ITAT Mumbai Quashes Reassessment Over Alleged Mutual Fund Dividend Manipulation

Background

The Mumbai Bench of the Income Tax Appellate Tribunal set aside a high-value reassessment against taxpayer Ramesh Purshottam Modi for Assessment Year 2015–16, deleting an addition of ₹39.53 crore linked to alleged dividend manipulation in a JM Mutual Fund scheme. The Tribunal held that the reopening of assessment was legally unsustainable and that the substantive addition treating dividend income as unexplained cash credit could not stand on merits. The reassessment was initiated years after a scrutiny assessment under section 143(3), based on information from the Investigation Wing alleging a pre-planned strategy of investing before dividend declaration, earning exempt dividend, and booking short-term capital loss on redemption. The Assessing Officer treated the dividend as fictitious and made a net addition under section 68 read with section 115BBE.

Change of Opinion and Merits Both Go Against Revenue

The Tribunal found that the mutual fund investments, dividend income, and redemptions had already been examined during the original scrutiny, and there was no failure by the assessee to disclose material facts. As the reopening occurred beyond four years, it was barred by the proviso to section 147 and amounted to a change of opinion. The Bench also noted a fatal mismatch between the reasons recorded for reopening, which referred to alleged fictitious losses, and the final addition, which targeted dividend income. Relying on settled law, the Tribunal held that reassessment cannot survive when the very ground for reopening fails. On merits, the Tribunal ruled that once purchase and redemption transactions were accepted as genuine and loss was partly allowed, the dividend from the same investment could not be selectively branded fictitious. Dividend from a SEBI-regulated mutual fund, received through banking channels, could not be treated as unexplained cash credit in the absence of evidence of collusion or sham. The reassessment and the addition were therefore quashed in full.