00,000/- which was subsequently sold for Rs. 49,16,785/- leading to a short term loss of Rs. 50,83,214/-. The said sales consideration received by the appellant is duly reflected in the bank statement and the folio statement submitted by her. The provisions of section 48 of the Act, which states that capital gains is computed by reducing cost of acquisition and expenditure incurred on transfer from sales consideration. Considering the provisions of the said section and the facts of the present case, it is seen that the appellant’s computation of short-term capital loss by reducing the cost of investment i.e.
Rs.1,00,00,000/- from sales consideration of Rs. 49,16,785/- appears to be in line with the provisions of the Act. Also, I find that the AO has not disputed the amount of such cost or sales consideration, thus doubting the short-term capital loss arising from such figures is not 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

correct. Further, it is not the case of the AO that the appellant has violated the provisions of section 94(7) of the Act.
6.14 In the assessment order, it is noted that AO has heavily relied on findings of survey action conducted in case of JM Financial Asset
Management Limited on 15.02.2021 wherein it has been alleged that JM Financial had manipulated accounting methodology so as to artificially inflate the distribute surplus thereby floating the SEBI guidelines. I find that AO has failed to bring on record any SEBI enquiry or order on JM Financials which supports the contention of the AO.The allegation levied in the assessment order are not sufficient to show that the appellant was involved in manipulation, if any, done by JM
Financials. Therefore, the allegation of AO is not support by any evidence which is found at the premises of the JM Financials.
6.15 Further, I have also considered the various statements of employees of JM Financials which has been relied upon by the AO. I find that none of the employees have admitted that the manipulation has been done for the purpose of providing tax benefit to the appellant or other investors. There is no mention that JM Financials have provided excess dividend to the appellant in order to provide tax benefit. Moreover, there is no live link between these statements and the appellant. Accordingly, I do not find any substance in the findings of the survey at JM Financials to hold the transaction entered in to by the appellant as non-genuine.
6.16 Further, I find that the entire transaction of purchase and sale has been done through proper banking channels. The appellant is a regular investor and has invested in similar funds. Units have been sold through proper and approval channels and the fund has been approved by SEBI. Also, the said fund is still active as on date. AO has not bought on record any evidence which could show that SEBI has suspended the said fund from operations. Therefore, the allegation of the violation of SEBI guidelines stated by AO does not holds true.
6.17 In this regard, I rely on the recent judgement of Hon’ble Mumbai
Tribunal in case of M/s. Goldiam International Ltd. Vs. DCIT in ITA No.
3218/Mum/2023 dated 05.04.2024, wherein similar facts involving JM
Financials Mutual Fund. The Hon’ble Tribunal has held that it is natural for NAV to drop after dividend declaration and investor incurring loss on redemption thereafter and that the investors act on public notices issued by the mutual fund, and thus transactions entered by the 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

assessee cannot be said to be fictitious/ sham on that account. The relevant para of the decision is reproduced as under:
“7. 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 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 unitholder 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 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.”
6.18 Further, I also place reliance on the decision in the case decided by Jaipur Tribunal in the case of M/s Agencies Rajasthan Pvt. Ltd. Vs. ITO in ITA 567/JP/2019 dated 01.07.0219 wherein the assessee has purchased units of mutual funds of JM Financial Mutual Fund amounting to Rs. 50.00 crores, on which the assessee has earned dividend of Rs. 10.33 crores and Rs. 17.62 crores. The A.O. further stated that soon after earning dividend, redemption was taken place on 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

26/3/2015 wherein the assessee has suffered loss of Rs. 24.04 crores.
This loss was set off against the capital gain of Rs. 26.79 crores earned by the assessee. The assessee has also claimed dividend income exempt U/s 10(33) of the Act. The A.O. has further observed that it appears that by all these ways, the assessee has concocted a story beautifully in connivance with M/s JM Financial Mutual Funds and M/s
India Infoline Finance and attempted to prepare a colourable device just to set off the capital gain earned on sale of immovable property and also by claiming exemption on the dividend earned just within three to five months. Considering that transaction was not genuine and fictitious, the A.O. disallowed set off of short-term capital loss.
Considering the above facts, Tribunal held as under:
“31. We had also carefully gone through the reply given by JMF dated 04/01/2018 & 29.11.17 to AO’s latter dated 28.12.2017
& 29.12.2017. The allegation of the A.O. was that the JM
Financial Mutual Funds has not declared any dividend in the past year and the assessee had purchased mutual funds from this company. Further the assessee earned 52% dividend on the mutual funds. Similarly, the allegation of the ld. CIT(A) was that the investment was made in the mutual fund which had not declared any dividend since 2010 and suddenly after investment was made by the assessee it started paying dividend which was abnormally high as compared to its past history and not commensurate with its financial position. In this regard we observe that the dividend making decision can be taken by the fund only after duly considering all the regulatory requirements.
The stringent provisions of Regulation 18(17) and 18(18) of SEBI
(Mutual Fund) Regulation, 1996 requires that all the transactions carried out between the Mutual Funds, Asset Management
Company and its associates are subject to quarterly review by the Trustees. The Trustees are also required to review the net worth of Asset Management Company and in case of any short fall, to ensure that the AMC makes up for short fall. Dividends are declared only after compliance with Regulation 52A. Had there been any mal practice by the Mutual Fund, the SEBI has full rights to carry out inspections and Audit as per Regulation 61. 33. The A.O. has also alleged that the mutual fund has declared dividend as high as 52% and therefore, the AO very comfortably smacked something wrong and conspiracy between the assessee and the JM Financial Mutual Fund as also the IIFL (the lender).
However, the scene is completely otherwise in as much as it was 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

not at all within the hands of the assessee or anybody employees of these entities or in the hand of anybody else for this reason to influence or to get the dividend declared at his own wishes. The earnings of the Mutual Fund are directly based upon the type/nature of the investment made by the Mutual Fund.
Needless to say, that the declaration of the dividend by the companies depends upon the several factors and market sentiments. It has to be kept in mind that it is not guaranteed that there will always be a profit but the companies might have also sustained huge losses with the result that the mutual funds would not have been able to declare any dividend at all. It was only keeping in mind the past track record, better performance and the good market movement in the Indian Capital Market that the AMC made investments in those companies and directors of the assessee company also having a vast experience, decided to invest in JM Mutual Fund
35. In view of the above, the suspicion of the AO on this aspect is completely baseless. To prove his allegation that 52% dividend was declared in connivance, it was for him to have established beyond all reasonable doubts but he is completely silent as regards the onus lay upon him.”
6.19 Further, similar issue has been decided by the Hon’ble Calcutta
High Court in the case of Eveready Industries India Ltd.vs. CIT reported in 334 ITR 413 (2011) wherein it was held 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, 1989 at the rate of 13 per unit for the aggregate consideration of Rs. 4,55,00,000. (b) While the units were purchased cum-dividend, as the booking closing date was 30th June, 1989 and the shares were purchased on 29th May,
1989, those units having been sold after the book closure, i.e., on 31st July, 1989, were sold exdividend. The assessee also received dividend at the rate of 18 per cent on those units, which worked out to be Rs. 63 lakh. Thus, in connection with the 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

aforesaid transaction, the assessee incurred a loss of Rs.
63,84,000
which is the subject matter of dispute.
……………………….
9. After hearing the learned counsel for the parties and after going through the aforesaid decision of the Supreme Court, we find that it is now clear that the fact that the dividend received by the assessee was tax free is the position recognized under section 10(33) of the Income-tax Act. It appears that the assessee has utilized the said provision of the statute and as such, the same cannot be called as an abuse of the process of law. As pointed out by the Supreme Court, even if we assume for the sake of argument, that the transaction was a preplanned one, there was nothing to impeach the genuineness of the transaction. As regards the observation of O. Chinnappa Reddy, J. in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 /22 Taxman 11, it was pointed out by the Supreme Court in the later decision of the Supreme Court in the case of Union of India v. Azadi Bachao
Andolan [2003] 263 ITR 706 / 132 Taxman 373 , that a citizen is free to carry on his business within the four corners of the law and that mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon. Thus, in a case arising before April 1, 2002, the losses pertaining to exempted income cannot be disallowed.
10. We, therefore, set aside the order passed by the authorities below and hold that in the case before us, the assessee is entitled to claim loss on the aforesaid transaction by answering the two questions framed by the Division Bench in favour of the assessee against the Revenue. We direct the Assessing Officer to treat the loss arising out of the aforesaid transaction and also to grant benefit of exemption as pointed out by the Supreme Court.”
6.20 Thus, in view of the details discussed in foregoing paragraphs and facts of the appellant’s case, I hold that the disallowance of Short-Term
Capital Loss of Rs. 50,83,214/- and addition of Rs. 11,71,029/- disallowing claim of exempt income u/s. 10(35) of the Act made by the AO is incorrect
Hence, the AO is directed to delete the disallowances/additions of Rs. 50,83,214/- and Rs. 11,71,029/-. Thus, the ground nos. 1 and 2of appeal are allowed.”
Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal.
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

that J.M. Financial Asset Management Ltd., issued a market update on 18/03/2018 wherein, the details of the funds were made public based on which assessee made investment on 20/03/2018 of Rs.1 Crores in J.M. Financial Asset Management
Ltd. It is submitted that the assessee earned dividend of Rs.52,16,588/-(40,45,599 during assessment year 2018-19 and 11,71,029
for assessment year
2019-20)The assessee subsequently during assessment year 2019-20 sold the units for consideration of Rs.49,16,785.96/- resulting is a capital loss.
5.6 The Ld.AR submitted that Ld.AO did not invoke provisions of Section 94(7). It is submitted that even otherwise the said section is not applicable to the facts of the assessee. He submitted that loss incurred on account of issue of dividend is to be treated as non-genuine and the same shall be disallowed when the record date falls within the period as stipulated u/s.94(7). In the present facts it is submitted that the assessee sold the units beyond 6 months of its acquisition and thus does not fulfil the requirement under the section 94(7) for any disallowance.
We have perused arguments advanced by both sides based on materials available on record.
6. It is noted that the assessing officer held the transaction of short-term capital loss and the dividend claimed exempt by the assessee under section 10 (35) of the act, as non genuine. To deny the claim of the assessee the Ld.AO relied on the survey action carried out in case of JM Financial wherein it was found that, JM Financial manipulated the method of accounting and artificially inflated the distributable surplus. It was noted by the 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

survey team that, a portion of capital was paid out to the investors in the form of dividend. The Ld.AO came to the conclusion that as the assessee received dividend and made loss on redemption of the units of mutual fund, managed by JM financial, the assessee claimed bogus exemption and bogus short-term capital loss.
6.7 The Ld.CIT(A) deleted additions/disallowance made by assessing officer on the ground that, SEBI enquiry relied by the Ld.AO did not report any adverse findings regarding JM Financial and that the statement recorded from the key personnel’s did not mention name of the assessee. The Ld.CIT(A) also granted relief to the assessee by observing that assessee did not violate provisions of section 97(4) of the act, and therefore the transaction of the short-term capital loss claimed by the assessee and exemption of dividend under section 10(35) cannot be treated as non genuine. Further the Ld.CIT(A) relied on the decisions of coordinate bench of this Tribunal in case of investors with similar facts involved in investments made in J M Financial
Asset Management Ltd. in case of Goldmine International Ltd. vs.
DCIT in ITA No. 3218/Mum/2023 dated 05.04.2024. 6.2 It is noted that the Ld.AR from the paper book filed, relied on the decision of Hon’ble Bombay High Court in case of Karan
Financial alleged to be fictitious was under consideration. Hon’ble
Court while considering the legality of the reopening, looked into implications of the provisions of section 94(7) having regards to the decisions of Hon’ble Supreme Court in case of McDowell & Co
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

Ltd vs CTO reported (1985) 47 CTR 126, the celebrated decision in case of Union of India & Anr. vs Azadi Bachao Andolan & Anr.
reported (2003) 184 CTR 450 and decision of Hon’ble Supreme
Court in case of CIT vs Walfort Share & Stockbrokers (P) Ltd., reported (2010) 233 CTR 42.Hon’ble Court analysed identical arguments of the revenue, as is raised before this Tribunal, 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 :
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 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

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.
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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). 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
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

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)
6.3 It is noted that in the present facts of the case the assessing officer treated the transaction undertaken by the assessee be bogus, based on the statements recorded of key personnel is of JM Financials. There is no live link or nexus between the statement recorded and the assessee.
6.4 Sufficient time was granted to the Ld.DR to bring on record any material/evidence in order to support the addition/disallowance made by the Ld.AO. Nothing has been filed by the department in the form of an order by SEBI holding that the investors should be denied the benefit. The SEBI order filed by the Ld.DR does not indicate any restriction cast on J M
Financial in respect of JM Balance Fund. In fact it is dealing with 3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

retail investment was J M Financial Products Ltd. and not with the specific fund the assessee has invested.
6.5 Be that as it may, it is noted that, the transaction undertaken by the assessee cannot be found fault with as the provisions of section 97 (4) is also not flouted by the assessee.
Admittedly assessee is an investor who invested in JM Financial fund based on the public notice declared in the newspapers on 18/03/2018. 6.6 For the sake of ready reference, Section 94(7) is reproduced hereunder:-
"Where (a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
(b) such person sells or transfers-
(i) such securities within a period of three months after such date; or (ii) such unit within a period of nine months after such date;
(c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax."
6.7 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
3001, 3002, 2990, 3000/Mum/2025;
A.Y. 2018-19, 2019-20

units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. "
"We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of s. 94(7) vide Finance
Act, 2001w.e.f. 1st April, 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 s. 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. vs. CTO (1985) 47 CTR (SC) 126:
(1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India vs. Azadi Bachao Andolan & Anr (2003) 184
CTR 450,263 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). Hence, in the cases arising before 1st April,
2002, losses pertaining to exempted income cannot be disallowed. "
6.8 Thus, loss incurred cannot be held to be non-genuine merely because the dividend has been issued by J.M. Financial funds. It is not in dispute that the purchase/investment of Rs.1Crore and sale is duly recorded and reflected in the bank statement. As per the provision of Section 48, capital gain has to be computed by reducing the cost of acquisition and expenditure incurred on transfer from sale consideration. In absence of applicability of Section 94(7), such short term capital loss is allowable under the Act.
We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.
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Accordingly, the grounds raised by the assessee stands dismissed.
ITA No.2998,2999,3001,3002,299&3000/Mum/2025
7. The appeal filed by the revenue in other assessee is before us are on similar facts and circumstances. Following the above observation mutatis mutandis, we do not find any merit in the grounds raised by the revenue in all the appeals under consideration.
Accordingly grounds raised by the revenue in the appeals stands dismissed.
In the result, all appeals filed by the Revenue stands dismissed.
Order pronounced in the open court on 22/08/2025 (OMKARESHWAR CHIDARA)
Judicial Member
Mumbai:
Dated: 22/08/2025
Poonam Mirashi,
Stenographer
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.25
ITA Nos. 2996, 2988, 2998,2999,
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A.Y. 2018-19, 2019-20

By order

(Asstt.