INCOME TAX OFFICER, PIRAMAL CHAMBERS V. DIBYA TRADING CO LLP, MUMBAI , MAHARASHTRA

ITA 4330/MUM/2024

AI Insights

The case revolves around the dispute concerning the exemption of dividend income received by Dibya Trading Co. LLP from JM Financial Mutual Fund, which was alleged to have manipulated its accounts to inflate distributable surplus. The Income Tax Officer (ITO) disallowed the exemption under section 10(35) of the Income-Tax Act, treating the dividend as income from other sources and the associated short-term capital loss as ineligible for set-off. The CIT(A) reversed this decision, which was contested by the ITO in the Tribunal. The Tribunal's decision favored the assessee, dismissing the revenue's appeal and upholding the CIT(A)'s order.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 470665 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2015-2016
• Other Referred Cases: Karan Maheshwari vs. ACIT, Agencies Rajasthan (P.) Ltd. Vs. ITO
• Laws Referred To: Income-Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R.R. MAKWANA
• Assessee Lawyers: MADHUR AGRAWAL; JAY BHAHSALI
• Keywords: Set aside; Business income; Reassessment proceedings; Capital Gains; Sham transactions; Accommodation entries; Earning of tax free income; Bogus
• Section: 250; 13; 10(33); 10(33); 20

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “D”, MUMBAI BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER AND SHRI SUNIL KUMAR SINGH, JUDICIAL MEMBER ITA No.4330/Mum/2024 Assessment Year: 2015-16 Income Tax Officer Vs. Dibya Trading Co. LLP 202, 2nd Floor, May Building, Near Princess Street, Mumbai- 400002. PAN: AAIFD 0076 D (Appellant) (Respondent) C.O. No.191/Mum/2024 (Arising out of ITA 4330/Mum/2024) Assessment Year: 2015-16 Dibya Trading Co. LLP 202, 2nd Floor, May Building, Near Princess Street, Mumbai- 400002. PAN: AAIFD 0076 D Vs. Income Tax Officer (Appellant) (Respondent) Present for: Assessee by : Shri Madhur Agrawal & Shri Jay Bhahsali Revenue by : Shri R.R. Makwana, Sr. DR Date of Hearing : 24.10.2024 Date of Pronouncement : 02.01.2025 O R D E R PER AMARJIT SINGH, ACCOUNTANT MEMBER: The appeal filed by the revenue and cross-objection filed by the assessee are directed against the order of ld. CIT(A), NFAC, Delhi passed u/s 250 of the Act. Both are adjudicated as under: ITA 4330/Mum/2024 (A.Y. 2015-16) (Revenue Appeal) “1. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the additions made by the Assessing Officer and allowing the exemption u/s 10(35) of the Income-Tax Act, of ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 2 Rs. 3,86,74,033/-, which was disallowed by the Assessing officer and taxed under the head income from other sources? 2. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74, 033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, without considering the fact that during the survey proceedings conducted by DGIT (Inv.) Mumbai, on M/s. JM Financial Asset Management Ltd, it was found that JM Balance Fund Quarterly Dividend Plan of JM Financial had manipulated accounting methodology, so as to artificially inflate the distributable surplus and thereafter artificial payout to the investor in the form of dividend ? 3. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74,033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, without considering the fact that, only dividend received by the unit holders from the equity based mutual fund are eligible for exemption, whereas dividend received from a Sham transaction generated using colorable devices and capital loss being artificial, where arrangement were created fictitious loss to the beneficiary investor is not eligible for set off ? 4. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74,033/- and Short Term Term Capital Loss of Rs. 3,41,02,141/-, without considering the fact that, M/s. JM Financial Asset Management Ltd, the fund house has deployed unfair and manipulative methods, by rigged up the distributable surplus, in a planned manner and while accounting the breakup of NAV on the date of investments, the fund house credited the IER (Income Equalization Reserve) account instead of UPR (Unit Premium Reserve), which is strictly against the guidelines specified by SEBI? 5. Whether on the facts and circumstance of the case and in law, the Id. CIT(A) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74,033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, ignoring the fact that, it has been admitted and confessed by the key persons/entities who have administered and controlled the said fund/scheme of M/s. JM Financial Asset Management Ltd, in their statement on oath before the DDIT-Unit -3(1) Mumbai (Income Tax Deptt) that SEBI's SOP and Guidelines regarding crediting portion of capital into unit premium reserve was not followed and violated by creating mere ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 3 chain of documents so as to impress upon that the guidelines were being followed and not flouted one? 6. Whether on the facts and circumstance of the case and in law, the Id. CITIA) has erred in allowing the exemption u/s 10(35) of the Income-Tax Act, of Rs. 3,86,74,033/- and Short Term Capital Loss of Rs. 3,41,02,141/-, by ignoring the fact that, a list of all beneficiaries was provided by the Investigation Wing of Income-Tax Department, in which the name of the instant assessee was also present, which proved that the assessee has invested and engaged in manipulated sham scheme of fund of M/s. JM Financial Asset Management Ltd. to minimize tax liability, received dividend and claimed STCL? 7. The appellant craves, leave, amend or alter any grounds or add a new ground which may be necessary.” 2. Fact in brief is that return of income declaring total loss of Rs. 1,47,41,685/- was filed on 25.08.2015. On perusal of the record, the assessing officer noticed that a survey action was carried out by the DDIT(In.) Unit-3, Mumbai dated 15.02.2021 in the case of M/s. JM Financila Asset Management Ltd. and it was found that they have artificially manipulated the distributable surplus which was paid to the investors in the form of dividend. On verification of the income tax return of the assessee, it was found that assessee had claimed loss under the head of equity/derivative to the tune of Rs. 3,68,74,023/-. The AO further stated that as per the investigation report of the DDIT, the investor in order to reduce their tax liability entered into sham transactions and received dividends and short term capital loss. Therefore, the AO stated that in such cases 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 being generated on account of some transactions. On the basis of above information, a notice u/s 148A(b) of the Act was issued on 22.03.2022 asking the assessee to show cause as to why a notice u/s ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 4 148 of the Act should not be issued on the basis of the aforesaid referred information. However, the assessee has failed to make any compliance within the stipulated time, therefore, a notice u/s 148 of the Act was issued on 13.04.2022. During the course of assessment in response to the show cause notice issued to the assessee, in its reply the assessee submitted as under: “3.3 Synopsis of the reply of the assessee to SCN and additional SCN (if any) 2. During the financial year ended 31st March, 2015, relevant to the assessment year under consideration, the assessee had invested a sum of Rs. 7 crores in JM Balanced Fund – Quarterly Dividend Option Regular Scheme (hereinafter referred to as ‘JM Balanced Fund”) on 14.10.2014. The said investment was, therefore, sold by the assessee on 25.03.2015 for Rs. 3,58,97,859/- resulting in short term capital loss of Rs. 3,41,02,141/-. The details of the same are as under: Name of the script Date of purchase Amount invested (Rs.) Date of sale Redemption Amount (in Rs.) STCL (in Rs.) JM Equity Fund 14.10.2014 7,00,00,000 25.03.2015 3,58,97,859 3,41,02,141 3. In the intervening period, the assessee received dividend on such investments amounting to Rs. 3,86,74,033/-. Details of the same are as under: Date Amount (in Rs.) 28.01.2015 1,42,93,175 25.03.2015 2,43,80,858 Total 3,86,74,033 4. Your good-self based upon purported information received from DDIT, Unit-3(1), Mumbai on 15.02.2021 has alleged that JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus. SEBI guidelines were flouted. The dividend paid by the fund was nothing but return on capital (capital gain) itself and hence cannot be claimed as exempt under section 10(35) of the Act. ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 5 7. In the present case, since the assessee has not satisfied the said conditions, the provisions of the said section would not apply. The relevant dates are as under: Date Amount (in Rs.) 14.10.2014 Date of purchase 28.01.2015 Dividend of Rs. 1,42,93,175 earned 25.03.2015 Dividend of Rs. 2,43,80,858/- earned 26.03.2015 Mutual Fund sold A perusal of the events would show that the record date is 28.01.2015 and 25.03.2015. The units of the fund was purchased on 14.10.2014 i.e. more than 3 months prior from date of declaration of dividend. Thus, the first conditions related to purchase of units within three months prior to record date is not satisfied. The provisions of dividend stripping under section 94(7) of the Act are not applicable. Therefore, it is not open to disallow the short term capital loss to the extent of dividend received of Rs. 3,41,02,141.” 3. However, the AO had not agreed with the submission of the assessee and stated that assessee has invested in mutual fund on 14.10.2014 and sold the mutual fund on 26.03.2015 within a period of 4.5 month and received huge dividend on investment which was not acceptable. The AO explained that the assessee has received income to the amount of Rs. 1,42,93,175/- on 28.01.2015 and Rs. 2,43,80,858/- on 15.03.2015 totaling to Rs.3,86,74,033/-. The assessee had invested Rs. 7 crore on 14.10.2014 and sold mutual fund on 26.03.2015 for consideration of Rs. 3,58,97,499/- and claimed short term capital loss to the tune of Rs. 3,41,02,141/- from mutual fund purchases from JM Financial. The assessing officer referred the Circular No. SEBI/IMD/CIR No 18/198647/2010 dated 15.03.2010 relating to non-availability of Unit Premium Reserve which is part of the sale price of the unit is not attributable to ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 6 realized gain and same cannot be used to pay dividend. The AO stated that 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 portion of capital as distributable surplus and thereafter artificially pay out to the investor in the form of dividend. Therefore, the dividend of Rs. 3,86,74,033/- received by the assessee on sale of JM Financial Mutual Fund was not allowed as exempt u/s 10(35) of the Act and added to the total income of the assessee. 4. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant extract of the decision of ld. CIT(A) is reproduced as under: “5. I have gone through the grounds of appeal, statement of facts, assessment order and the submissions of the appellant. The assessment was reopened based on the report of the DDIT Unit 3(1) Mumbai wherein it was mentioned that JM Balanced Fund Quarterly dividend plan of JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus. It is noticed from the record that the appellant had invested a sum of Rs. 7 crores in JM Balanced Fund on 14.10.2014. The said investment was, thereafter, sold by the appellant on 25.03.2015 for Rs. 3,58,97,859/- resulting in short term capital loss of Rs. 3,41,02,141/-. In the intervening period, the appellant received dividend on such investments amounting to Rs.3,86,74,033/-. Further, it is seen from the assessment order that according to the AO, the appellant has received dividend income of Rs.3,86,74,033/- on sale of J M Financial Mutual Fund which has been claimed as exempt income under section 10(35) of the Act. In the assessment order, the AO observed that the said transaction was a sham transaction, hence exemption under section 10(35) of the Act cannot be allowed and the said dividend income ought to be taxed. The AO observed that a survey action was conducted at J M Financial Asset Management Limited. In the course of such survey, it was found by the DDIT, Unit 3(1), Mumbai that the J M Financial Dividend Scheme was a sham scheme in which assessee is investor. The AO noticed various statements of employees who have admitted to the fund being manipulated. The AO observed as under: ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 7 5)Chronology of receipt of funds and distributable surplus in the Plan 5.1. The Plan started in 23/12/2014 with Assets under management (AUM) of Rs.5,000/- 5.2. As on 23/04/2015, the AUM was only Rs. 5,275 and there were only 2 investors in the Plan. While the NAV was Rs 26.99 but taking the advantage of low AUM, the distributable surplus of the plan was rigged to Rs 16.76 by realizing profitable open positions. Needless to mention that the said investments had been made long back, resulting into substantial appreciation. It is to be noted that it won’t be easy, if fund’s AUM is large. 5.3. During the period from 24/04/2015 to 15/06/2015, mutual fund received an inflow of Rs. 19.18 Crores and the closing AUM as on 14/06/2015 stood at Rs. 18.89 crores. 5.4. Further the Plan received huge trench of inflow of Rs. 2719.33 crores between 15/06/2015 to 18/06/2015 i.e in a span of just 4 days. Further, a dividend of Rs 4.75 per unit was distributed on 18/06/2015 i.e 17.85%. 5.5. The Plan received another inflow of Rs. 2259.28 Crores between 20/06/2015 to 27/12/2015 i.e in a span of just 6 months. A dividend of Rs. 4 per NAV was distributed to the unit holders on 27/12/2015 which is around 18.68%. 5.6. Further, the plan received an inflow of Rs 4698.28 Crores between 28/12/2015 to 30/03/2016. A dividend of Rs. 6 per NAV was distributed to the unit holders on 30/03/2016 which is around 40%. During the F.Y. 2015-16 (which is the year under consideration in the instant case), the total dividend distributed through plan was around Rs 3563.09 Crores. 5.7. After the payout of 3 dividends, the unit value decreased from Rs.26.60/- to Rs.11.21/-. 5.8. In the process, the SEBI guidelines regarding crediting portion of capital into unit premium reserve was violated. (6) Further, during the course of survey action, the statement of the key persons responsible for the management of the mutual fund was recorded who, in their statements, categorically admitted that due ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 8 process as mandated by the SEBI had not been followed by them. The summary of their statements recorded is as under: 6.1. Shri Sanjay Chhabaria, fund manager, admitted that there has been no application of mind in managing the fund and as per the advice of Shri Bhanu Katoch, CEO, he has increased the distributable surplus. He further stated that the due process of dividend distribution, as mandated by the SEBI guidelines, was not followed in letter and spirit. Mere chain of documents was created so as to impress upon that the guidelines were being followed. 6.2. ShriSuvenduRakshith, the head of sales team, stated that the sales team had been passing on the hints to the distributors about the prospective dividen distribution, much in advance, to lure the prospective clients. This violated SEBI dividend declaration policy that there should not be any type of communication regarding probable date and amount of dividend by the mutual fund before the decision taken by the trustee company. 6.3. Shri Deepan Doshi, Institutional Sales Head stated that he has never been part of any committee for deciding the dividend amount and has no role in any dividend declaration. 6.4.Mrs. Diana D’sa, the Compliance Head, JM AMC who is responsible for overseeing all the compliance as per SEBI Guidelines admitted that SOP has not been followed and documents are created to show that the SEBI guidelines are followed. (7) In view of the above, it can be safely deduced that by deploying unfair and manipulative methods, the mutual fund house rigged up the distributable surplus, in a planned manner. While accounting the breakup of NAV on the date of investments, the fund house credited the IER (Income Equalization Reserve) account instead of UPR (Unit Premium Reserve), which is strictly against the guidelines specified by SEBI. Immediately after the dividend was declared, since there was not enough money to distribute, the capital amount introduced by the clients was distributed back to them in the form of tax-free dividend. Balance amount was redeemed at a loss, since the NAV fell and the investors booked short-term capital loss which looked genuine but was an actually fictitious and preplanned loss. (8) The investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and Short-Term Capital Loss ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 9 and the instant assessee too is one of such investors. As a result, the dividend is not eligible for deduction u/s 10(35) of the I.T. Act and short- term capital loss is also not eligible for adjustment with other capital gains, being generated on account of sham transactions. In fact, being distributed out of capital itself, such dividend should be reduced from the cost of investment with resulting reduction in short term capital loss. (9) The amount of capital loss has been either adjusted against long term capital gain or business income or carried forward for future adjustment. In some cases, the benefit of the exempt dividend received has been taken in the computation of MAT. Even though dividend is received during AY 2016-17, fictitious loss generated on redemption of mutual fund units might have set off during next Assessment years. A list of all the beneficiaries was furnished by the Investigation wing in which the name of the instant assessee was also present. 2.3.3. In the assessee’s case too, as evident from ITR filed by the assessee, the short term capital gain of Rs. 28413782/- has been adjusted out of short term capital loss of Rs. 3,41,02,141/- and further carried forward loss of Rs. 56,88,359/- on sale of JM financial Mutual fund. Further assessee has shown dividend received on mutual fund of JM Financial to the tune of Rs. 3,86,74,033/- as exempt income during the year under consideration. 5.1 In this connection, I have gone through the provisions of section 94(7) of the Act which read as under: (7) 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. ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 10 5.1.2 According to the provisions of section 94(7) of the Act, if any person purchases units of a mutual fund within three months prior to the record date of dividend and sells any units of mutual funds within a period of nine months from the record date for such dividend, the loss, if any, on such sale of units would be ignored for computing income chargeable to tax to the extent of dividend income received. 5.1.3 In the present case, the undisputed chronology of events are as under: Date Particulars 14.10.2014 Date of purchase 28.01.2015 Dividend of Rs. 1,42,93,175/- earned 25.03.2015 Dividend of Rs. 2,43,80,858/- earned 25.03.2015 Mutual Fund sold It is seen from the above tabular chart that the provisions of section 94(7) are not applicable to the present case, as the units of the fund were purchased on 14.10.2014 i.e. more than 3 months prior from date of declaration of dividend. Therefore, the first conditions related to purchase of units within three months prior to record date is not satisfied. Therefore, it appears that the provisions of dividend stripping under section 94(7) of the Act are not applicable in the instant case. 5.1.4 Further, a perusal of the provisions of section 10(35), which reads as under: Section 10(35) - Any income by way of, (a) income received in respect of the units of a Mutual Fund specified under clause (23D); or (b) income received in respect of units from the Administrator of the specified undertaking; or (c) income received in respect of units from the specified company: Provided that this clause shall not apply to any income arising from transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund, as the case may be. In view of the above, as per the provisions of section 10(35) which clearly speaks that, if an assessee has earned dividend from a mutual fund, the same is exempt under section 10(35) of the Act. The statute does not provide for reclassification of such dividend as capital gain. ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 11 5.1.5 It is noticed from the record that during the course of reassessment proceedings, the appellant has furnished all the relevant documents in respect of purchase & sale of mutual funds in its submissions furnished on various dates & sales also which were not been disputed by the AO at all. It is seen from record that the appellant has submitted the following:- • Mutual fund statement for the period 01.04.2014 to 31.03.2015 • Capital gain statement for the period 01.04.2014 to 31.03.2015 Scrip wise details of Short Term capital Loss (STT paid) and Short Term Capital Gain (Non STT) • • Bank Statements of the assessee for the period 01.04.2014 to 31.03.2015 5.1.6 After going through the above, it is felt that if there was any violation of SEBI guidelines, the said scheme either would have been wound up or restriction would have been imposed on making any new investment in the said scheme by SEBI. However, the said scheme is still continuing as on the present date with no restrictions imposed by SEBI on investing in the said scheme. Relying on the judgment of the Hon’ble Supreme Court, in the case of CIT vs.Walfort Share & Stock Brokers (P.) Ltd. (326 ITR 1), has held that by inserting section 94(7) with effect from 1-4-2002, Parliament has not treated dividend stripping transactions as sham or bogus and that by applying section 94(7) in a case for assessment year(s) falling after 01-04-2002, loss to be ignored would be only to extent of dividend received and not entire loss. Thus, losses over and above amount of dividend received would still be allowed. The relevant extract of the judgment reads as under: \"Para-20 ………. 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 s. 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 year(s) 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 words, 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 ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 12 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. ………. \" 5.1.7 Further, it is noticed that similar view has also been taken by the Hon’ble Jaipur Tribunal in case of Agencies Rajasthan (P.) Ltd. Vs. ITO (109 taxmann.com 139) where during assessment year 2015-16, the assessee company had taken loan of Rs. 50 crore from IIFL. Out of loan amount, the assessee purchased certain units of mutual funds of Rs. 50 crore from JM Balanced Fund and earned dividend of certain amount on same. The assessee after earning dividend, sold the units of mutual fund and had suffered a loss of Rs. 24.04 crores. This loss was set off against capital gain earned by assessee during year from sale of immovable property. The assessee had also claimed the said dividend income as exempt under section 10(33) of the Act. The Assessing Officer observed that appellant had concocted a story in connivance with JM Balanced Fund and IIFL and attempted to prepare a colorable device just to set off capital gain earned on sale of immovable property and also to claim exemption of dividend earned. The loan taken by assessee from IIFL was paid through bank and the assessee had also filed repayment schedule of IIFL. The assessee had also filed copy of mutual fund statement issued by JM Balanced Fund in which purchase of mutual fund was clearly shown. In view of documentary evidence, it was found that lower authorities completely failed to rebut evidences and explanations so filed by agencies so as to conclude that it was a colorable device or any connivance with companies to evade tax by booking loss. The Jaipur Tribunal observed that there was no iota of evidence brought by revenue on record to prove IIFL had indulged in providing bogus capital gain/losses etc. Further, revenue admittedly found that subjected transaction completely falls out of clutches of section 94(7), assessee was entitled to claim set off of said loss against income from longterm capital gain. The relevant extract of the judgment reads as under: “41. It is under this background only, with a view to curb the evasion of such short-term losses, Sec. 94(7) was inserted by the Finance Act, 2001 w.e.f. 01.04.2002, by providing certain minimum period of holding before and after the record date of dividend. Those, not fulfilling the conditions, shall loose the loss to the extent of amount of dividend however, for those not falling in the clutches of the provision, there is absolutely no further provision is made to doubt the claim of the short-term capital loss or the high amount of dividend in any manner whatsoever. The CBDT nowhere ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 13 terms such transaction as sham or Bogus. Therefore, in this case, once the authorities below admittedly found, that subjected transaction completely falls out of the clutches of Sec. 94(7) i.e. the restrictions placed by the legislature, it is beyond one's comprehension as to how they still bent upon to deny the claims made by the assessee. An utter disregard shown by the revenue when the legislature in its wisdom, being fully aware of the fact that some of the assessees might make use of the transactions to their benefit and plan their affair, put some restriction by the prospective amendment by introduction of Section 94(7) w.e.f. 1st April, 2002 but when the case of the assessee do not fall/suffers from those restrictions, it has to be inferred that the assessee could not have been denied that benefit as claimed.” 5.1.8 Considering the decision of the Hon’ble Bombay High Court in the case of Karan Maheshwari Vs. ACIT (WPL 37211 of 2011) wherein the Petitioner sold units of JM Financial Mutual Fund and incurred a short term capital loss. The Petitioner also earned certain dividend income from its investment in JM Financial Mutual Fund. Both the transactions were duly shown in the return of income for AY 2016-17. Thereafter, notice under section 148A(b) of the Act was issued stating that the assessee has received dividend income and claimed fictitious losses in JM Equity Fund. The Hon’ble Bombay High Court set aside the reopening as it was based upon allegations against JM Financial which do not implicate petitioner in any manner. The High Court observed that 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. The relevant extract of the judgement is as under: “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 victimised by the Assessing Officer. 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. Infact in paragraph 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 had 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. It is also trite law that while the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the Income Tax Officer in coming to the belief, the Court can certainly ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 14 examine whether the reasons are relevant and have a bearing on the matter in regard to which the Assessing Officer is required to entertain the belief before he can issue notice under Section 148 of the Act. If there is no rational or intelligible nexus between the reasons and the belief, the exercise undertaken by the Income Tax Officer can be interfered with. 19 In the notice issued under Section 148A(b) of the Act, the Assessing Officer 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. Infact 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 Limited, to the tune of Rs.3,41,12,651/- during the F.Y. 2015-16 relevant to the A.Y. 2016-17 …….”. Therefore, the Assessing Officer 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 Assessing Officer. 20 For all these reasons above, notice dated 20th August 2022 under Section 148A(b) of the Income Tax Act, 1961 (the Act), order dated 30th September 2022 under Section 148A(d) of the Act and notices dated 30th September 2022 and 7th October 2022 under Section 148 of the Act are hereby quashed and set aside….” ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 15 6. In view of the above, it is noticed that there is no evidence that the appellant has indulged actively in a manipulation for which action is taken by SEBI or for that matter any other agency. Since, the appellant is a mere investor, it is squarely covered by the above ruling of jurisdictional High Court. Respectfully, following the above ruling of jurisdictional High Court, the impugned addition of Rs.3,86,74,033/- is hereby deleted. Accordingly, ground nos 3 & 4 of appeal are allowed.” 5. Heard both the sides and perused the material on record. Without reiterating the facts as elaborately discussed above in this order, the assessee had purchased units of JM Mutual Fund referred as JM Balance Fund on 14.12.2014 for Rs. 7 crores. Before us, the ld. Counsel also referred the judicial pronouncement of Hon’ble Bombay High Court in the case of Karan Maheshwari vs ACIT, CC- 8(4), Mumbai WP (L) No. 37211 of 2022 and decision of ITAT Jaipur in the case of Agencies Rajasthan (P) Ltd. vs ITO, Ward-6(2), Jaipur. The assessee has received dividend of Rs. 1,42,93,175/- and Rs. 2,43,80,858/- on 28.01.2015 & 25.03.2015 respectively. The assessee had sold the acquired units of mutual funds on 25.03.2015 for the amount of Rs. 2,58,97,859/- and claimed short term loss of Rs. 3,41,02,141/-. The assessee had claimed dividend income of Rs. 3,86,74,033/- as exempt u/s 10(35) of the Act. However, the AO had disallowed the claim of exemption on the ground that assessee had taken accommodation entries since the JM Financial Fund had manipulated accounting methodology so as to artificially inflate the distributable surplus on the basis of period of investment and declaration of dividend within a short period of investment before selling the units as discussed in this order. We find that ld. CIT(A) has elaborately discussed in the findings as reproduced above in this order that the provisions of section 94(7) for ignoring the loss on ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 16 selling of the units of mutual funds to the extent of dividend income received. 6. We have perused the provisions of section 94(7) of the Income Tax Act and extract of the same is reproduced as under: “(7) 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.” 7. It is clear that as per the provisions of section 94(7) of the Act, if any persons purchase units of mutual funds three month prior to the record date of dividend and sells any units of mutual funds within a period of nine months from the record date for such dividend the loss if any, on such sale of units would be ignored for computing income chargeable to tax to the extent of dividend income received. Since in the case of the assessee the units of the fund was purchased on 14.10.2024 i.e. more than 3 months prior from date of declaration of dividend therefore the provisions of dividend stripping u/s 94(7) of the Act are not applicable. The AO failed to rebut the supporting documents filed by the assessee as discussed in the order of ld. ITA No.4330/Mum/2024 & C.O. No. 191/Mum/2024 Dibya Trading Co. LLP A.Y. 2015-16 17 CIT(A). Looking to the above facts and findings, there is no material on record to take contrary view, therefore, the impugned order of the ld. CIT(A) does not require any interference at our level. Therefore, all the grounds of appeal are rejected. Accordingly, the appeal of the Revenue is dismissed. C.O. No. 191/M/2024 (A.Y. 2015-16) Since we have dismissed the appeal of the Revenue, therefore, the cross-objection filed by the assessee has become infructuous and same is also dismissed. 8. In the result, appeal of the revenue is dismissed and cross- objection of the assessee is also dismissed. Order pronounced in the open court on 02.01.2025. Sd/- Sd/- (SUNIL KUMAR SINGH) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai,Date: 02.01.2025 Biswajit, Sr. P.S. Copy to: 1. The Appellant: 2. The Respondent: 3. The CIT, 4. The DR //True Copy// [ By Order Assistant Registrar ITAT, Mumbai Benches, Mumbai "