BALRAM CHAINRAI,MUMBAI vs. INT TAX , WARD 2(1)(1), MUMBAI

During the course of hearing, the ld. AR submitted that ground no. 1.1 with regard to limitation is not pressed and therefore, same is dismissed as not pressed.

The assessee is a non-resident individual and filed the return of income for AY 2016-17 on 28.07.2016 declaring a total income of Rs. 10,18,16,270/-. The assessee during the year under consideration has received dividend of Rs. 5,47,81,701/- from JM Financial Asset Management Ltd towards JM Balanced Fund. The assessee also declared Short Term Capital Loss (STCL) of Rs. 5,73,87,212/- from the transfer of JM Balanced Fund. The Assessing Officer (AO) received information of DIT (System) based on a survey conducted at the JM Financial Asset Management Ltd. that distributable surplus available for distribution of dividend of JM Balanced Fund is artificially inflated by manipulating the accounting methodology and fictitious loss is being booked towards the transfer of the said fund. It is alleged by the AO that assessee is one of the beneficiaries of creating that fictitious loss since the assessee is receipt of dividend income from the said mutual fund. Therefore, the AO reopened the assessee's case by issue of notice under section 148 of the Act. Subsequently, pursuant to the directions of the Hon'ble Supreme Court in the case of Ashish Agarwal (Civil Appeal No. 3005/2022 dated 04.05.2022) the notice under section 148 was treated as notice issued under section 148A(b) of the Act. After considering the objections filed by the assessee, the AO passed an order under section 148A(b) on 27.07.2022 stating that the dividend income received by the assessee from JM Financial Asset Management Ltd. is from sham transaction generated using colourable devices and that the dividend has laid to generation of bogus STCL of mutual funds. The AO issued fresh notice under section 148 subsequently and the assessee filed the return in response to notice under section 148 of the Act. The AO called on the assessee to furnish further detail with regard to the impugned transactions. The assessee filed the relevant details pertaining to the impugned transactions and submitted that If the JM Financial Asset Management Limited has manipulated the accounting methodology or not followed any guidelines issued by the SEBI, then the assessee shall not be punished for the same by way of taxing the dividend income earned by the assessee and no action is taken against JM Financial Asset Management Limited. The assessee also submitted that there are no adverse findings by the SEBI against JM Financial Mutual Fund in the dividend declaration process and therefore the assessee who is an innocent investor cannot be held responsible.

The AO did not accept the submissions of the assessee and held that since the assessee has received the dividend from JM Financial Asset Management Ltd. which from a sham transaction the STCL to the extent of the dividend amount of Rs. 5,47,81,701/- was disallowed. The DRP confirmed the said disallowance. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.

Before us the ld. AR raised the contention that notice issued under section 148A was not valid. The ld. AR submitted that the assessee has raised the said contentions before the AO as well as the DRP and that the same has not been considered. In this regard the ld. AR drew our attention to the reply filed in response to notice under section 148A(b) (page 98 to 112 of PB) where the assessee has raised objections with regard to the notice issued under section 148A. The ld. AR further submitted that the whole addition is based on survey proceeding in the case of JM Financial Asset Management Ltd. and that the AO did not bring anything on record to show that the assessee is in any way involved in the alleged sham transaction. The ld. AR further submitted that the assessee is a non-resident and is regular investor in mutual funds which is evidence from the statement of income (page 136 of PB) wherein the assessee has declared only capital gains and income from other sources. The ld. AR also submitted that mere receipt of dividend from JM Financial Asset Management Ltd. and sale of mutual fund as a regular investor cannot be held against the assessee for the reason that those were fictitious transactions carried out by JM Financial Asset Management Ltd. The ld. AR relied on the decision of the Hon'ble Bombay High Court where under identical circumstances involving transactions with JM Financial Asset Management Ltd in the case of Karan Maheshwari Vs. ACIT (Writ Petition No. 37211 of 2022 dated 08.03.2024) the Hon'ble High Court has quashed the notice issued under section 148A. Therefore, the ld. AR argued that the AO is not correct in disallowing the dividend income without giving the opportunity to assessee to examine the statement recorded from persons during survey and without giving any corroborative material to support the claim that the assessee in any way involved in the fictitious transactions.

The ld. DR on the other hand vehemently argued that the assessee cannot raise the contentions against issue of notice under section 148A before the Tribunal since the assessee has participated in the 148 proceedings. The ld. DR further submitted that the objections raised by the assessee against notice under section 148A have already been dealt with by the AO. The ld. DR also submitted that assessee is one of the beneficiaries of the bogus transaction carried out by JM Financial Asset Management Ltd. and therefore the AO has correctly disallowed the dividend income claimed by the assessee as well as revenue.

We heard the parties and perused the material on record. During the year under consideration, the assessee has received a dividend income of Rs. 5,47,81,701/- and has also claimed STCL of Rs. 5,68,72,731/- which is setoff against other STCG. During the survey proceedings in the case of JM Financial Asset Management Ltd. statements have been recorded to the effect that JM Financial Asset Management Ltd. 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. It is noticed by the AO that the assessee has received dividend from JM Financial Asset Management Ltd. and has also booked STCL from sale JM Balanced Fund – quarterly dividend. 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 disallowed the STCL setoff against STCG to the extent of the dividend income earned and claimed as exempt by the assessee. The assessee contended before the AO while filing response to notice under section 148A stating that the documents relied upon by the revenue for the purpose of reopening the assessment have not been made available to the assessee. The assessee also submitted all the relevant documents and bank statements in support of the mutual fund transactions in response notice under section 148A. The assessee also submitted that he being an investor cannot be held liable for any manipulated transactions carried out by JM Financial Asset Management Ltd. These objections of the assessee have been dismissed by the AO without giving any specific finding with regard to the objections and by stating that the assessee is a beneficiary of the bogus transactions. The assessee has raised similar contentions before the DRP which were dismissed. The main contention of the assessee before us is that the notice under section 148A is not valid for the reason that the AO has re-opened the assessment without any material connecting the assessee to the alleged sham transaction and that the assessee was not provided with the documents relied on by the AO for the purpose of reopening the assessment. In this regard, 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 Asset Management Ltd. and held that “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 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.

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 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.

We notice that the reasons recorded by the AO in assessee's case are similarly worded as in the reasons recorded by the AO in the above case. The Hon'ble High Court has held that the AO in the above case 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 which indicates non application of mind by the AO. We further notice that same is fact in assessee's case also since the reasons recorded are the similar and therefore in our considered view, the above decision of the Hon'ble High Court is applicable to assessee also. The Hon'ble High Court quashed the notice for one more 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. It is also relevant to mention here that the assessee is a regular investor which is substantiated by the significant investments made by the assessee in mutual funds etc. (refer statement of investments submitted). Considering the facts of the present case and the decision of the Jurisdictional High Court, we hold that the notice issued by the AO under section 148A is not sustainable and accordingly the addition / disallowance made in the reopened proceedings is liable to be quashed.

Ground No.2 pertains to the same issue disallowance made by the AO / DRP towards dividend and in view of our finding in Ground No.1.2 this ground has become academic. Ground No.3 pertaining to penalty is premature and does not require any separate adjudication. The ld. AR during the course of hearing contended the jurisdiction of the AO. Since we have already allowed the appeal in favour of the assessee, the argument has become academic not warranting adjudication.

In the result, the appeal of the assessee is partly allowed.