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

ITA 5107/MUM/2024

AI Insights

The case revolves around the appeal by the Deputy Commissioner of Income Tax against the order of CIT(A)-47, Mumbai, which had allowed the exemption of dividend income and the set off of short term capital loss for the assessee, Rasesh Manhar Bhansali, for the Assessment Year 2016-17. The Revenue contended that the dividend income and the capital loss were the result of sham transactions and colorable devices used by the assessee to evade tax. The Tribunal examined the merits of the case, including the application of SEBI guidelines and the authenticity of the transactions conducted by JM Financial, the mutual fund involved. The Tribunal's decision was influenced by the lack of direct evidence linking the assessee to any wrongdoing and the precedent set by similar cases.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312359 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2016-2017
• Other Referred Cases: Union of India Vs. Ashish Agarwal, Walfort Share & Stock Brokers (P) Ltd. vs. Union of India, McDowell & Co. Ltd. vs. CTO, Union of India vs. Azadi Bachao Andolan & Anr, Goldiam International Ltd. Vs. DCIT, Eveready Industries India Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R.R. MAKWANA
• Assessee Lawyers: PRATEEK JAIN
• Keywords: Set aside; Income from undisclosed sources; Cost of acquisition; Capital Gains; Sham transactions; Avoidance of tax; Benefit of exemption
• Section: 143(3); 133A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & MS PADMAVATHY S, ACCOUNTANT MEMBER ITA No.5107/Mum/2024 (Assessment Year :2016-17) Deputy Commissioner of Income Tax, Central Circle – 1 (2) Mumbai Vs. Rasesh Manhar Bhansali Gem & Jewellery Complex, SEEPZ SEZ Andheri East Mumbai- 400 009 PAN/GIR No.AAACV2355C (Appellant) .. (Respondent) Assessee by Shri Prateek Jain Revenue by Shri R.R. Makwana, Addl. CIT Date of Hearing 18/02/2025 Date of Pronouncement 30/04/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against order dated 05/07/2024 passed by CIT(A)-47, Mumbai for the quantum of assessment passed u/s.147/143(3) for the A.Y.2016-17. 2. In the grounds of appeal, the Revenue has raised following grounds:- \"1. Whether in the facts and circumstances of the case and in law, the Id. CIT(A) is correct in allowing the assessee's claim of divided ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 2 income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when the same cannot qualify as dividend on account of the sham transactions entered into by the assessee using colorable devices?\" 2 \"2. Whether in the facts and circumstances of the case and in law, the ld. CIT(A) is correct in allowing's the assessee's claim of divided income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when the dividend received is not on account of appreciation of the investment but represents income of the assessee from unexplained sources and, as such, the same cannot qualify as dividend on account of the sham transactions entered into by the assessee using colorable devices?\" 3 \"3. Whether in the facts and circumstances of the case and in law, the Id. CIT(A) is correct in allowing's the assessee's claim of divided income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when it was found during the course of Survey action conducted w/s 133A of the Act by the DDIT, Unit-3(1), Mumbai on 15.02.2021 that JM Financial in its scheme \"JM Balanced Fund -Quarterly Dividend Plan\" had manipulated accounting methodology so as to artificially inflate the distributable surplus and in the process the SEBI guidelines have been floated 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?\" \"4. Whether in the facts and circumstances of the case and in law, the Id. CIT(A) is correct in allowing's the assessee's claim of divided income of Rs. 1,83,65,846/- as exempt u/s 10(35) of the Income Tax Act, 1961 and set off of short term capital loss of Rs. 1,99,36,352/- against capital gains when the persons responsible for the management of the mutual fund in their statement/have categorically admitted that due process, as mandated by the SEBI, has not been followed by them? ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 3 3. 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. 4. 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 4 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. 5. 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 5 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. 6. 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 6 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/-. 7. 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/-. 8. The ld. CIT (A) though upheld the reopening u/s.148, however, on merits he has given relief by allowing the dividend income to ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 7 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. 9. 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. 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 8 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 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 9 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. \" 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 10 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. 13. 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. ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 11 14. 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. 15. 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. 16. 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:- ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 12 \"7. Even on the merits of the case, the facts clearly shows that assessee purchased JM balanced fund mutual fund on 17/6/2015 and the record date of dividend was 18/6/2015 as per the notice dated 13 June 2015 that a dividend of 4.75 per unit is to be declared. The assessee purchased mutual fund of 300 lakhs (11,36,316.29 units). The assessee earned dividend on 18/6/2015 of Rs.5,397,502/-, Further on December 21, 2015, and notice was issued by the mutual fund for declaration of dividend of Rs. 4 per unit. The record-date record was fixed on 26 December 2015. In both the notices issued by mutual fund clearly state that \"after payment of dividend, the power unit NAV of the dividend options of the scheme will fall to the extent of the payout and statutory levies (if applicable) Therefore, naturally if anybody is selling after the dividend earned by the unitholder the redemption value will fall. Assessee sold all those mutual funds on 28/3/2016 at redemption amount of Rs.19,434,337/-, which resulted into a short-term capital loss Thus, the assessee acted on a publicly available notice Issued by the mutual fund, both the notices are placed before us, it cannot be said that transaction entered into by the assessee is fictitious or sham. With respect to the applicability of provisions of section 94 (7) of the act, the lower authorities have also accepted that the assessee fulfils the condition by which the transaction insecurities cannot be considered for avoidance of tax. Assessee purchased such securities and 17/6/2015 when the record date was 18 June 2015 and securities were sold on 28/3/2016. The lower authorities have denied the exemption of dividend income and allowability of capital loss despite transaction is not falling under section 94 (7) of the act holding it to be sham and fictitious transaction is devoid of any merit. Accordingly on the merits also, orders of the lower authorities are reversed and ground number 4- 7 of the appeal are allowed.\" 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 ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 13 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 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. ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 14 10. We, therefore, set aside the order passed by the authorities below and hold that in the case before us, the assessee is entitled to claim loss on the aforesaid transaction by answering the two questions framed by the Division Bench in favour of the assessee against the Revenue. We direct the Assessing Officer to treat the loss arising out of the aforesaid transaction and also to grant benefit of exemption as pointed out by the Supreme Court\" 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. 18. In the result, appeal of the Revenue is dismissed. Order pronounced on 30th April, 2025. Sd/- (PADMAVATHY S) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 30/04/2025 KARUNA, sr.ps Copy of the Order forwarded to : 1. The Appellant ITA No.5107/Mum/2024 Rasesh Manhar Bhansali 15 BY ORDER, (Asstt. Registrar) ITAT, Mumbai 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// "