The Income-Tax Department has said that the Nirmal Bang Group, which is into the business of stock broking through various companies, has indulged in dividend stripping to the tune of Rs 61 crore through various mutual funds. In the process, the department has stumbled upon the massive scale of dividend stripping that has become common in the industry after mutual fund dividends were made tax free in the hands of investors.
Group officials refused to comment on the issue. Illustrating this in an internal report following up on the IT raids on stock brokers, the department said the Nirmal Bang Group invested in the mutual fund units not with a view to capital appreciation but with the sole purpose of creating short-term capital losses. These losses were used to offset profits generated from the sale and purchase of the shares in the accounts of various family members. In fact, the department has named one particular mutual fund which seems to have been used for the purpose of asset stripping.
According to the IT investigations, the track of inflows and outflows into the mutual fund shows that most applications were made on the date when the price of mutual fund units incorporated the cumulative dividend. On this day, the number of units rose to as high as Rs 113.45 crore from Rs 2.33 crore on the immediate preceding working day. This came down to a low of Rs 3.76 crore on the immediate following day, reflecting a shrinkage of 96.46 per cent. The department suspects the investment of Rs 109 crore was made in the mutual fund for only one day.
"It is not difficult to make out that this investment pattern in the mutual fund is not a natural one. This definitely indicates towards a design, the purpose of which appears to be tax avoidance by the unit subscribers who invested for one day only. It may be mentioned that the past record of the same mutual fund when dividend was taxable does not show such abnormal investment on the Trade Date," the report says.
Indeed, asset stripping involves a calculated short-term loss on capital as the net asset value of the units declines immediately after the dividend is paid out.
The department further pointed out that no distinctive numbers of units were allotted by the said mutual fund. The units were simply credited in the ledger account of the assessee with the mutual fund and no actual delivery was made.
Cheques were issued by the investor assessee to the Fund on the Trade Date itself and units were allotted, only on paper, even without realisation of the application money.
Normally no separate cheques were issued for dividend and the amount was shown to have been reinvested in the units. The whole transaction of allotment of units, distribution of dividend, reinvestment of dividend, repurchase of the ex-dividend units was completed within three days, the IT department notes.
The IT Dept has stated that the assessee has adopted the original cost of acquisition for the purpose of computing short-term capital loss. But a Supreme Court judgment on this issue makes it clear that the acquisition cost of the units may not be the original cost of acquisition, but the original cost reduced by the benefit received by the assessee in the form of dividend which was embedded in the price of original units at the time of application.
The adoption of such "cost acquisition" will bring short-term capital loss of units to almost nil as cost of acquisition and repurchase price will become almost the same.
