DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), INCOME TAX DEPARTMENT vs. RASHESH MANHAR BHANSALI, ANDHERI EAST

Facts in brief are that assessee is an individual and is director of M/s. Goldiam International Ltd., Golden Jewellery and other entities. He has filed the return of income on 12/08/2016 declaring total income of Rs.5,77,50,560/-. In his 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.148 on the basis of some information received through insight portal, i.e., survey u/s.133A of the Income Tax Act, 1961, was conducted on 15.02.2021 in the case of M/s. JM Financial Asset Management Limited ("JM Financial"), Mumbai. In the course of survey, it was found that JM Balanced Fund- Annual Dividend Option Regular Plan (the "Plan") of JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus. In the process, the SEBI guidelines have been flouted by the JM Mutual Fund by classifying a portion of capital as distributable surplus and thereafter artificial payout to the investor in the form of dividend.

It was also communicated that though dividend received by the 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.) had 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.

Further, ld. AO noted that SEBI vide its Circular No. SEBI/IMD/CIR No 18 / 198647/2010 dated March 15, 2010, had 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. It can distribute only from surplus generated by realizing the gains on investments or dividends received from equity markets which it had invested. That means it has to invest and make a profit to distribute. However, said direction of the SEBI has not been followed by the mutual fund, as first it has artificially rigged the distributable surplus and then applied said ratio to future allotted units (before the planned dividend distribution date). Thus, ld. AO observed that it can be deduced that deploying unfair and manipulative methods, the mutual fund house has rigged up the distributable surplus in a planned manner and strictly 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. Assessee was now the beneficiary of this scam by adopting the said modus operandi and assessee has also claimed short term capital loss alongwith claim of dividend income which is a colourable nature of transaction. Accordingly, notice u/s.148 was issued on 29/06/2021.

In response assessee filed his return of income on 07/07/2021 declaring total income of Rs.5,77,50,560/-, the assessee had filed writ petition before the Hon’ble Bombay High Court challenging the notice dated 29/06/2021 issued by the ld. AO u/s.148. However, as per the direction of the Hon’ble Supreme Court in the case of Union of India Vs. Ashish Agarwal, earlier notice was held to be within time and in view of the direction of the Hon’ble Supreme Court, all the assessees were required to be issued show-cause notice u/s. 148A(b) which in the case of the assessee was issued on 28/05/2022 and the assessee was given two weeks time in response assessee has uploaded statement on 13/06/2022. The ld. AO passed order u/s 148A (d) of the Act on 28/07/2022 and issued notice u/s.148 on the same date. The case of the assessee before the ld. AO was that assessee is a regular investor and has paid huge investment in mutual funds, hares and bonds which as on 31/03/2016 aggregated to Rs.82.30 Crores. The assessee has declared income from capital gains of more than Rs.15.25 Crs. and has earned dividend of over Rs. 5 Crs. during the year under consideration. In the course of his regular investment activity, the assessee purchased units of mutual fund namely JM Balanced Fund- Quarterly Dividend Plan of Rs.5,00,00,000/- on 17.06.2015 & Rs.1,00,00,000/- on26.06.2015 aggregating to Rs.6,00,00,000/- floated by JM Financials. Further, in the period of holding such mutual fund, appellant had also received dividend income of Rs.1,83,65,846/-. The said mutual fund was redeemed on 28.032016 for a consideration of Rs.4,00,63,648/-. Such redemption has resulted in short term capital loss ofRs.1,99,36,352/-.

The short term capital loss on account of sale of mutual fund has been adjusted while computing short term capital gains from other modes. Similarly, dividend income of Rs. 1,83,65,846/- has been claimed as exempt u/s 10(35) of the Act. However, ld. AO in light of information received based on survey action carried out in the case of J.M. Financial Asset Management Ltd. u/s.133A on 15/02/2021 and SEBI Circular observed that the short term capital loss is fictitious which cannot be allowed to be set off and claimed a dividend exempt is also not allowable. He has also made reference to statement of various persons during survey proceedings in case of J.M. Financials. Accordingly, AO taxed the dividend income of Rs.1,83,65,846/- as income from undisclosed sources and disallowed the short term capital loss of Rs. 1,99,36,352/-.

The ld. CIT (A) though upheld the reopening u/s.148, however, on merits he has given relief by allowing the dividend income to be exempt and set off of short term capital loss. His detailed reasonings and the conclusion drawn by him shall be discussed hereinafter in forthcoming paragraphs.

We have heard both the parties at length and also perused the relevant finding given in the impugned orders. The case of the department before us is that denial of exemption of dividend income u/s.10(35) and claim of set off of short term capital loss is based on –  Firstly, survey action carried out in the case of J.M Financial Asset Management Ltd., which revealed that J.M Financial Asset Management Ltd., has manipulated accounting methodology to artificially inflate distributable profits which lead to the conclusion by the ld. AO that dividend received by the investors from the said fund was out of sham transaction;  Secondly, ld. AO has relied heavily upon SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 which instructed that the 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. Ld. AO has also referred to some statement recorded by various employees of J.M Financial Asset Management Ltd.

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. "

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.

Another important fact here is that nowhere the ld. AO has brought on record any SEBI enquiry in the case of J.M. Financial Asset Management Ltd., to support his finding given by him. His entire order is based on the premise of SEBI Circular which was general and not particularly applicable for J.M. Financial Asset Management Ltd., Nowhere, there is any material that assessee was involved in manipulation done by J.M. Financial Asset Management Ltd.

Ld. CIT (A) has also considered various statements of employees of J.M. Financial Asset Management Ltd., which has been relied upon by the ld. AO, however, none of the employees were admitted that any manipulation has been done for the purpose of providing tax benefit to the asset in other investors. There is no whisper that J.M. Financial Management Ltd., have provided excess dividend to the assessee nor provided tax benefit. There is no live link nexus between the statement and the assessee. Thus, ld. CIT (A) has rightly held that there is no substance in relying upon such statement.

Another fact which has been noted by the ld. CIT (A) is that there is no SEBI enquiry raised on J.M. Financial Management Ltd. It is a matter of fact that the said fund is still active in the market and has given early return of 11.51% against the benchmark return of 11.33% as reflected in the annual report of J.M. Financial Management Ltd., for A.Y.2014-15. Thus, when assessee has made investment in open-ended scheme floated by the Mutual Fund and assessee has made investment as per the price available in the open market and has exited at the time based on market price, then it cannot be said that assessee was involved in alleged pre-planned transaction.

Ld. CIT (A) has also relied upon the co-ordinate Bench decision of the ITAT, Mumbai in the case of Goldiam International Ltd. Vs. DCIT wherein similar facts involved in J.M. Financial Asset Management Ltd., was involved. The relevant observation and the finding of the Tribunal are as under:-

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.

In the result, appeal of the Revenue is dismissed.