Loading judgment…
Facts
The revenue appealed against the CIT(A)'s order deleting additions made by the AO. The additions were based on allegations of tax evasion through structured schemes involving mutual funds, dividend stripping, and fictitious capital losses. The case involved a survey action at JM Financial which allegedly revealed manipulation of accounting methods.
Held
The Tribunal held that the AO did not establish that the assessee participated knowingly in any sham transaction and that the allegations were primarily against JM Financial. The Tribunal also noted that the assessee, being an NBFC, was engaged in regular business activities. The loss on revaluation of shares of alleged penny stock was considered a business loss. The grounds raised by the revenue were dismissed.
Key Issues
Whether the dividend income received and the short-term capital loss claimed by the assessee were genuine, or part of a scheme to evade tax, and whether the disallowance of business loss on revaluation of shares was justified.
Sections Cited
10(35), 94(7), 143(3), 148A, 153A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI ANIKESH BANERJEE, JM &
(Assessment Year: 2018-19) ACIT, Central Circle-8(2), Subhkam Ventures (I) Pvt. Ltd. Room No. 658, 6th Floor, 14th Floor, Maker Chamber, Aayakar Bhavan, M.K. Road, Vs. IV 222, Nariman Point, Mumbai-400020. Mumbai-400021. PAN: AAACW1624M Appellant) : Respondent) : Shri Vipul Joshi & Prashant Appellant /Assessee by Ghumare, AR Revenue / Respondent by : Shri Mahendra Bishnoi , CIT- DR Date of Hearing : 07.05.2025 Date of Pronouncement : 20.05.2025 O R D E R Per Padmavathy S, AM:
These appeals by the revenue and the Cross Objections (CO) of the assessee are against the separate orders of the Commissioner of Income Tax (Appeals)-50,
3 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. Mumbai [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) all dated 30.08.2024 for AY 2015-16, 2016-17 & 2018-19.
I.T.A. No. 5622/Mum/2024 – AY 2018-19
The revenue raised the following grounds –
“1. "Whether on the facts and circumstances of the case, the Learned CIT(A) erred in deleting the addition made based on the findings unearthed during the search proceedings, considering that the entire scheme of JM Financial Mutual Funds was allegedly structured to facilitate tax evasion for the beneficiaries?"
2. "Whether, on the facts and circumstances of the case, the Learned CIT(A) erred in failing to appreciate the findings in the assessment order, which highlighted that the assessee received tax-free dividends while simultaneously claiming a loss on the sale of units, and that the assessee had deliberately engaged in a pre-planned transaction of purchasing and selling units with the intention of benefiting from exempted dividends, despite knowing the fall in NAV after the record date, thereby rendering the claimed loss on sale as not genuine?"
3. "Whether on the facts and circumstances of the case, the Learned CIT(A) erred in confirming the exemption claimed by the Assessee and subsequently deleting the addition of Rs. 61,01,94,438/-with respect to dividend received from mutual fund schemes exempt u/s 10(35) of the Act on account of dividend stripping from Mutual Funds?
4. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in deleting the addition of Rs. 61,01,94,438/-when the Survey action on M/s JM Financial Mutual Funds unearthed a colourable device of the tax-evasion by the assessee, when Hon'ble Supreme Court of India has held in the case of McDowell & Co. Ltd Vs CTO (1985) 154 ITR 148 that colourable device within the framework of law cannot be allowed to be a part of tax planning?
"Whether, on the facts and circumstances of the case, the Learned CIT(A) erred in confirming the loss incurred of Rs. 61,96,50,080/-by the Assessee on the sale of mutual funds, invoking the provisions of dividend stripping under Section 94(7) of the Income Tax Act?"
4 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. 6. "Whether on the facts and circumstances of the case, the Learned CIT(A) erred in treating the pre-decided loss arising from orchestrated transactions entered into by the assessee can be treated as business loss when the element of adventure in the nature of trade or commerce is missing from these transactions."
7. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”
There was a search & seizure action under section 132 of the Act was carried out on 25.03.2021 in assessee's premises. A notice under section 153A has duly served on the assessee and in response the assessee filed the return of income on 08.11.2021 declaring a total income of Rs. 3,04,70,780/-. The Assessing Officer (AO) noticed that the assessee has received dividend of Rs. 50,30,41,376/- from the investments made in JM Equity Fund and a sum of Rs. 10,71,53,062/- from investments made in JM Mutual Fund. The AO also noticed that the assessee has made a Short Term Capital Loss (STCL) from the redemption of the above Mutual Funds as tabulated below:
The AO held the transaction of STCL and the dividend claimed as exempt by the assessee as non-genuine. The reason as stated by the AO is that a survey action was carried out by DDIT (Inv.) in the case of M/s JM Financial Asset Management
5 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. Ltd. (JM Financial) and in the course of survey it is found that JM Financial has manipulated the method of accounting so as to artificially inflate the distributable surplus whereby a portion of capital is paid out to the investors in the form of dividend. The AO further held that since the assessee has received dividend and also has made a loss on redemption of the Mutual Funds which are managed by JM Financial the assessee has claimed bogus exemption and STCL. Accordingly, the AO treated the dividend income as taxable and accordingly reduced the STCL claimed by the assessee to Rs.94,55,642/-.
5. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) deleted the addition made by the AO by holding that the survey and the SEBI report which is relied on by the AO are not valid since there is no SEBI enquiry or order on JM Financial. The CIT(A) further held that the statements of the employees of JM Financials which is relied on by the AO do not mention that the manipulation has been done for the purpose of providing tax benefits to the investors or the assessee in specific. The CIT(A) relied on the decision of the Jaipur Bench of the Tribunal in the case of Agencies Rajasthan (P) Ltd. vs. ITO 109 taxmann.com 139. The revenue is in appeal before the Tribunal against the order of the CIT(A).
The ld. DR submitted that during the survey at JM Financial it was found that the financials have been manipulated whereby dividend is distributed in violation of SEBI Guidelines. The ld. DR further submitted that the subsequent reduction in the value of the Mutual Funds and the redemption by the assessee to book huge loss substantiates that the assessee is a beneficiary of the non-genuine activity. The ld. DR also submitted that JM Financials has colluded with the investors to carry out a syndicate operation whereby the dividend income which is exempt is manipulated to reduce the share value against which the investor can book losses to be set off. With 6 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. regard to the contention of the assessee that the materials found during the course of search in the form of Mutual Fund statements and ledger account cannot be considered as incriminating material the ld. DR argued that these documents evidence that the assessee has carried out activities to evade tax which itself is incriminating in nature. The ld. DR further argued that the documents seized cannot be looked in isolation and considering the overall scenario the documents received substantiates the fact that the assessee has benefited from a non-genuine transaction and hence is incriminating.
The ld. AR on the other hand submitted that the assessee is a NBFC and is a regular investor in Mutual Funds. The ld. AR further submitted that the survey operation at JM Financials and the statements recorded there are not made available to the assessee and that the addition merely based on the same without linking the assessee is not sustainable. The ld. AR also submitted that in assessee's case the regular assessment under section 143(3) of the Act was conducted which included the verification of the impugned transactions and therefore the findings of the AO by holding the same set of documents as incriminating is not correct. The ld. AR drew our attention to the decision of the Hon'ble Bombay High Court in the case of Karan Maheshwari vs. ACIT (W.P. No. 37211 of 2022 dated 08.03.2024) where a similar Mutual Fund managed by JM Financial was held to be genuine and that no addition can be made in the hands of the assessee.
We heard the parties and perused the material on record. During the year under consideration, the assessee has received a dividend of Rs. 50,30,41,376/- from the investments made in JM Equity Fund and a sum of Rs. 10,71,53,062/- from investments made in JM Mutual Fund and has also claimed STCL of Rs. 61,96,50,080/- from the sale of said Mutual Funds.. During the survey proceedings
7 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. in the case of JM Financials statements have been recorded to the effect that JM Financial had manipulated the accounting methodology so as to artificially inflate the distributable surplus and that the company has flouted the SEBI Guidelines by classifying a portion of the capital as distributable surplus and thereafter artificial pay out of dividend to investors. It is also alleged that fictitious STCL are booked after the distribution of capital as dividend. The AO during the course of search found the Mutual Fund statements and ledger accounts evidencing that the assessee has received dividend from the Mutual funds managed by JM Financials and has also booked STCL from the sale of the said Mutual Funds. Therefore, the AO held that the assessee is a beneficiary of the sham transaction and has entered into such transaction in order to reduce the tax liability. Accordingly, the AO treated the dividend income earned as taxable to reduce the STCL claimed by the assessee. On further appeal, the CIT(A) deleted the additions on the ground that the SEBI enquiry relied on by the AO did not report any adverse findings regarding JM Financial and that the statement recorded from the employees of JM Financial does not mention assessee's name. The CIT(A) further held that the alleged JM financial Mutual fund cannot be termed as tax evasion schemes only due to the fact that the assessee derived benefit by complying to the provisions of Section 97(4) of the Act. Therefore the issue for our consideration is whether the impugned transaction being receipt of dividend and STCL are non-genuine in the hands of the assessee since survey at JM Financial revealed that there have been some irregularities. It is relevant to mention here that the assessee is an NBFC and as part of its regular business activities has invested in Mutual Funds. We notice that the Hon'ble Bombay High Court in the case of Karan Maheshwari (supra) has considered the similar issue involving the alleged fictitious transaction with JM Financial and held that 8 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. “13. It is necessary to observe that the officer has conveniently not mentioned the date on which he received the information because the earlier notice for reopening on the basis of dividend earned by petitioner was issued on 2nd June, 2021 and closed on 26th July, 2022. We should note that the notice now issued also does not indicate when the information was uploaded and when the IT Department flagged the information under high risk CRIU/VRU information Admittedly, petitioner had sought various documents from the Department. Without providing any information as requested, the impugned order was passed. Surprisingly, the AO has relied upon information which has not been made available to petitioner. Petitioner has admittedly been found blameworthy of acts which he has not been permitted to defend on merits. Petitioner was not given an opportunity to meet and explain his actions based on information withheld from him on one hand but used against him on the other.
Without providing any information, as sought for by petitioner, the impugned order dt. 30th Sept. 2022 under s. 148A(d) of the Act has been passed. In the order, things which have not been made available to petitioner has been relied upon.
It is the contention of Department that between 23rd April, 2015 and 15th June, 2015 the mutual fund received an inflow of Rs. 19.18 crores. Thereafter between 15th June 2015 and 18th June, 2015 there was an inflow of Rs. 2719.33 crores in the mutual fund. Between 20th June, 2015 to 27th Dec., 2015 a further inflow of Rs. 2259.28 crores was made in the mutual fund and between 28th Dec., 2015 to 30th June, 2016 there was a further inflow of Rs. 4698.28 crores into the mutual fund. In this, petitioner's investment was only Ra 1.10.00.000 on 17th June, 2015 and Rs. 6,00,00,000 on 25th Aug. 2015.
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 victumised by the AD. 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. In fact in para 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 has 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.
In the notice issued under a. 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 9 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. 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. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC). Paragrapha 18 and 20 of the Judgment of the apex Court in CIT vs. Walfort Share & Stock Brukers (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233: (2010) 192 Taxman 211 (SC) read as under: "18. The next point which arises for determination in 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 Ra. 1.82.12.862 on the sale of 40 per cent 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.
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 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. ist 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 23 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 ISC) 126 (1985) 154 ITR 148 (SC), it may be stated that in 10 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. the later decision of this Court in Union of India vs Azadi Bachao Andolan 263 ITR 706(SC) it has been held that a citizen is free to carry on ita business within the four comers 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. case (supral. Hence. in the cases arising before 1st April, 2002, losses pertaining to exempted income cannot be disallowed. However, after 1st April, 2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of a. 94/7). The object of s. 94(7) is to curb the short-term losses. Applying s. 94(7) in a case for the assessment yearis) falling after 1st April, 2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other worda, 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 1st April, 2002, losses over and above the dividend received will not be ignored under s. 94(7). If the argument of the Department is to be accepted, it would mean that before 1st April, 2002 the entire loss would be disallowed as not genuine but, after 1st April, 2002, a part of it would be allowable under s. 94(7) which cannot be the object of s. 94/7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is ont more way of answering this point. Secs. 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, s. 14A was inserted w.e.f. 1st April 1962 whereas s. 94(7) was inserted w.e.f 1st April 2002. The reason is obvious. Parliament realized that several public secter 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 SEI for last couple of years. If s. 94(7) would have been brought into effect from 1st April, 1962, as in the case of a 144, would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to a. 94(7) only w.e.f. 1st April, 2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to ss. 14A and 94(7). However, it is the duty of the Court to examine the circumstances and reasons why s. 14A inserted by Finance Act. 2001 stood inserted w.e.f. lst April, 1962 while s. 94(7) inserted by the same Finance Act as brought into force w.e.f. 1st April. 2002 (emphasis, italicised in print, supplied) 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 ITO and 11 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. 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 ITO 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 ITO 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 ITO vs Lakhmani Mewal Das 1976 CTR (SC) 220: (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 ITO 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 ITO 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 s. 34 of the Act of 1922 at one time before its amendment in 1948 are not there in s. 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. The powers of the ITO 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 IT 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 quasi judicial proceedings. It is, therefore, essential that before such 12 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. 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 ITO 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 asses 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, italicised in print, 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 ITO 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 AO is required to entertain the belief before he can issue notice under s. 148 of the Act. If there is no rational or intelligible nexus between the reasons and the belief, the exercise undertaken by the ITO can be interfered with.
In the notice issued under s. 148A(b) of the Act, the AO alleges that JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus and the investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and short-term capital loss. These are allegations against JM Financial and do not implicate petitioner in any manner. There is nothing to indicate that petitioner had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss. In fact 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 13 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. Ltd., to the tune of Rs. 3,41.12.651/- during the financial year 2015-16 relevant to the asst. yr. 2016-17. Therefore, the AO is also not clear whether the assessee had booked loss or claimed dividend in the JM Balanced Fund-Annual Dividend Option Regular scheme or JM Equity Hybrid Fund-Quarterly Dividend This also indicates non application of mind by the AO.
For all these reasons above, notice dt. 20th Aug. 2022 under a. 148A(b) of the IT Act, 1961 (the Act), order dt. 30th Sept., 2022 under s. 148Ald) of the Act and notices dt. 30th Sept., 2022 and 7th Oct. 2022 under s.148 of the Act are hereby quashed and set aside.
Rule is thus made absolute.”
The Hon'ble High Court quashed the notice for the reason that the allegations are against JM Financial and do not implicate the assessee in any manner and that there is nothing to indicate that assessee had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss. In assessee's case also, we notice that the AO has not brought anything on record to implicate the assessee that he in any manner is involved in the sham transaction. We notice that the AO has treated the Mutual Fund statements and the ledger account found during the course of search as incriminating material to make the addition. As already mentioned the assessee is an NBFC which as part of its business activity has invested in the Mutual Funds of JM Financial. Considering the facts of the present case and the decision of the Jurisdictional High Court, we are of the view that there is no infirmity in the order of CIT(A) in deleting the addition made by the AO by denying the exemption of the dividend income received by the assessee. The grounds raised by the revenue in this regard are this dismissed.
14 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. – AY 2015-16
For AY 2015-16 also, the AO made addition by reducing the STCL loss claimed by the assessee towards sale of Mutual Funds managed by JM Financials based on the DDIT(Inv) report. From the perusal of the facts pertaining to AY 2015- 16 we notice that it is identical to the facts in AY 2018-19. Therefore in our considered view our decision with respect to denial of exemption to the dividend received by the assessee stating that they are sham transactions, would mutatis mutandis be applicable for AY 2015-16 also. Hence we see no reason to interfere with the decision of the CIT(A), deleting the disallowance made by the AO in this regard.
For the years under consideration the revenue is contending one more issue of CIT(A) deleting the disallowance made by the AO towards loss on reinstatement of alleged penny scrip M/s. Pearl Electronics (earlier M/s.Mystic electronics) The assessee during AY 2015-16 has accounted for loss on reinstatement of stock in trade at cost or market value which ever is lower as per the accounting standard followed by the assessee. Such reinstatement as of 31.03.2015 included the shares of alleged penny stock companies M/s. Pearl Electronics (earlier M/s.Mystic electronics) to the tune of 1126190 shares of the face value of Rs.1/- each as per details below
Scrips Price Amount PRICE Amount GAIN/LOSS Opening Revalued as balance closing stock 112619 365 41105935 1126190 8.20 8.20 -3,18,71,177 PEARL EC Total -3,18,71,177
The AO did not allow the loss claimed by the assessee for the reason that the said scrip is a penny stock as per the findings of the Investigation Wing. The AO in 15 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. the order has given the details of the modus operandi adopted in the scrip to book bogus Long Term and Short Term Capital Loss / Gain. The AO did not consider the submissions of the assessee that the loss is booked as business loss arising out of the valuation of closing of the impugned shares. The CIT(A) deleted the disallowance by holding that – 21. I have considered the assessment order, submission of appellant and facts available on record. During the assessment proceedings from the details furnished by the appellant the AO observed that the appellant has traded in the scrip namely M/s Pearl Electricals/Mystic Electric. The appellant had shown opening balance of 1,12,619 shares @Rs.365/- per share for the value of Rs.4,11,05,935/-. These shares have been revalued at Rs.92,34,758/- @Rs.8.20/- per share showing loss of Rs.3,18,71,177/-. The AO noted that the Investigation Wing of the income tax department has investigated the facts related to the scrip of M/s Pearl Eelc. It was found that the scrip is penny stock which has been rigged by various accommodation entry providers and the various beneficiaries have availed the benefit of the same by showing bogus gains/losses. The AO analysed the details of rise and fall of the scrip and held that the same is not backed by any fundamentals. The AO concluded that the scrip of M/s Pearl EC was controlled and managed to provide bogus gains/losses as per the requirement of beneficiary. Therefore, the AO disallowed the business loss claimed of Rs.3,18,71,177/- due to revaluation of closing stock of this scrip. 21.2 In the financial year 2013-14 , the Appellant had purchased 1,12,619 equity shares of the face value of Rs.10/- each of Pearl Electric, earlier, Mystic Electric on for a consideration of Rs.5,27,41,730/-. Thereafter, this stock was revalued as on 31.03.2014 at market value of Rs.4,11,05,935/- showing business loss of Rs.1,16,35,795/- during FY 2013-14. Thereafter, during FY 2014-15, due to corporate action, Pearl Electric shares of the face value of Rs.10/- each converted into face value of Re.1/- each, and consequent thereto, the Appellant was allotted 1126190 shares of the face value of Re.1/- each. Here again, since the Appellant did not sell these shares and these shares remained as stock in trade as at 31.03.2015, the Appellant valued these shares (remaining as stock in trade as at 31.03.2015) at market price following its method of valuation being lower of Cost or Market Price and accordingly, these shares were valued as on 31.03.2015 at the market value of Rs.92,34,758/- showing business loss of Rs.3,18,71,177/- during the year under consideration. 21.3 It is seen that the business loss is claimed due to revaluation of closing stock of shares of M/s pearl Electric. The AO disallowed this loss on the basis that the alleged scrip is a penny stock and the same has been manipulated to provide
16 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. accommodation entries to the beneficiaries. This allegation is to be examined in the facts of the case. The appellant is a NBFC carrying out business of trading in shares. On perusal of P&L account as on 31.03.2015, it is seen that the total revenue from operations is shown of Rs.922,19,69,775/- which includes sale of shares and securities of Rs.836,85,52,753/-, Profit on derivative trading of Rs.64,17,90,699/-, profit on speculation in shares and securities of Rs.42,14,248/-, loss on sale of investments of Rs.30,83,17,392/-, income from venture capital fund of Rs.15,48,864/- , other income of Rs.51,32,38,813/- and interest received of Rs.9,41,790/-. In the balance sheet as on 31.03.2015, inventory valuing Rs.187,56,84,419/- is shown. It is also observed that during the year under consideration the appellant had purchased and sold around 150 Scrips. During the year under consideration the appellant has shown total loss of Rs.69,52,33,901/- from the sale of 67 Scrips. Similarly, it has earned profit of Rs.58,17,33,320/- from the sale of 86 scrips during the year. 21.4 From the above fact, it is evident that the main business of the appellant is trading in shares. It is not a case that the appellant is naïve investor and purchased only the shares of alleged penny stock. It is also a fact that enquiries have been carried out by the SEBI in scrip of M/S Pearl Electric and it was found that this scrip was manipulated; however, there is no finding against the appellant. There is no fact on record which indicates that the appellant is involved in any connivance with the persons who manipulated the scrip. The appellant has traded in several scrips regularly; one of such share is Pearl Electric. The facts show that the transactions are in regular course of trading business activity. 21.5 The appellant purchased 112619 shares of Pearl Electrical for Rs.10 per share on 18.03.2014. Total purchase prices of Rs.5,27,41,730/- has been paid through banking channels. These shares were purchased online on stock exchange through the brokers, Kotak Mahindra Bank and India Infoline. These purchases have not been doubted by the AO. Further, the AO has not carried out any inquiry regarding the alleged purchase of scrip of Pearl Ele. The disallowance is made only on the basis of report received from the Kolkata Investigation Unit. The appellant has furnished all the documentary evidence with respect to the purchase. The loss is booked on revaluation of the closing stock at market price. Therefore, the loss cannot be disallowed only on the basis of report of Kolkata investigation Unit. 22.**** 23. Considering the facts that the purchase of share of Pearl Electric is regular business activity of the appellant and there is no adverse findings against the appellant, it cannot be held that the alleged purchase is an accommodation
17 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. entry. Therefore, the loss disallowed by the AO cannot be sustained. Accordingly, appeal on this ground is ALLOWED. 13. The ld DR argued that the findings of the Investigation wing makes it clear that the scrip is a penny stock and therefore the transactions of the assessee in the said scrip is non-genuine. Accordingly the ld DR supported the order of the AO.
14. The ld AR on the other hand primarily argued that for AY 2015-16 the assessment under section 143(3) is completed and that it is an un-abated AY. The ld AR further argued that for the un-abated AYs, the addition can be made only based on incriminating materials found during the course of search and that the impugned disallowance made by the AO is not based on any incriminating material found during the course of search. The ld AR also argued that a regular business loss disclosed by the assessee in the financial statement due to reinstatement of closing stock of shares cannot be considered as an incriminating material warranting disallowance in an un-abated AY. The ld AR in this regard relied on the decision of the Hon'ble Supreme Court in the case of CIT v/s. Abhisar Buildwell Pvt. Ltd. ([2023] 454 ITR 212). On merits the ld AR submitted that the AO has ignored the fact that the loss booked is a business loss arising in the regular course of the business of the assessee which is a NBFC. The ld AR further submitted that as per the accounting standards the assessee is required to revalue the closing stock at cost or market value whichever is lower and the loss for the year under consideration is arising out of the same. The ld AR also submitted that the assessee in any case has discharged the onus of proving the genuineness of the transaction by furnishing all the relevant details before the AO / CIT(A) and that the CIT(A) has given relief after perusing the same. Accordingly the ld AR submitted that there is no infirmity in the order of the CIT(A).
18 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd.
15. We heard the parties and perused the material on record. The assessee has accounted for a loss in the Profit & Loss account arising out the revaluation of the closing stock which includes the alleged penny stock M/s. Pearl Electronics (earlier M/s.Mystic electronics). The AO disallowed the same by placing reliance on the report of the Investingation Wing. We in this regard notice that the AO in the order passed under section 153A has merely elaborated the modus operandi as to how bogus Long term or Short Term Gain / losses are booked by the parties, but has not recorded any specific findings pertaining to the assessee. Further the AO has also not recorded any adverse findings with regard to the documents furnished by the assessee substantiating the purchase of the impugned documents. We further notice that the CIT(A) has given relief to the assessee after examining the issue on merits and after considering the documentary evidences furnished by the assessee. Therefore there is merit in the contention that there is no infirmity in the findings of the CIT(A). We also notice that for the year under consideration the assessment under section 143(3) of the Act is completed and that AY 2015-16 is an un-abated assessment. This fact is acknowledged by the AO since AO has relied on the documents furnished during the assessment proceedings to make the disallowance in the order under section 153A of the Act. The Hon'ble Supreme Court in the case of Abhisar Buildwell (P.) Ltd (supra) has held that in the case of completed assessments i.e. un-abated assessments no addition can be made by AO in absence of any incriminating material found during course of search under section 132 or requisition under section 132A. In the given case, it is an undisputed fact that the AO has relied on the findings of the Investigation Wing for the purpose making the disallowance towards alleged bogus loss and based on the details submitted during assessment proceedings. Therefore we are of the considered view that the disallowance made by the AO fails on that count also. In view of these discussions
19 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. and considering the facts, we see no reason to interfere with the decision of the CIT(A). The grounds of the revenue raised in this regard are dismissed accordingly.
ITA No.5652/Mum/2024 – AY 2016-17
16. For AY 2016-17 also, the AO made addition by reducing the STCL loss claimed by the assessee towards sale of Mutual Funds managed by JM Financials based on the DDIT(Inv) report. From the perusal of the facts pertaining to AY 2016- 17 we notice that it is identical to the facts in AY 2018-19. Therefore in our considered view our decision with respect to denial of exemption to the dividend received by the assessee stating that they are sham transactions, would mutatis mutandis be applicable for AY 2016-17 also. Hence we see no reason to interfere with the decision of the CIT(A), deleting the disallowance made by the AO in this regard.
17. For the years under consideration the revenue is contending one more issue of CIT(A) deleting the disallowance made by the AO towards loss on sale of alleged penny scrip M/s. Pearl Electronics (earlier M/s.Mystic electronics). In this regard we notice that the assessee during the year under consideration has sold the scrip which resulted in the business loss of Rs.27,40,949 and that the AO has disallowed the loss by recording the reasons which is similar to AY 2015-16. We further notice that similar to AY 2015-16, the AO has not recorded any adverse findings about the documentary evidences submitted by the assessee and has also not recorded any findings as to how the assessee is linked to the modus operandi. We also notice that the CIT(A) has given relief to the assessee for the reason that the purchase of shares of M/s. Pearl Electric is a regular business activity of the assessee and given that there is no adverse finding against the assessee, it cannot held that the alleged purchase is on account of accommodation entry. Considering these facts, in our
20 ITA 5657/M/24-CO 276/ M/ 24-ITA 5620/ M/24 -CO 277M/ 24- ITA 5622/M/24- Subhkam Ventures (I) Pvt. Ltd. view, our decision with regard to business loss booked by the assessee on restatement of closing stock of the alleged penny stock M/s.Pearl Electric is applicable to the business loss booked by the assessee on the sale of the said scrip. Accordingly we find no infirmity in the order of the CIT(A) in deleting the disallowance based on the merits of the case. The grounds raised by the revenue in this regard are hereby dismissed C.O.276 & 277/Mum/2024 – AY 2015-16 & AY 2016-17
The assessee in the C.O. is contending the denial of exemption by the AO to the dividend income received by the assessee from the Mutual Funds operated by JM Financial. Since we have already dismissed the appeals of the revenue contending the relief given by the CIT(A) in this regard, the C.O. of the assessee for AY 2015-16 & AY 2016-17 have become infructuous and dismissed accordingly.
19. In result, appeals of the revenue are dismissed and the C.O. of the assessee are dismissed.