ACIT Vs Sabitha Subhash Cipy (ITAT Pune)
Pune ITAT Upholds Exemption Under Section 10(35); Investor Cannot Be Denied Benefit for Alleged Violations by Mutual Fund
Summary: The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) deleting an addition of ₹4,05,34,683 made after denying exemption under Section 10(35) on dividend income received from JM Financial Asset Management Ltd., while the assessee’s cross objections were withdrawn. The Assessing Officer had reopened the assessment, treated the dividend as ineligible for exemption, invoked Section 68, and relied on alleged violations of SEBI regulations by the mutual fund. The CIT(A), after considering the assessee’s submissions, judicial decisions, and the order passed in the assessee’s husband’s identical case, directed deletion of the addition and held that the exemption claimed under Section 10(35) read with Section 10(23D) was allowable. The Tribunal observed that the Revenue could not controvert the findings of the CIT(A) with any new cogent material or information. It upheld the CIT(A)’s order, finding no infirmity in the conclusion that the assessee had rightly claimed exemption under Section 10(35) read with Section 10(23D), dismissed the Revenue’s appeal, and also dismissed the assessee’s cross objections as withdrawn.
The Pune ITAT upheld the order of the CIT(A) deleting an addition of ₹4.05 crore made by the Assessing Officer, holding that the assessee was entitled to exemption under section 10(35) on dividend received from a SEBI-regulated mutual fund. The Revenue had alleged that JM Financial Asset Management Ltd. had manipulated its accounting methodology by distributing dividends out of the Unit Premium Reserve in violation of SEBI regulations, and therefore the dividend was not eligible for exemption.
The Tribunal noted that the entire investment, receipt of dividend and redemption transactions were carried out through normal banking channels, and the assessee had claimed exemption strictly in accordance with section 10(35) read with section 10(23D). It observed that the allegations, if any, were directed against the mutual fund and not against the investor, and there was no evidence to suggest that the assessee had knowingly participated in any sham arrangement to reduce tax liability.
Relying on the Bombay High Court’s decision in Karan Maheshwari, the Tribunal held that mere allegations against the mutual fund cannot automatically disentitle an investor from claiming the statutory exemption, particularly when SEBI had not initiated any adverse action or held that the mutual fund had violated its regulations. The Tribunal also referred to the Supreme Court’s ruling in Kishinchand Chellaram, reiterating that a dividend does not lose its character merely because it is alleged to have been paid out of capital.
Finding no infirmity in the CIT(A)’s detailed reasoning and noting that the Revenue failed to produce any fresh material to dislodge those findings, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the ₹4.05 crore addition. The assessee’s cross-objection was dismissed as withdrawn.
FULL TEXT OF THE ORDER OF ITAT PUNE
The Revenue has filed an appeal against the order of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi passed u/sec 147 r.w.s. 143(3) and 250 of the Income Tax Act and the assessee has also filed Cross Objection and the Revenue has raised the fallowing grounds of appeal as under:-
(1) On the facts and circumstances of the case the Ld.CIT(A) erred in the allowing exemption on dividend income of Rs. 4.05 crs when in fact the dividend income received by the assessee was clearly in nature of dividend paid out of the Unit Premium Reserve.
(2) On the facts and circumstnaces of the case, the Ld.CIT(A) erred in allowing the dividend income of Rs. 4.05 crore eligible for exemption u/s. 10(35) of the Act, without giving any finding on the available surplus with the fund for distribution.
(3) On the facts and circumstances of the case, the Ld.CIT(A) erred inignoring the SEBI Circular No. SEBI/IMD/CIR No. 18/198647/2010 dated 15.102010 wherein 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.
2. At the time of hearing the Ld.AR of the assessee has not pressed the cross objections and made endorsement and the cross objections are treated as withdrawn and dismissed.
