Gujarat High Court

Mukundbhai Manubhai Patel vs Assistant Commissioner Of Income Tax, ... on 24 June, 2025

Author: Bhargav D. Karia

Bench: Bhargav D. Karia

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                            C/SCA/8350/2022                                       JUDGMENT DATED: 24/06/2025

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                                     IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                                       R/SPECIAL CIVIL APPLICATION NO. 8350 of 2022


                       FOR APPROVAL AND SIGNATURE:


                       HONOURABLE MR. JUSTICE BHARGAV D. KARIA
                                  and
                       HONOURABLE MR. JUSTICE PRANAV TRIVEDI

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                                      Approved for Reporting                No   Yes
                                                                             
                       ==================================================
                                           MUKUNDBHAI MANUBHAI PATEL
                                                       Versus
                             ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1,
                                                     VADODARA
                       ==================================================
                       Appearance:
                       MR SN SOPARKAR SR. ADVOCATE with MR B S SOPARKAR(6851) for the
                       Petitioner(s) No. 1
                       KARAN G SANGHANI(7945) for the Respondent(s) No. 1
                       ==================================================

                          CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
                                            and
                                HONOURABLE MR. JUSTICE PRANAV TRIVEDI

                       Date : 24/06/2025

                       ORAL JUDGMENT

(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)

Heard learned Senior Advocate Mr. S.N.

Soparkar with Mr. B.S. Soparkar for the

petitioner and learned Senior Standing Counsel

Mr. Karan Sanghani for the respondent.

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2. By this petition under Articles 226/227 of

the Constitution of India, the petitioner has

challenged the notice dated 08.04.2022 issued

under Section 148 of the Income Tax Act, 1961

(For Short "the Act") as well as the order dated

08.04.2022 passed under Section 148A(d) of the

Act.

3. Having regard to the controversy arising in

the petition, which is in a narrow compass, with

the consent of the learned advocates for the

parties, the matter is taken up for hearing.

4. Rule returnable forthwith. Learned Senior

Standing Counsel Mr. Karan Sanghani waives

service notice of rule on behalf of the

respondent.

5. The brief facts of the case are as under :-

5.1. The petitioner filed Return of Income for

Assessment Year 2018-19 on 18.09.2018 offering

total income at Rs.1,67,40,840/-. The impugned

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show cause notice under Section 148A(b) of the

Act was issued on 23.03.2022 by the Respondent

along with the details of information on the

basis of which it was believed that the income

chargeable to tax has escaped the assessment for

the year under consideration. The petitioner

filed detailed reply on 28.03.2022 which was

uploaded on 30.03.2022 indicating that there is

no income which has escaped the assessment and

prayed for dropping the reopening of the

proceedings. The respondent Assessing Officer

passed the impugned order dated 08.04.2022 under

Section 148A(d) of the Act on arriving at a

conclusion that it is a fit case to reopen the

assessment along with the notice under Section

148 of the Act. The reasons for reopening as

stated in the notice under Section 148A(b) of the

Act reads as under :-

"2. A survey action under Section 133A of the I.T. Act, 1961 in the case of M/s. J.M. Financial Asset Management Limited ("JM Financial") situated at 7th and 8th Floor, Appa Saheb Marathe Marg, Cynergy,

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Prabhadevi, Mumbai was conducted by DDIT, Unit 3(1), Mumbai on 15.02.2021. 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 process, the SEBI guidelines have been flouted by the J M Mutual Fund by classifying a portion of capital as distributable surplus and thereafter artificial payout to the investor in the form of dividend.

3. Although dividend received by the unit holders from the equity based mutual fund is exempt from taxation under Section 10 (35) of the I.T. Act, 1961, in this case, provisions of this section cannot be applied as said provisions are for genuine investments in market regulated mutual funds. In the case of assessee under reference, the dividend received is 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. As such, 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. Such dividend needs to be reduced from the cost of investment and accordingly capital loss should also be reduced.

The conduct of assessee proves without doubt that he was well aware of the

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nuances of the scheme and knowingly and purposefully indulged in the sham scheme just to avail fictitious loss.

Sham nature of dividend declared :

4. The SEBI vide its circular No. SEBI/IMD/CIR No. 18/198647/2010 dated March 15, 2010, has instructed fund houses as below .

"3. Non availability of Unit Premium Reserve for dividend distribution

i. The Ninth and Eleventh Schedule of SEBI (Mutual Funds) Regulations provide the accounting policies to be followed for determining distributable surplus and accounting the sale and repurchase of units in the books of the Mutual Fund. In this regard, the format for Scheme Balance Sheet (including Abridged) provides for disclosure of Unit Premium Reserve.

ii. It is clear from the above regulatory requirements that the Unit Premium Reserve, which is part of the sales price of units that is not attributable to realized gains, cannot be used to pay dividend. However, it is observed that some Mutual Funds are using Unit Premium Reserve for distribution of dividend. It is therefore reiterated that :

1. When units of an open-ended scheme are sold, and sale price is higher than face value of the unit, part of sale proceeds that represents unrealized gains shall be credited to

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a separate account (Unit Premium Reserve) and shall be treated at par with unit capital and the same shall not be utilized for the determination of distributable surplus.

2.When units of an open-ended scheme are sold, and sale price is less than face value of the unit, the difference between the sale price and face value shall be debited to distributable reserves and the dividend can be declared only when distributable reserves become positive after adjusting the amount debited to reserves as per para 2(a) (ix) of Eleventh Schedule of SEBI (Mutual Funds) Regulations."

5. Thus, SEBI clearly says 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 realising 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).

Chronology of receipt of funds and distributable surplus in the scheme.

6.1. The Plan started in with AUM of

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Rs.5,000/- on 23.09.2014.

6.2. As on 15.03.2018, the AUM of the Plan is just Rs.6388 only. Needless to mention that said investments have 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. So, taking the advantage of low AUM, NAV of the Plan has been rigged and appreciated to Rs.32.5.

6.3. During the period 16.03.2018 to 22.03.2018, the mutual fund Plan, received an inflow of Rs.2673.96 crores, i.e. in a span of just 6 days. The closing AUM as on 22.03.2018 stood at Rs.2,660.95 crores.

6.4. Further on 22.03.2018 a dividend of Rs.13.00 per unit has been distributed to the unit holders i.e 40% of the inflows received has been distributed back as dividend. Aggregate amount of dividend distributed on 22.03.2018 is to the tune of Rs.1081.14 crores.

6.5. After the payout of dividend, the unit value decreases from Rs.32.5 to Rs.22.34.

6.6. In the process, the SEBI guidelines regarding crediting portion of capital into unit premium reserve has been violated."

5.2. It was further stated in the impugned

notice that during course of survey actions

statements of key persons were recorded and in

order to reduce the tax liability, the investors

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entered into the sham transactions and received

dividends and short term capital loss and as a

result, such dividend would not be eligible for

deduction under Section 10(35) of the Act.

5.3. So far as the petitioner is concerned,

the notice reads applicable for the Assessment

Year 2018-19, the impugned notice reads as

under :-

"12. On the basis of information and after conducting necessary enquiry, it is observed that the assessee has shown fictitious short term capital loss of Rs.20,56,835/- in ITR and has also shown dividend exempt Under section 10(35) as Rs.1,36,79,785/- in ITR. Moreover, the assessee has claimed setoff against the fictitious loss in ITR. The dividend is not eligible for deduction under Section 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 transaction. Therefore, the undersigned is satisfied that an opportunity of being heard as per provisions of section 148A(b) should be given to assessee by serving a notice to show cause as to why a notice should not be issued under Section 148 of the IT Act for the issue of claim of fictitious short term capital loss which suggests escapement of income for the Assessment Year 2018-19."

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5.4. The petitioner in response to the notice

filed the reply contending inter alia that the

statement relied on for issuing notice, which was

recorded during the survey action at J.M.

Financial Management Ltd., were never provided to

the petitioner and, therefore, the notice is bad

and the same is required to be dropped. It was

further contended that the Principal Commissioner

of Income Tax has granted mechanical approval for

issuance of the notice more particularly, when

there is no fictitious loss as stated of

Rs.20,56,835/- mentioned in the notice and as

such, loss has arisen on account of equity

transaction carried out by the petitioner during

the year under consideration and not from the

J.M. Balanced Fund.

5.5. The respondent - Assessing Officer

however considering the information received as

well as the reply filed by the petitioner passed

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the order dated 08.04.2022 on the ground that the

petitioner has availed the fictitious loss of

Rs.20,56,835/- and sham nature of dividend to the

tune of Rs.1,36,79,785/- which has resulted into

the escapement of the income and it was found

that it is a fit case to reopen the assessment.

5.6. Learned Senior Advocate Mr. Soparkar for

the petitioner submitted that the respondent

Assessing Officer has committed an error in

reaching to prima facie conclusion that it is a

fit case to reopen the assessment more

particularly, when the computation of income

clearly shows that the short term capital loss

suffered by the petitioner is arising out of the

equity transactions. Learned Senior Advocate Mr.

Soparkar invited the attention of the Court to

the computation of income placed on record along

with additional affidavit filed on 16.06.2025 by

the petitioner to point out that the statement of

such short term capital loss does not refer to

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the J.M. Balance Fund. It was further submitted

that the accounts statement from J.M. Financial

placed on record along with the additional

affidavit clearly shows that the petitioner has

purchased the mutual funds of Rs.2 Crore on

22.03.2018 and received the dividend of

Rs.8,106,936.73.

5.7. It is further submitted that the

petitioner has purchased mutual funds of Rs.6.5

crores and dividend of Rs.1,36,79,785/- which is

claimed as exemption under Section 10(35) of the

Act. It was submitted that the petitioner has

made investment on 22.03.2018 and has received

the dividend on the same day which is permissible

in law. It was also pointed out that the

petitioner has sold the mutual funds after one

year in the month of March, 2019. It was

submitted that as held by the Hon'ble Apex Court

in the case of Commissioner of Income-Tax v.

Walfort Share and Stock Brokers P. Ltd., reported

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in (2010) 326 ITR 1 (SC) wherein the decision of

the Bombay High Court is affirmed by holding in

similar facts that the petitioner assessee is

entitled to claim exemption under Section 14A of

the Act for the dividend earned on the same day

of making investment, which cannot be said to be

"abuse of law". It was further held that even

assuming that the transaction was preplanned,

there was nothing to impeach the genuineness of

the transactions.

5.8. It was further submitted that after the

decision of the Hon'ble Apex Court the provisions

of Section 94(7) of the Act were brought in the

statute so as to provide the time period for sale

of the units which are purchased for the purpose

of claiming the exemption of dividend after a

period of three months so that the assessee may

not get the double benefit of exemption of the

dividend as well as the loss on sale of such

units within short time. It was therefore,

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submitted that the reasons recorded in the

impugned notice as well as the impugned order

passed under Section 148A(d) of the Act are not

tenable as there is no escapement of the income.

6. Reliance was also placed on the decision of

this Court in the case of Pranav Ramesh Parikh v.

Deputy Commissioner of Income-Tax rendered in

Special Civil Application No. 8349 of 2022 dated

25.03.2025, wherein this Court after following

the decision of the Bombay High Court in case of

Karan Maheshwari v. Assistant Commissioner of

Income-Tax & Ors., rendered in Writ Petition (L)

No. 37211 of 2022 dated 08.03.2024, wherein in

similar facts, the Bombay High Court quashed and

set aside the orders passed in case of the said

petitioner along with the notice of reopening

issued under Section 148 of the Act.

7. On the other hand, learned Senior Standing

Counsel Mr. Karan Sanghani for the respondent

submitted that the impugned notice as well as the

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order are based on the information provided by

the SEBI in relation to the transactions of the

J.M. Financial Limited. Learned Senior Standing

Counsel Mr. Karan Sanghani invited attention of

the Court to the details of the chronology of

receipt of funds and distributable surplus in the

scheme of JM Financial which is also reproduced

in the notice to demonstrate that during the

period from 16.03.2018 to 23.03.2018 the mutual

fund plan received an inflow of Rs.2673.96 crores

i.e in a span of just 6 days and the closing AUM

as on 22.03.2018 stood at Rs.2,660.95 crores and

on the same day dividend of Rs.13.00 per unit was

been distributed to the unit holders i.e. 40% of

the inflow received has been distributed back as

dividend and the aggregate amount of dividend

distributed on 22.03.2018 was to the tune of

Rs.1081.14 crores. It was pointed out that after

the payout of dividend, the unit value decreases

from Rs.32.5/- to 22.34. It was therefore,

submitted that the petitioner has been

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beneficiary of such sham transactions carried out

by the JM Financial and, therefore, the

petitioner is not eligible for the exemption of

the dividend earned on the basis of such facts

which requires further scrutiny and reassessment

proceedings are therefore justified.

7.1. It was further submitted that the facts

of the present case are different than that of

the case of the Pranav Ramesh Parikh (supra),

wherein this Court has quashed and set aside the

notice for reopening as in that case the only

issue was with regard to the short term loss

which was not earned from the transaction with

the J.M. Financial. It was submitted that in the

facts of the present case, when the petitioner

has invested the amount of Rs.3,35,00,000 and on

the same day earned dividend of Rs.1.36 crores

and in view of the fact that such dividend from

the sham transactions entered into by the J.M

Financial is not entitled to the exemption under

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Section 10(35) of the Act. It was, therefore,

submitted that no interference may be made while

exercising extraordinary jurisdiction under

Articles 226/227 of the Constitution of India.

8. Having heard the learned advocates for the

respective parties and on perusal of the material

placed on record, it appears that the petitioner

has purchased the mutual funds of J M. Financial

on 22.03.2018 for Rs.3,35,00,000 and has earned

dividends of Rs.1.36 crores on the same day,

which cannot be said to be impermissible and the

information which in possession of the Assessing

Officer to the effect that there was an

allegation of sham transaction entered by the

J.M. Financial cannot be extended to the

petitioner in view of the decision of the Apex

Court in the case of Walfort Share and Stock

Brokers P. Ltd. (supra) wherein it is held by the

Hon'ble Apex Court as under :-

"16. The main issue involved in this batch of cases is-whether in dividend stripping

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transaction (alleged to be colourable device by the Department) the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act? According to the Department, the differential amount between the purchase and sale price of the units constituted "expenditure incurred" by the assessee for earning tax-free income, hence, liable to be disallowed under Section 14A. As a result of the dividend pay-out, according to the Department, the NAV of the mutual fund, which was Rs. 17.23 per unit on the record date, fell to Rs. 13.23 on 27.3.2000 (the next trading date) and, thus, Rs. 4/- per unit, according to the Department, constituted "expenditure incurred" in terms of Section 14A of the Act. In its return, the assessee, thus, claimed the dividend received as exempt under Section 10(33) and also claimed set- off for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage.

20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre- meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have

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two sets of cases before us. The lead matter covers assessment years before insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. 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 Section 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. v. Commercial Tax Officer [154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [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 1.4.2002, losses pertaining to exempted income cannot be disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of Section 94(7). The object of Section 94(7) is to curb the short term losses. Applying Section 94(7) in a case for the assessment year(s) falling after 1.4.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other

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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 1.4.2002, losses over and above the dividend received will not be ignored under Section 94(7). If the argument of the Department is to be accepted, it would mean that before 1.4.2002 the entire loss would be disallowed as not genuine but, after 1.4.2002, a part of it would be allowable under Section 94(7) which cannot be the object of Section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, Section 14A was inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by SEBI for last couple of years. If Section 94(7) would have been brought into effect from 1.4.1962, as in the case of Section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to Section 94(7) only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations

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given by us to Sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why Section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002."

9. This Court in case of Pranav Ramesh Parikh

(supra) in similar facts so far as the claim of

short term capital loss is concerned has followed

the decision of the Hon'ble Bombay High Court in

the case of Karan Maheshwari(supra) wherein it is

held as under:-

"17. In the notice issued under Section 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

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taxes through colourable devices is not frowned upon even by the judgment of the Apex Court in McDowell & Co. Ltd. V/s. Commercial Tax Officer reported in 1985 (154) ITR 148 (SC). Paragraphs 18 and 20 of the judgment of the Apex Court in Commissioner of Income Tax, Mumbai V/s.

Walfort Share & Stock Brokers (P). Ltd. reported in (2010) 192 Taxman 211(SC) read as under :

18. The next point which arises for determination is 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 Rs. 1,82,12,862 on the sale of 40% tax- free units of the mutual fund. The AO held that the assessee had purposely and in a planned manner entered into a pre- meditated transaction of buying and selling units yielding exempted income with the full knowledge about the guaranteed fall in the market value of the units and the payment of tax-free dividend, hence, disallowance of the loss.

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20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner

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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 Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. 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 Section 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. v. Commercial Tax Officer [154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [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 1.4.2002, losses pertaining to exempted income cannot be

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disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of Section 94(7). The object of Section 94(7) is to curb the short term losses. Applying Section 94(7) in a case for the assessment year(s) falling after 1.4.2002, 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 1.4.2002, losses over and above the dividend received will not be ignored under Section 94(7). If the argument of the Department is to be accepted, it would mean that before 1.4.2002 the entire loss would be disallowed as not genuine but, after 1.4.2002, a part of it would be allowable under Section 94(7) which cannot be the object of Section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, Section 14A was inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years

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in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by SEBI for last couple of years. If Section 94(7) would have been brought into effect from 1.4.1962, as in the case of Section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to Section 94(7) only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to Sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why Section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while Section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002.

(emphasis supplied)

18. It is settled law that the reasons for the formation of the belief that there has been escapement of income must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and his view that there has been escapement of income of the assessee from assessment in the particular year. It is settled law that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched which would suggest escapement of the income of the assessee from assessment. The powers of the Income Tax

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Officer to reopen assessment, though wide, are not plenary. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The live link or close nexus should be there between the information before the Income Tax Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income of the assessee. The relevant paragraphs of Income Tax Officer V/s. Lakhmani Mewal Das4 read as under :

As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income- tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words

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"definite information" which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action cannot be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income- tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi- judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income- tax Officer in the present case and the

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belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs.

(emphasis supplied)

It is also trite law that while the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the Income Tax Officer in coming to the belief,the Court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which the 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

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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.

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This also indicates non application of mind by the Assessing Officer."

10. Considering the aforesaid decisions of

the Hon'ble Apex Court in the case of Walfort

Share & Stock Brokers (P). Ltd.(supra) and the

decision of the Bombay High Court in case of

Karan Maheshwari(supra), we are of the opinion

that the respondent officer could not have

assumed jurisdiction for reopening the assessment

and, therefore, adopting the same reasons as per