Punjab & Haryana H.C : the investment in units of JM Mutual Fund was merely to get benefit of dividend income under s. 10(33)

High Court Of Punjab & Haryana

Vaneet Jain vs. CIT & Anr.

Sections 2(13), 28(i)

Asst. Year 2001-02

Adarsh Kumar Goel & Rajesh Bindal, JJ.

IT Ref. Nos. 558 & 559 of 2005

7th July, 2006

Counsel Appeared : Akshay Bhan, for the Appellant Order

By the court :

This order will dispose of IT Appeal Nos. 558 and 559 of 2005. The appellant-assessee is aggrieved by disallowance of claim for loss on account of purchase and sale of securities. The AO, the appellate authority as well as the Tribunal held that the investment in units of JM Mutual Fund was merely to get benefit of dividend income under s. 10(33) of the IT Act, 1961 and the assessee was not otherwise engaged in the said business. The assessee projected that loss was incurred in purchasing units of JM Mutual Fund at higher price and selling the same at lower price after it became ex-dividend. It is not disputed that the assessee purchased the units on 7th Feb., 2001 and sold the same on 11th Feb., 2001. The investment of the assessee was only Rs. 5 lacs whereas the units were purchased to the extent of Rs. 1 crore by having the same financed. This clearly shows that there was no genuine business transaction and that no loss as projected was in fact incurred by the assessee. In the concluding part, the Tribunal observed as under : “17. Now, coming to the facts of the case, we find that basic characteristic of the trade mentioned above is lacking in these cases. Both the assessees before us adopted the same modus operandi since the amounts of purchases, sales, net profit, etc. are same. All the transactions were effected through Kotak Mahindra Ltd. Even the purchase of units was also financed by that concern. In fact, it appears to be package deal between assessees and that concern under which tax-free dividend income to the assessees was arranged. They knew in advance about the record date when the dividend was to be declared. That is why, they purchased the units of mutual fund on 9th Feb., 2001, i.e., one day before the record date. On 10th Feb., 2001 (record date), they received dividend of Rs. 29,03,225 and sold the units on 11th Feb., 2001 for Rs. 68,25,806. The units were purchased along with right to receive dividend. The persons in such trade know in advance that prices of units or shares are highest before the record date because of right to receive dividend and the same plunge to the lowest after declaration of dividend. Kotak Mahindra Finance Ltd. are stated to be the financier and broker in mutual fund units and, therefore are in a position to offer package deal to its customer for earning tax-free dividend income. On overall consideration of all the facts, it is clear that there was no intention to earn profits on sale of such units particularly when such units were intended to be sold immediately after declaration of (sic) trade which was lacking in these transaction as there was no possibility of getting higher price on sale of units after declaration of dividend. No prudent businessman would purchase anything with intention to sell at loss. Accordingly, it is held that purchase and sale of units did not constitute an adventure in the nature of trade. Since essential feature of trade has been found to be lacking, it is not necessary for us to deal with other factors pointed out by the assessee’s counsel.

22. In view of the above discussion, it has been held that even assuming that the transaction entered into by assessee constituted an adventure in the nature of trade, there was no loss of Rs. 31,94,194 as contended by assessee’s counsel. The actual loss would be computed as under : Cost of units Sale proceeds of units 68,25,806 Dividend received 29,03,226 B 97,29,032 Actual loss (A-B) 1,50,771 It is this loss of Rs. 1,50,771 which can be adjusted or set off against current year’s income and, if not adjustable, can be carried forward to next year. Had there been any surplus, it would have represented dividend income to the extent it was received. However, since we have already held that no such adventure in the nature of trade was carried on by assessee, the orders of CIT(A)/AO have to be upheld. Since scope of appeal is limited to the determination of the head of income under which loss is to be assessed, no further modification is permissible in law.”

We have heard learned counsel for the appellant and perused the findings recorded by the Tribunal. Result of this single transaction is that the assessee by investing merely a sum of Rs. 5 lacs for five days wanted to enjoy tax-free income of Rs. 29,02,226 (by way of dividend declared by JM Mutual Fund) and further claimed a sum of Rs. 31,94,194 as business loss on account of loss on sale of units. Such manipulations are not permissible under the law. We are unable to hold that the findings recorded by the Tribunal are perverse. Once the said findings are affirmed, no substantial question of law arises in these appeals. The appeals are, accordingly, dismissed.

[Citation : 294 ITR 432]

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