Genuine Mutual Fund Transactions with Records Cannot Be Disallowed | ITAT

Case Details: Deputy Commissioner of Income-tax v. CMS Computers Ltd - [2025] 177 taxmann.com 669 (Mumbai - Trib.) 

Judiciary and Counsel Details

• Amit Shukla, Judicial Member
•  Girish Agrawal, Accountant Member

Facts of the Case

Assessee was a limited company. It filed its return of income declaring a total income of Rs. 15.01 crores. The return was processed under section 143(3), determining total income at Rs. 15.53 crores. Subsequently, based on information arising from a survey conducted in the case of JM Financial Asset Management Ltd., as well as a survey at the assessee’s premises, the case was reopened under Section 147.

During the survey of JM Financial Asset Management Ltd., it was found that the JM Balanced Fund had employed a manipulated accounting methodology. It was alleged that the scheme was designed to enable investors to receive tax-free dividends and simultaneously generate fictitious short-term capital losses for set-off against taxable capital gains.

The Assessing Officer (AO) contended that the assessee claimed fictitious short-term capital loss along with the claim of dividend income. The assessee was well aware of the nuances of the scheme and knowingly and purposefully participated in the sham scheme solely to claim a fictitious loss. AO disallowed the claim of short-term capital loss and made additions to the income of the assessee.

On appeal, CIT(A) deleted the additions made by AO, and the matter reached the Mumbai Tribunal.

Tribunal Held

The Tribunal held that the assessee was not an occasional or isolated participant in the mutual fund market. It was a regular and consistent investor in shares, securities, and mutual funds. The assessee also invested in many other mutual funds. This showed that the investment in the JM financial fund was not an isolated transaction. The fund was an open-ended, SEBI-approved mutual fund scheme. Such a scheme was available to the general investing public, and units could be purchased or redeemed at the prevailing NAV on any business day. During the relevant period, the scheme posted an overall annual return of 11.51% for FY 2014-15, slightly outperforming its benchmark of 11.33%.

There was no material brought on record to suggest that SEBI had suspended, penalised, or debarred this scheme during or after the relevant period. In the absence of any regulatory censure or penal action, it was unsafe to characterise the scheme as inherently sham. It is trite law that suspicion, however strong, cannot take the place of proof.

The burden lies squarely upon the Revenue to establish, by direct, cogent, and credible evidence, that a transaction is colourable or devoid of commercial substance. In the instant case, that burden has not been discharged and the assessee’s claim of short-term capital loss was to be allowed.

List of Cases Reviewed

• CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 233 CTR 42/326 ITR 1/192 Taxman 211 (SC) (para 22)
•  Goldiam International Ltd. v. DCIT [IT Appeal No. No.3218(Mum) of 2023, dated 05-04-2024] (para 23)
• Dy.CIT v. Rajesh Manhar Bhansali Gem & Jewellery Complex [IT Appeal No. 5107(Mum) of 2024, dated 30-4-2025] (para 25) Followed
• CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 233 CTR 42/326 ITR 1/192 Taxman 211 (SC) (para 22)
•  Goldiam International Ltd. v. DCIT [IT Appeal No. No.3218(Mum) of 2023, dated 05-04-2024] (para 23)
• Dy.CIT v. Rajesh Manhar Bhansali Gem & Jewellery Complex [IT Appeal No. 5107(Mum) of 2024, dated 30-4-2025] (para 25) Followed

List of Cases Referred to

• CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 233 CTR 42/326 ITR 1/192 Taxman 211 (SC) (para 10)
• Goldiam International Ltd. v. DCIT [IT Appeal No. No.3218(Mum) of 2023, dated 05-04-2024] (para 23)
• Dy.CIT v. Rajesh Manhar Bhansali Gem & Jewellery Complex [IT Appeal No. 5107(Mum) of 2024, dated 30-4-2025] (para 24).