DCIT, MUMBAI vs. 2015 GROVER FAMILY TRUST, MUMBAI

5. The ld. AO in his order has extensively noted the report of Investigation Wing and thereafter, has referred to a survey action u/s.133A which was conducted on 15/02/2021 in the case of CMS Computers Limited and Universal Trustees Pvt. Ltd., During the survey, a statement of Shri Mahesh Idnani was recorded wherein, he has stated that capital gain has been adjusted against short term capital loss due to sale of investment in JM balanced fund managed by M/s. JM Financial Asset Management Ltd., The working of the capital gain was stated to be as under:-

CMS Computers Limited Sale Consideration Rs.113,42,01,195/- Cost of Acquisition Rs.57,59,85,255/- Capital Gains Rs.55,82,15,940/ Short term Capital loss Rs. 42,83,05,918/- adjusted Tax Paid Rs.2,59,82,004/-

Date of Transactions No. of Units Values Transactions Purchase 24.12.2014 57540931 1500000000 Dividend 28.01.2015 57540931 299212840 Received Dividend 25.03.2015 57540931 510388056 Received Redemption 07.04.2015 57540931 772418241

―6.11 Summary of findings: 6.11.1 The modus operandi identified as per the findings during the course of survey action as well as post survey inquires is being summarized as under: i. JM Financial Asset Management Company, internally creates and floats few schemes with their employees as subscribers to the scheme ii. While the scheme has only 2 or maximum 3 subscribers (all of whom are internal employees/associate companies) with minimum investment amounts, the IER is increased over a long period of time to show huge distributable surplus, the ratio of which is applied to all the inflow of funds iii. Once a significant IER is created on a small AUM base, the sales team reaches out to other distributors/NHIs/Big Corporates with the plan of providing fictitious STCL and distributing dividend (exempt from täxation) which would not fall within the purview of section 94(7) of the IT Act. iv. The target Investors are about the modus operandi and the possible tax benefit that they would avall by subscribing to schemes as genuine investors. v. In the meantime, the Income Equalization Reserve (IER) is increased to a reasonable size by realizing profitable positions. vi. The dividend distribution is conveniently planned well in advance according to which target investor decide about quantum and timing of investment to match their specific requirements. This results in flow of funds from different investors in large amount at almost same time. Dividend is distributed just after 3 months and few days from the last date of investment. This ensures that the provisions of section 94(7) were not applicable to the investors. vii. The new investors infuse money into this scheme, as per their requirements to ensure that they get desired short term capital losses. viii. While accounting the breakup of NAV on the dates of investments, the fund house credits the IER account instead of UPR which is strictly against the guidelines specified by SEBI. ix Immediately after the dividend is declared, since there is not enough gains to distribute, the capital amount introduced by the clients is distributed back to them in the form of tax-free dividend. For this purpose, existing investments are sold in large quantity by the scheme. x. After this units are redeemed at a loss by the investor since the NAV falls because of dividend payment and the investors book a short-term capital loss which looks genuine but is actually fictitious and preplanned loss resulting from sham transactions entered into abusing provisions of Income Tax and SEBI regulations. xi. Such Short-Term Capital Loss is only notional as the loss is pre-planned and offset with money paid back to the investors in the form of dividend. A genuine investment is made for the purpose of making gains, not for the purpose of having tax free income and creation of artificial losses. However, in given case, the only purpose of investment is to evade tax xii. The investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and Short- and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust Term Capital Loss. As a result, the dividend is not eligible for deduction u/s 10(35) of the I.T. Act and short-term capital loss is also not eligible for adjustment with other capital gains, being generated on account of sham transaction. In fact, being distributed out of capital itself, such dividend should be reduced from the cost of investment with resulting reduction in short term capital loss.‖

10. Ld. CIT(A) after considering the submissions made by the assessee as well as the entire assessment order and all other material facts on record has deleted disallowance made by the ld. AO. He has referred to relevant provision of Section 94(7) CBDT Circular, judgment of Hon’ble Supreme Court in the case of Walfort Share & Stock Brokers (P) Ltd., (2010) 41 DTR 233 (SC) and finally deleted the addition in the following manner:-

―Coming to the validity of the assessee’s claim regarding the short-term capital loss, it is noted that the assessee had made an investment of Rs.150,00,00,000/- which was subsequently sold for Rs.77,24,81,241/- leading to a short-term loss of Rs. 72,75,18,759/-. The said sales consideration received by the and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust assessee is duly reflected in the bank statement and the folio statement submitted by the assessee. The assessee in its submission has made reference to 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 assessee’s computation of short-term capital loss by reducing the cost of investment i.e. Rs.150 crores from sales consideration of Rs.77,24,81,241/- 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 correct. Further, it is not the case of the AO that the appellant has violated the provisions of section 94(7) of the Act. Further, it is noted that the appellant is a regular investor and has also incurred losses of Rs.7,25,636/- in BOI AXA Equity Mutual Fund which has not been doubted by the AO. It is also noted that the appellant has also received dividend of Rs. 18,68,861/- from Infosys Limited, Bharat Electronic Limited & BOI AXA Equity Mutual Fund. This shows that the investment in JM financial fund is not an isolated transaction. 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. 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 and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust that JM Financials have provided excess dividend to the appellant in order to provide tax benefit. It is also noted that though the employees have mentioned the name of CEO Mr. Bhanu Katoch, no statement of the CEO has been recorded or relied upon by the AO. 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. Coming to the findings of the survey in assessee’s case, AO has relied upon the statement of Mr. Mahesh Idnani, Sr. Vice President of M/s CMS Computers Limited, wherein he was enquired about the Investment made in JM Balanced Fund. In response to the same, he responded that investment was made on advice given by IIFL Wealth Management and on approval of Ms. Aarti Grover, promoter of the group. He has also confirmed that the investment was made on the presumption that the fund would give decent returns. He has also stated that apart from JM Financials, they have made investment in other funds also. Further, I find that AO has relied scheme suggested with reference to issue of bonus units by IIFL; however, the loss incurred is with respect to dividend scheme and not bonus scheme. Therefore, reliance of AO is misplaced. Further, it is also important to note that the action of the appellant is engaging IIFL wealth management to obtain advise on investing in mutual fund which would be tax effective cannot be doubted. There is no evidence bought on record by the AO that the appellant, IIFL and JM Financials have worked in collusion to obtain illegal tax benefit. Further, it is important to note that there is no SEBI enquiry raised on the JM Financials which has been bought on record by the AO to establish his allegation. It is also noted that the said fund is still active in the market and has given overall return of 11.51% against the benchmark return of 11.33% as reflected in the annual report of JM Financials for FY 2014-15. It is also noted that an investor makes investment after analysing the performance and publicly available data of the Mutual Fund. The assessee has shown that the said scheme is an open-ended scheme floated by the Mutual Fund, so any person can enter the scheme at the price available in the open market and exit the scheme at any time at the market price. and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust Therefore, the chances of assessee being specifically being involved in the alleged pre-planned transaction gets reduce in the absence of clear evidences bought on record by the AO. 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. It is also noted that out of the total loss incurred of Rs. 74 Cr., the assessee had suo-moto offered dividend to tax of Rs.29.92 Cr. which cannot be ignored. I have also considered that argument of the appellant that there are several balances and checks provided by the Statute and several independent Government and Semi Government bodies and experts have been introduced to ensure the bonafide, genuineness of the Scheme floated by a Mutual Fund. Therefore, unless a very specific allegation supported by direct and cogent evidence is brought on record which is also confirmed by SEBI, allegations merely on suspicion cannot be upheld.‖

(i) Ld.CIT(A) noted that the assessee had made an investment of Rs.150,00,00,000/- which was subsequently sold for Rs.77,24,81,241/-leading to a short-term loss of Rs. 72,75,18,759/- The said sales consideration received by the (ii).Ld.CIT(A) has referred to the provision 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 said provision section, Ld.CIT(A) observed that assessee's computation of short-term capital loss by reducing the cost of investment. i.e. Rs.150 crores from sales consideration of Rs.77,24,81,241/- appears to be in line with the provisions of the Act.

(iii) Ld. CIT(A) noted that AO has not disputed amount of cost or sales consideration thus, doubting the short-term capital loss arising from such figures is not correct. Further, id. CIT(A) noted that it is not the case of the AO that the assessee has violated the provisions of section 94(7) of the Act. In this regard, Id. CIT(A) has relied upon the CBDT Circular No.14/2001 and decision of Supreme Court in the case of Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR 233 (SC).

(iv) Ld.CIT(A) observed that assessee is a regular investor in shares and securities including the mutual funds. Ld.CIT(A) noted that in the same year, assessee has also incurred losses of Rs.7,25,636/-in BOI AXA Equity Mutual Fund which has not been doubted by the AO. Further, LD.CIT(A) also noted that assessee has received dividend of Rs. 18,68,861/- from Infosys Limited. Bharat Electronic Limited & BOI AXA Equity Mutual Fund. This shows that the investment in JM financial fund is not an isolated transaction.

(v) With regards to findings of id AD based on the survey in case IM Financial Asset Management Limited. Ld.CIT(A) observed that Id. AO has failed to bring on record any SEBI enquiry or order on JM Financials which supports the allegations of the Id AO.

(vi) With regards to statements of various employees of JM Financials which has been relied upon by the AO Ld. CIT(A) observed that none of the employees have admitted that the manipulation has been done for the purpose of providing tax benefit to the assessee or other investors. Ld. CIT(A) also noted that employees of JM Financials have mentioned name of CEO Mr. Bhanu Katoch, but no statement of the said CEO has been recorded or relied upon by AO. Further, Ld. CIT(A) also noted that there is no live link between these statements and the assessee.

(vii) Ld. CIT(A) also noted there is no adverse statement given by the assessee group during survey in its premises which could show that assessee has knowingly invested in the JM Fund for the purpose of incurring losses. The statement of Mr. Mahesh Idnani, Sr. Vice President of assessee company stated that Investment in JM Balanced Fund was made on advice given by IIFL Wealth Management and approved by Ms. Aarti Grover, promoter of the group. He has also confirmed that investment was made on the presumption that the fund would give decent returns. Thus, Id. CIT(A) noted that such statement does not help the allegation of AO.

(viii) Ld CIT(A) also noted that action of assessee is engaging IIFL wealth management for advise on investing in mutual fund cannot be doubted. Ld. AO has not bought evidence to show that IIFL and JM Financials have worked in collusion to obtain illegal tax benefit.

(ix) Ld.CIT(A) also observed that there is no SEBI enquiry raised on the JM Financials which has been bought on record by the AO to establish his allegation. He also observed that the said fund is still active in the market and has given overall return of 11.51% against the benchmark return of 11.33% as reflected in the annual report of JM Financials for FY 2014-15 (x) Ld.CIT(A) in its order appreciated the fact that scheme floated by JM Financials is an open-ended scheme floated by the Mutual Fund, so any person can enter the scheme at the price available in the open market and exit the scheme at any time at the market price. Therefore, the chances of assessee being specifically being involved in the alleged pre-planned transaction gets reduce in the absence of clear evidences bought on record by the AO.

(xi). Ld.CIT(A) also noted that entire transaction of purchase and sale has been done through proper banking channels. The assessee 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. Moreover, the said fund is still active as on date and has been debarred by SEBL Ld.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 (xii) Ld.CIT(A) also noted that there are several balances and checks provided by the Statute and several independent Government and Semi Government bodies to ensure the bonafide, genuineness of the Scheme floated by a Mutual Fund. Therefore, unless a very specific allegation supported by direct and cogent evidence by SEBI, allegations made by AO is merely on suspicion (xiii) Ld CIT(A) has also relied on the decision of Mumbai Tribunal in the case of M/s. Goldiam International Ltd. Vs. DCIT in dated 05.04.2024, wherein similar facts involving JM Financials, Hon'ble Tribunal has held that it is natural for NAV to drop after dividend declaration and investor incurring loss on redemption thereafter Thus, transactions entered by the assessee cannot be said to be fictitious/ sham on that account

13. Here also the finding of the ld. AO and ld. CIT(A) is exactly similar.

14.We have considered the rival submissions, perused the orders of the authorities below, and examined the material available on record. We have also carefully considered the statements, survey findings, legal provisions, and judicial precedents relied upon by both sides. The central premise of the Assessing Officer’s case is that the JM Balanced Fund – Annual Dividend Option Regular Plan of JM Financial Asset Management Ltd., in which the assessees invested, was allegedly structured in a manner so as to artificially inflate the distributable surplus through impermissible accounting methods. This, according to the Assessing Officer, was in violation of SEBI Circular No. SEBI/IMD/CIR No. and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust 18/198647/2010, which specifically prohibits the utilisation of Unit Premium Reserve (UPR) for payment of dividends. Based on such premise, it was concluded that the scheme was nothing but a colourable device, devoid of commercial substance, designed to enable investors to receive tax-free dividends and simultaneously generate fictitious short-term capital losses for set-off against taxable capital gains.

16. On a careful analysis, we find that such an inference is not borne out by cogent and corroborative evidence. The transactions of purchase and redemption are supported by unimpeachable documentary evidence including mutual fund folio statements and bank statements and have been duly recorded in the regular books of account. The computation of and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust short-term capital loss has been carried out strictly in accordance with section 48 of the Act, wherein the cost of acquisition and expenses on transfer are deducted from the full value of consideration. Significantly, the Assessing Officer has not disputed either the cost of acquisition or the redemption value. Further, the assessees have themselves disallowed, under section 94(7), the loss to the extent of the dividend component, thereby adhering to the statutory disallowance mechanism.

10. Whereas, the assessee’s case before us that he is a regular investor in shares and mutual funds and he has made investment of Rs.6 Crores in J.M. Financial Asset Management Ltd., and has earned dividend income of Rs.1,83,65,846/- and the said units were sold for consideration of Rs.4,00,63,648/- which had resulted into premium capital loss. Thus, it has been submitted that J.M. Financial Asset Management Ltd., has issued a market update on 30/09/2014 wherein, the details of the funds were made public based on that assessee made investment on December 2014, thus, the investment was made after duly considering the market information. Apart from that, it has been submitted that ld. AO has not invoked the provision of Section 94(7) and even otherwise also the said section is not applicable. 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 and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.‖ 11. From the perusal of the aforesaid provision, it is clear that loss incurred on account of issue of dividend has not been considered as non-genuine and the same shall be disallowed only when the record date falls within the period as stipulated u/s.94(7). This proposition has been upheld by the Hon’ble Supreme Court in the case of Walfort Share &Stock Brokers (P) Ltd. (2010) 41 DTR 233 (SC) wherein the Hon’ble Supreme Court held as under:- ―The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre- meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. " "We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years 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. "

and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust 12. 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.6 Crores and sale had duly been recorded and reflected in the bank statement and 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 otherwise allowable under the Act. It has been further noted by the ld. CIT(A) that assessee has also invested in many other mutual funds during the year under consideration for instance, assessee has incurred losses of Rs.92,24,691/- in India Bulls Blue Mutual fund and Rs.3,25,836/- in Franklin India Smaller Company Fund Growth. He has also received dividend of Rs. 49,93,432/- from these funds. He has earned a total dividend of Rs.5,12,90,760/- through his investments in stocks and mutual funds during the year. As a matter of fact, appellant has also invested in JM Arbitrage Advantage Fund floated by JM Financial and earned capital gain of Rs.4,27,67,171/- which has not been doubted by the AO. This shows that the investment in JM Financial Mutual Fund is not an isolated transaction.

16. The ld. CIT(A) has also relied upon various other co- ordinate Bench decision and also the judgment of the Hon’ble Calcutta High Court in the case of Eveready Industries India Ltd. vs. CIT reported in 334 ITR 413. The relevant finding of which are as under:- "4. The facts leading to the filing of this appeal may be summed up thus (a) The assessee had purchased 35 lakh units of UTI from Peerless General Finance & Investment Co. Ltd "Peerless") on 29th May, 1989 at the rate of Rs. 14.75 per unit for a total consideration of Rs 5,16,25,000. Those very units were sold back to Peerless on 31st July, 1 of Rs. 4,55,00,000, 989/ TAX DEPA the rate of 13 per unit for the aggregate consideration (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 ex-dividend. 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 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 sald 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 and 5108/Mum/2024 CMS Computers Limited & 2015 Grover Family Trust 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 comers 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.

17. Thus, the finding of the ld. CIT (A) in deleting the disallowance / addition made by the ld. AO is upheld. Otherwise also, on the facts as discussed in the impugned orders, we do not find that there any sham transaction involved between assessee and J.M. Financial Asset Management Ltd., to hold that dividend income is fictitious or the short term capital loss is also fictitious. Accordingly, the claim of the assessee is allowed and the appeal of the Revenue is dismissed.

Order pronounced on 12th August, 2025.