Apex court upholds Bombay HC order on dividend-stripping 

The Supreme Court has upheld the Bombay High Court order which had said that brokers were entitled to have their losses accrued due to dividend strippings from mutual funds (MFs) set off against income from other transanctions, reports Our Bureau. A bench headed by Chief Justice SH Kapadia on Tuesday dismissed appeals of revenue challenging the high court order on the issue of MF dividend- strippings. These cases were relating to the assessment years prior to 2002-03.Dividend stripping happens when a mutual fund declares a tax-free dividend for unit-holders who, after taking the dividend, exit the scheme. The net asset value of the scheme declines and unit-holders are able to show a capital loss. As a result, the exchequer misses a chance to tax capital gains. However, the unit-holder gets the dividend. According to the Income Tax Department, these agents resort to dividend stripping as they know that after the dividend is declared, the net asset value (NAV) of the MF decreases.

Economic Times, New Delhi, 07-07-2010