I bought mutual fund units, took the dividend the same day and booked a short-term loss. The department calls it fictitious and has reopened. Can it?
Not on that material alone. The Gujarat High Court quashed a s.148A(d) order and s.148 notice where the reopening rested on an allegation that the fund house had manipulated its distributable surplus: purchasing units and earning dividend on the same day is not impermissible, and allegations against the fund manager cannot be extended to the investor without something showing he knowingly participated.
Decided by the High Court (Bhargav D. Karia J and Pranav Trivedi J (oral judgment by Bhargav D. Karia J)) on 2025-06-24, reported as R/Special Civil Application No. 8350 of 2022 (High Court of Gujarat at Ahmedabad). It bears on section 148, section 148A, section 148A(b), section 148A(d), section 10(35), section 14A, section 94(7) of the Income Tax Act 1961, in Reassessment & Reopening, Capital Gains Exemptions, Capital Gains and Evidence & Burden of Proof matters.
This is the current form of the dividend-stripping dispute. The department no longer argues that the loss is not real; it issues a s.148A notice built on a survey at the asset management company and a list of investors, and calls the loss fictitious. The Court's answer is the reassessment answer, not the s.94 answer: there must be a live link between the information and the belief, and allegations against a third party do not implicate the assessee. Two limits should be stated to a client. The relief here was jurisdictional, so it says nothing about whether a stripping loss is allowable on merits in a year when s.94(7) applies. And the facts were favourable — the units were held for about a year before sale, so the record-date holding condition in s.94(7) was not in play at all; a client who sold inside the statutory window has a different case. The judgment is also a convenient source for the Supreme Court's reasoning in Walfort, paras 16 and 20 of which it reproduces at length.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The petitioner filed his return for AY 2018-19 on 18 September 2018 offering total income of Rs 1,67,40,840. A show cause notice under s.148A(b) was issued on 23 March 2022 stating that he had shown a fictitious short-term capital loss of Rs 20,56,835 and had shown dividend of Rs 1,36,79,785 as exempt under s.10(35), that the dividend was not eligible for the exemption and the loss not eligible for set off, being generated on a sham transaction. He replied on 28 March 2022 contending that no income had escaped assessment, that the statement recorded during a survey at J.M. Financial Management Ltd. and relied on in the notice had never been furnished to him, that the approval for issue of the notice was mechanical, and that the short-term capital loss had arisen on equity transactions and not from the J.M. Balanced Fund. The Assessing Officer nonetheless passed an order under s.148A(d) on 8 April 2022 and issued the s.148 notice. The petitioner had invested in mutual funds on 22 March 2018 and received the dividend the same day, selling the units after one year in March 2019.
The Assessing Officer could not have assumed jurisdiction to reopen (para 10). In the operative paragraph the Court quashed and set aside 'the impugned notice dated 08.4.2022 and the assessment order dated 08.04.2022' — the order there described as the assessment order being the order passed under s.148A(d) on that date — and made the rule absolute to that extent, with no order as to costs.
On the material, the petitioner had purchased the mutual funds on 22 March 2018 and earned dividend on the same day, which the Court held cannot be said to be impermissible, and the information that a sham transaction had been entered into by J.M. Financial could not be extended to the petitioner, in view of the Supreme Court in Walfort Share and Stock Brokers (para 8). The Court reproduced paras 16 and 20 of Walfort, in which the Supreme Court held that where there was a genuine sale and receipt of dividend, use of the exemption cannot be called abuse of law, that even a pre-planned transaction is not thereby impeachable, that for years before 1 April 2002 losses pertaining to exempt income cannot be disallowed, and that after that date the loss to be ignored under s.94(7) is only to the extent of the dividend received and not the entire loss — from which it follows that Parliament has not treated dividend stripping as sham. The Court then followed its own decision in Pranav Ramesh Parikh and the Bombay High Court in Karan Maheshwari, in which it was held that there was nothing in the notice to indicate the basis on which the loss was said to be fictitious, that the reasons for the belief must have a rational connection and a live link with the information, and that allegations against the fund house do not implicate the investor (para 9).
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 the aforesaid decisions, the impugned order as well as well as the assessment orders are not tenable in the eyes of law.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNot on that material alone. The Gujarat High Court quashed a s.148A(d) order and s.148 notice where the reopening rested on an allegation that the fund house had manipulated its distributable surplus: purchasing units and earning dividend on the same day is not impermissible, and allegations against the fund manager cannot be extended to the investor without something showing he knowingly participated. This was decided by the High Court (Bhargav D. Karia J and Pranav Trivedi J (oral judgment by Bhargav D. Karia J)) and bears on section 148, section 148A, section 148A(b), section 148A(d), section 10(35), section 14A, section 94(7) of the Income Tax Act 1961. It is reported as R/Special Civil Application No. 8350 of 2022 (High Court of Gujarat at Ahmedabad). This is the current form of the dividend-stripping dispute. The department no longer argues that the loss is not real; it issues a s.148A notice built on a survey at the asset management company and a list of investors, and calls the loss fictitious. The Court's answer is the reassessment answer, not the s.94 answer: there must be a live link between the information and the belief, and allegations against a third party do not implicate the assessee. Two limits should be stated to a client. The relief here was jurisdictional, so it says nothing about whether a stripping loss is allowable on merits in a year when s.94(7) applies. And the facts were favourable — the units were held for about a year before sale, so the record-date holding condition in s.94(7) was not in play at all; a client who sold inside the statutory window has a different case. The judgment is also a convenient source for the Supreme Court's reasoning in Walfort, paras 16 and 20 of which it reproduces at length. If it applies to you, the first step is this: Ask for the information and the statement relied on. Here the assessee's ground that the survey statement recorded at the asset management company had never been furnished was part of the reply and part of the record.
The petitioner filed his return for AY 2018-19 on 18 September 2018 offering total income of Rs 1,67,40,840. A show cause notice under s.148A(b) was issued on 23 March 2022 stating that he had shown a fictitious short-term capital loss of Rs 20,56,835 and had shown dividend of Rs 1,36,79,785 as exempt under s.10(35), that the dividend was not eligible for the exemption and the loss not eligible for set off, being generated on a sham transaction. He replied on 28 March 2022 contending that no income had escaped assessment, that the statement recorded during a survey at J.M. Financial Management Ltd. and relied on in the notice had never been furnished to him, that the approval for issue of the notice was mechanical, and that the short-term capital loss had arisen on equity transactions and not from the J.M. Balanced Fund. The Assessing Officer nonetheless passed an order under s.148A(d) on 8 April 2022 and issued the s.148 notice. The petitioner had invested in mutual funds on 22 March 2018 and received the dividend the same day, selling the units after one year in March 2019. The matter was decided on 2025-06-24 by the High Court (Bhargav D. Karia J and Pranav Trivedi J (oral judgment by Bhargav D. Karia J)). On those facts the High Court held as follows. The Assessing Officer could not have assumed jurisdiction to reopen (para 10). In the operative paragraph the Court quashed and set aside 'the impugned notice dated 08.4.2022 and the assessment order dated 08.04.2022' — the order there described as the assessment order being the order passed under s.148A(d) on that date — and made the rule absolute to that extent, with no order as to costs.
On the material, the petitioner had purchased the mutual funds on 22 March 2018 and earned dividend on the same day, which the Court held cannot be said to be impermissible, and the information that a sham transaction had been entered into by J.M. Financial could not be extended to the petitioner, in view of the Supreme Court in Walfort Share and Stock Brokers (para 8). The Court reproduced paras 16 and 20 of Walfort, in which the Supreme Court held that where there was a genuine sale and receipt of dividend, use of the exemption cannot be called abuse of law, that even a pre-planned transaction is not thereby impeachable, that for years before 1 April 2002 losses pertaining to exempt income cannot be disallowed, and that after that date the loss to be ignored under s.94(7) is only to the extent of the dividend received and not the entire loss — from which it follows that Parliament has not treated dividend stripping as sham. The Court then followed its own decision in Pranav Ramesh Parikh and the Bombay High Court in Karan Maheshwari, in which it was held that there was nothing in the notice to indicate the basis on which the loss was said to be fictitious, that the reasons for the belief must have a rational connection and a live link with the information, and that allegations against the fund house do not implicate the investor (para 9). In the words reproduced by the source cited on this page: "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 the aforesaid decisions, the impugned order as well as well as the assessment orders are not tenable in the eyes of law." The decision followed or applied Commissioner of Income-Tax v. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1 (SC) — applied; Karan Maheshwari (Bombay High Court) — followed; Pranav Ramesh Parikh (Gujarat High Court) — followed.
It was decided by the High Court on 2025-06-24 and is reported as R/Special Civil Application No. 8350 of 2022 (High Court of Gujarat at Ahmedabad). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 148, section 148A, section 148A(b), section 148A(d), section 10(35), section 14A, section 94(7), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Assessing Officer could not have assumed jurisdiction to reopen (para 10). In the operative paragraph the Court quashed and set aside 'the impugned notice dated 08.4.2022 and the assessment order dated 08.04.2022' — the order there described as the assessment order being the order passed under s.148A(d) on that date — and made the rule absolute to that extent, with no order as to costs. It arises in Reassessment & Reopening, Capital Gains Exemptions, Capital Gains and Evidence & Burden of Proof matters, on section 148, section 148A, section 148A(b), section 148A(d), section 10(35), section 14A, section 94(7) of the Income Tax Act 1961, and was decided by Bhargav D. Karia J and Pranav Trivedi J (oral judgment by Bhargav D. Karia J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Set out the purchase and sale dates against the record date. If the units were held beyond the statutory period after the record date, s.94(7) is not engaged and the notice cannot be defended on it. Reconcile the loss actually claimed with the scrips it arose on — in this case the computation showed the short-term capital loss came from equity transactions and not from the fund named in the notice. Take the point that allegations against the fund house are not information against the investor, and put the live-link requirement squarely in the reply under s.148A(b) rather than saving it for writ.
Validity check could not be completed. Validity check could not be completed. The judgment is recent and no search for later treatment or for a Special Leave Petition was carried out. It is a decision on the assumption of jurisdiction under s.148A and s.148 and decides nothing on the merits of a dividend-stripping loss in a year in which s.94(7) is engaged on the record dates; a reader whose units were sold inside the statutory period after the record date is not covered by it. The Supreme Court's reasoning in Walfort, which it applies, remains the governing authority on whether a stripping loss is expenditure for s.14A. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read from indiankanoon ?type=print in what reads as the original wording, with the neutral-citation header and the counsel block intact; para 10 was re-confirmed verbatim through /docfragment/ and is reproduced here including the printed repetition 'as well as well as'. The numbering as printed jumps — the transcription begins at para 2 and paragraphs are numbered 5.1, 5.3, 5.4, 5.6, 5.7 — so intermediate paragraphs exist that were not read. The figures in para 5.7 and para 8 do not agree: para 5.7 records a purchase of mutual funds of Rs 6.5 crores while para 8 records a purchase of Rs 3,35,00,000; the dividend figure of Rs 1,36,79,785 is consistent in both. The judgment quotes at length from the Bombay High Court in Karan Maheshwari and from this Court's decision in Pranav Ramesh Parikh, and paragraph numbers 17, 18 and 19 appearing in the middle of the judgment are the paragraph numbers of that quoted decision, not of this one. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Assessing Officer could not have assumed jurisdiction to reopen (para 10). In the operative paragraph the Court quashed and set aside 'the impugned notice dated 08.4.2022 and the assessment order dated 08.04.2022' — the order there described as the assessment order being the order passed under s.148A(d) on that date — and made the rule absolute to that extent, with no order as to costs.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
My return was only processed under 143(1). Does that stop the department reopening it later?
How much am I actually required to disclose — and can they reopen because the officer drew the wrong conclusion?
The sanctioning authority just wrote 'yes' and signed. Is that a sanction?
A reassessment was done in between. Does the two-year clock for s.263 restart from it?