MAGICAL ENTERPRISES L.L.P ,DELHI V. .ACIT CIRCLE-58(1), DELHI

CO 86/DEL/2022

AI Insights

The case revolves around the dispute concerning the tax treatment of profits arising from a buyback scheme and the taxation of long-term capital gains (LTCG) by Magical Enterprises L.L.P. for the assessment year 2016-17. The Revenue challenged the CIT(A)'s decision which had favored the assessee, reversing the AO's additions. The main issues were the applicability of section 10(34A) which provides exemption for certain profits, and the correct tax rate for LTCG under section 112. The Tribunal's decision affirmed the CIT(A)'s findings, dismissing the Revenue's appeal and the assessee's cross-objection.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 23851 (ITAT-DELHI)
• Appeal Type: Cross Objection
• Pronouncement Date: 20-12-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2016-2017
• Other Referred Cases: UOI Vs. Azadi Bachao Andolan, 263 ITR 706
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SURESH GUPTA
• Assessee Lawyers: AMIT SHUKLA; VIRTUE OF
• Keywords: Capital Gains; Sham transactions; Earning of tax free income; Benefit of exemption
• Section: 143(3); 143(2); 250

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “E” BENCH: NEW DELHI BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI VIMAL KUMAR, JUDICIAL MEMBER ITA No.1059/Del/2022 [Assessment Year : 2016-17] ACIT Circle-58(1) Delhi. vs Magical Enterprises L.L.P 80, Kiran Vihar New Delhi-110092. PAN-ABAFM4809Q APPELLANT RESPONDENT C.O.No.-86/Del/2022 [In ITA No.1059/Del/2022] [Assessment Year : 2016-17] Magical Enterprises L.L.P 80, Kiran Vihar New Delhi-110092. PAN-ABAFM4809Q vs ACIT Circle-58(1) Delhi. APPELLANT RESPONDENT Appellant by Shri Amit Shukla, Sr.DR Respondent by Shri Suresh Gupta, CA Date of Hearing 23.10.2024 Date of Pronouncement 20.12.2024 ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal has been filed at the instance of the Revenue seeking to assail the First Appellate order dated 16.03.2022 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] under s. 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 31.12.2018 passed u/s 143(3) of the Act pertaining to assessment year 2016-17. The assessee, in turn, has also filed Cross Objection No. 86/Del/2022 against the Revenue’s Appeal in ITA No.1059/Del/2022 for the Assessment Year 2016-17. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 2 ITA No.1059/Del/2022 [Assessment Year : 2016-17] 2. The Revenue has raised following grounds of appeal:- 1. “On the facts and circumstances of the case, Ld. CIT(A) has erred in allowing the exemption u/s 10(34A) of Rs. 2,34,91,510/- to the assessee on the mere fact that the provisions of section 115QA was introduced w.e.f 01.06.2013 and Section 10(34A) was introduced w.e.f. 01.04.2014 in the Income Tax Act, whereas, the transaction under investigation was completed in F.Y. -2010-11. Whereas, AO has rightly disallowed the exempt income u/s 10(34A) as the transaction of buy back of shares of the unlisted companies i.e. MAG Associates Pvt. Ltd., SAM India Infrastructure Pvt. Ltd., S C Industries Pvt. Ltd., SAM India Builtwell Pvt. Ltd. and Space India Realtech Pvt. Ltd. was completed in the F.Y. 2015-16 and the Company buying back its shares has not paid distribution Tax u/s 115QA, and for claiming exemption u/s 10(34A) it is necessary that distribution tax u/s 115QA should be paid. 2. Ld. CIT(A) has ignored the facts that the partners of Magical Enterprises LLP i.e Sh. Arvind Goel and Nutan Goel and the firm Magical enterprises LLP were the major shareholders of MAG Associates Pvt. Ltd., SAM India Infrastructure Pvt. Ltd., S C Industries Pvt. Ltd., SAM India Builtwell Pvt. Ltd. and Space India Realtech Pvt. Ltd. and the disallowance of aforesaid exemption resulting in addition to the Total income of the assessee by the AO is correct and Justified as the buyback transaction has taken place after introduction of law. 3. On the fact and circumstances, the Ld. CIT(A) has erred in allowing Rs. 1,63,92,653/- as LTCG under section 112 taxed @ 20%, as the AO has proved that the assessee has entered into the sham transactions in order to convert its unaccounted money into legitimate money without paying any tax. Therefore Rs. 1,63,92,653/- should be treated as income from the other sources and taxed @ 30%.” 3. Briefly stated, the assessee filed return of income on 15.09.2016 under s. 139(1) of the Act declaring total income of INR 2,19,10,571/-. The Assessing Officer (“AO”) completed the assessment proceedings under s. 143(3) of the Act by making additions of INR 2,34,91,510/- attributable to disallowance of exemption claimed under s. 10(34A) of the Act. The AO while computing the assessed income also treated Long Term Capital Gain (“LTCG”) of INR 1,63,92,653/- as income from other sources and thus denied benefit of special rate of tax available to LTCG under s. 112 of the Act. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 3 4. Aggrieved, the assessee preferred appeal before the Ld. CIT(A). It was contended before the Ld.CIT(A) that the AO has wrongfully denied the claim of exemption under s. 10(34A) of the Act. It was contended that the benefit of exemption under s. 10(34A) of the Act was denied on the ground that the unlisted companies have entered in buyback of its shares from the assessee. However, such unlisted companies have not fulfilled their tax payment obligations contemplated under s. 115QA of the Act. In counter, the assessee contended that non-fulfillment of tax obligation by the unlisted companies, if any cannot result in denial of exemption available under s. 10(34A) of the Act to the shareholders availing buyback scheme of the corresponding company. The assessee also controverted the observations of AO there exists a colorable device which was used as a tool for conversion of black money into legitimate funds through pre-planned LTCG merely on suspicions and conjectures and without any tangible evidence. In the alternate, the assessee contended before the Ld.CIT(A) that additions of INR 2,34,91,510/- could arise in Financial Year 2010-11 relevant to Assessment Year 2011-12 i.e. year in which the shares under buyback, were allotted to erstwhile entity of the assessee i.e. M/s. Magical Enterprises P. Ltd. and the entity to be assessed could be erstwhile entity M/s. Magical Enterprises P.Ltd. and not the present L.L.P. The assessee also questioned the disallowance of claim of special rate of tax under s. 112 of the Act on LTCG of INR 1,63,92,653/-. It was contended that the AO has wrongly assessed such LTCG taxable under the head ‘income from other sources’ rather than ‘capital gains as claimed’. 4.1. The assessee made oral and written submissions before the Ld.CIT(A) as reproduced in para 4 of the first appellate order. Based on the analysis of the detailed submissions of the assessee recorded in the first appellate order, the Ld.CIT(A) found the contentions of the assessee to be quite tenable in law. 4.2. The relevant part of the order of the Ld.CIT(A) is extracted hereunder for the ready-reference:- Ground No. 3: “Vide this ground of appeal, the appellant has challenged the addition of Rs.2,34,91,510/- by disallowing the exemption claimed u/s. 10(34) of the Act. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 4 In the assessment order, it is noted by the AO that appellant has earned distributed profits of Rs.2,34,91,510/- on account of buy back of total 1,29,874 unlisted shares of five private limited companies MAG Associates Pvt. Ltd., SAM India Infrastructure Pvt. Ltd., S.C Industries Pvt. Ltd., SAM India Buildwell Pvt. Ltd. & Space India Realtech Pvt. Ltd. It is noted by the AO that these five related group companies of appellant had issued shares to original allottees in F.Y. 2007-08, 2008-09 & 2009-10 at face value ranging from Rs.5 per share to Rs.17.50 per share and premium ranging from Rs.65 per share to Rs.490. These original allottees sold the shares of these 5 companies to the entity Magical Enterprises Pvt. Ltd. (predecessor company of the appellant LLP) at respective face value only. In this process, original allottees incurred substantial losses to the extent of premium paid. As Magical Enterprises Pvt. Ltd. got converted into Magical Enterprises LLP, in current F.Y. 2015-16, it became owner of the shares of 5 companies bought from the original allottees. In the current A.Y., the five companies bought back the shares at their respective issue prices (inclusive of premium) leading to profits by the appellant due to difference in purchase price from original allottees at face value (without premium) and buyback by issuer companies at issue price which included face value and premium. This profit of Rs. 2,34,91,510/- was claimed by the appellant as exempt u/s. 10(34A) of the Act. The AO proceeded to conduct enquiries on the angle of infusion of appellant's own unaccounted funds through scheme of original allottees and recorded statements of directors of the five issuer companies. The AO noted that there were no details available about the original allottees and sample verification of return of income of original allottees indicated that these allottees had poor financials and no creditworthiness. Based on these findings, the AO concluded that distributed profits claimed as exempt u/s. 10(34A) which was obtained through fake and non-traceable entities cannot be allowed. In the appellate proceedings, the appellant has controverted the various lines of findings of the AO in the assessment order. The submission of the appellant is also reproduced in the current order and hence, there is no need to further narrate those contentions. The gist of appellant's contentions can be noted as under :- 1. The AO's adverse inference is based on the status of non- existent 'original allottees' for which it has been argued that the '3' companies, M/s. MAG Associates Pvt. Ltd. SAM India Infrastructure Pvt. Ltd. and SAM India Buildwell Pvt. Ltd. were subject to assessment u/s. 153A, wherein no adverse inference was drawn on the issue of shares and receipt of amounts from \"original allottees\". For the other two companies, S.C Industries Pvt. Ltd. and M/s. Space India Realtech Pvt. Ltd., the appellant contended that the share capital issue were accepted in respective assessment years. Copies of assessment orders were also furnished. 2. The appellant has referred to the decision of Hon'ble Supreme Court in the case of UOI Vs. Azadi Bachao Andolan, 263 ITR 706, whereby the tax planning by legitimate means have been ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 5 upheld. It was contended that there was no violation of any provisions of the Companies Act or the Income-tax Act in the process of buyback of shares by the related parties as per 115QA and claim of exemption u/s. 10(34A) by the appellant. The appellant has also referred to several other decisions to support its contention. After going through the findings of the AO in the assessment order and appellant's contention, following facts emerge :- 1. Five group companies related to the shareholders of appellant company raised share capital by issue of shares to 'original allottees' in F.Yrs. 2007-08, 2008-09 & 2009-10 at varrying face values as well as varying premiums for these five companies. These original allottees sold 1,29,874 shares of these five companies to the Magical Enterprises Ltd. (erstwhile predecessor of current appellant M/s. Magical Enterprises LLP) in F.Y. 2009-10 & 2010-11 at only respective face value of the shares of those five companies. However, the five companies bought back the shares from the appellant in the current assessment year at original issue price at which it was issued to the original allottees. This led to gain of Rs.2,34,91,510/- in the case of appellant by virtue of difference in the price paid for purchase at face value and buyback share price which included premiums also. This was claimed as deduction u/s. 10(34A) of the Act. The 5 companies did not have any income in the buyback process due to no differential in issue price and buyback price, so as to suffer tax u/s. 115QA of the Act. The AO's sole point of disallowance is non-existent original allottees and related parties buyback transactions. The facts indicate that the appellant did not receive any funds from \"original allottees\" and even \"original allottees who invested in shares of the 5 companies were in F.Yrs. 2007-08, 2008-09, 2009-10, which also stood concluded in the assessments of these 5 companies. Hence, I do not find any violation of provision of Section 115QA or Section 10(34A) to disallow the appellant's claim merely on some vague findings and that too of past several years like 2007-08, 2008-09 & 2009-10. In the current assessment year, the claim of Section 10(34A) is found to be as per the provisions of the Act. 2. The other issue for disallowance is found to be based on the fact that the '5' related group companies did not pay any tax u/s. 115QA and the appellant company claimed exemption u/s. 10(34A) of the Act to the tune of Rs.2,34,91,510/-. But this is fully within the purview of legitimate tax planning and supported by the Hon'ble Apex Court decision in the case of Azadi Bachao Andolan. 3. It is apparent from the chronology of events in the appellant's case that the said shares were purchased in F.Y. 2010-11 by ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 6 M/s. Magical enterprises Pvt. Ltd. from original allottees and any question of unreasonable purchase price or some kind of cash payments on purchase of such shares at face value to compensate original allottees could have been considered only in A.Y. 2011-12 and not in the current assessment year. Furthermore, the provisions of Section 115QA was introduced w.e.f. 01.06.2013 and Section 10(34A) was introduced w.e.f. 01.04.2014 in the Income-tax Act. Hence, the appellant could not have known in F.Y. 2010-11 about such provisions to plan sham transactions pertaining to these shares. In view of these facts, the AO's conclusions to disallow Section 10(34A) exemption is not sustainable. Based on the above discussion, I hold the appellant's claim of deduction u/s. 10(34A) is allowable and addition on this issue by the AO is hereby deleted.” 4.3. The Ld.CIT(A) also found merit in the plea of the assessee for wrongful denial of special rate of tax available under s. 112 of the Act towards LTCG arising to the assessee. The relevant operative para is extracted hereunder for ready-reference:- Ground No. 4 Vide this ground, the appellant has challenged taxation of Rs. 1,63,92,653/- long term capital gain at normal rate rather than special rate of tax u/s. 112 of the Act. In the assessment order, the AO noted that the appellant sold 15000 shares of SAM India Buildwell Pvt. Ltd. to Shri Arvind Goel @ Rs.500/- per share which was acquired by the appellant in F.Y. 2010-11 @ Rs.17.50 per share and claimed exemption of capital gain u/s. 10(38) of the Act. Similarly, 32,626 shares of Space India Realtech Pvt. Ltd. were sold @ Rs.300/- per share which was acquired by the appellant in F.Y. 2010-11 @ 10/- per share. It was stated by the AO that unaccounted money was converted into legitimate money without paying tax and disallowed exempt long term capital gain of Rs. 1,63,92,653/-. In the appellate proceedings, the appellant pointed out that there was no claim of exemption u/s. 10(38) of the Act as regards LTCG of Rs. 1,63,92,653/-. It was also contended that the AO did not grant any opportunity before taking such adverse view and incorrect appreciation of facts. The appellant has submitted that out of 20000 shares of SAM India Buildwell Pvt. Ltd., 5000 shares were offered for buyback @ Rs.400/- per share and remaining 15000 shares were sold @ Rs.500/- per share. Similarly, out of 43500 shares of Space India Realteck Pvt. Ltd., 10874 shares were offered in buyback @ Rs.375/- per share and balance 32626 shares were sold @ Rs.300/- per share to Arvind Goel. The LTCG arising at Rs. 1,63,92,653/- was duly shown in the return of income and tax @ 20% as per section 112 was paid. Hence, it was contended that the AO had incorrect appreciation of facts on this issue. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 7 I have gone through the return of income and computation of total income of the appellant and found that there was no claim of exemption u/s. 10(38) of amount of Rs. 1,63,92,653/-. In fact, tax @ 20% on Rs. 1,63,92,653/- was worked out and paid. Hence, there is no case for any addition and the same is hereby deleted. As the appeal is allowed on merits of addition, legal ground no. 2 is not adjudicated. In the result, the appeal is hereby allowed.” 6. The Ld.CIT(A) thus reversed the action of the AO and granted relief on both counts. 7. Aggrieved, the Revenue is preferred appeal before the Tribunal. 8. The Ld. Sr. DR for the Revenue strongly relied upon the observations made in the assessment order. Per contra, the Ld. Counsel for the assessee relied upon the findings of the first appellate order. 9. We have carefully considered the rival submissions and perused the material available on record. The first issue involves challenge to the additions of INR 2,34,91,510/- by denying exemption claimed by the assessee under s. 10(34A) of the Act. The facts, as emerging from record, shows that the assessee has earned distributed profits of INR 2,34,91,510/- by virtue of offering shares of unlisted companies in buyback scheme floated by such cluster of companies. Prior to buyback, these five companies had issued shares to original allottees in FYs 2007-08, 2008-09 & 2009-10 at face value ranging from INR 5/- per share to INR 17.50/- per share together with premium of varied amounts as noted by the Ld.CIT(A). The original allottees sold these shares of these five companies to the entity namely, M/s. Magical Enterprises P.Ltd. which was later converted into M/s. Magical Enterprises LLP i.e. assessee hereunder. In the current FY 2015-16 relevant to AY 2016-17 in question, in consequent of the conversion from Private Limited to LLP, the assessee herein became the rightful owner of the shares of five companies, earlier held by erstwhile M/s. Magical Enterprises P. Ltd. In the AY 2016-17 in question, the assessee LLP availed a buyback scheme floated by the issuer companies and sold the shares of such companies to the respective issuer companies giving rise to profits to the tune of INR 2,34,91,510/- being the difference between the purchase price and the buyback price. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 8 9.1. The assessee claimed exemption under s. 10(34A) of the Act on such profits arising from buyback scheme. The AO proceeded to conduct the inquiries from the angle of infusion of assessee’s unaccounted funds, if any and recorded the statements of Directors of five issuer companies too. The AO raised suspicion on the transactions of acquisition of shares from the issuer companies at premium by certain section of shareholders who in turn, sold these shares to erstwhile assessee company at face value or meager premium. The assessee thus sold the shares at hefty buyback price resulting in huge profits without payment of tax. 9.2. Based on these findings, the AO concluded that the exemption claimed under s. 10(34A) of the Act obtained through alleged non-traceable companies cannot be allowed. 10. The Ld.CIT(A) in first appeal, on nuanced analysis of facts, observed that original allotment of shares at premium were carried in FYs 2007-08, 2008-09 & 2009-10 to some original allottees. These shares were, in turn, purchased by M/s. Magical Enterprises P.Ltd. in FYs 2009-10 & 2010-11 at a face value without paying any premium to the original allottees. These five issuer companies however bought back the shares from the transferee company namely, M/s. Magical Enterprises P.Ltd. at premium resulting in gains of INR 2,34,91,510/- in question. The assessee has availed exemption under s. 10(34A) of the Act on such case. The Ld.CIT(A), in such facts, noted that there appears to be no violation of provisions of section 10(34A) of the Act to disallow the assessee’s claim merely on some vague findings on bonafides of the transactions arising way back in AYs 2007-08, 2008-09 & 2009-10 etc. The Ld.CIT(A) also observed that in the absence of any differential value arising to issuer companies between issue price to original allottees and buy back price, the liability under s. 115QA to buy back companies do not arise. The Ld.CIT(A) thus reversed the action of the AO denying the exemption under s. 10(34A) of the Act and rejected the imputations of any colorable device alleged to have been adopted by the assessee. ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 9 11. Without repeating the facts, we hold that the Ld.CIT(A) has examined the issue threadbare and concluded in favour of the assessee after due consideration of facts and law. In order to avail benefit under s. 10(34A) of the Act, the conditions therein need to be satisfied which was found to have been met. Thus, based on alleged manipulations on issue price in some earlier concluded years, the benefit of exemption under s. 10(34A) of the Act on transaction recorded in the books and subjected to assessment process in the past, could not be denied by any stretch of imagination. We find no infirmity in the order of the Ld.CIT(A) in this regard. Hence, we decline to interfere. 12. As regards challenge to taxation of INR 1,63,92,653/- offered by the assessee as LTCG, the Ld.CIT(A) found the reasoning of the AO that some unaccounted money was converted into legitimate the money as baseless and unfounded. The assessee has not claimed any benefit of exemption under s. 10(38) of the Act on such LTCG and has merely applied special rate of tax @ 20% as prescribed under s. 112 at LTCG. The purchase transactions carried out in the earlier years could not be disturbed in a subsequent year to deny the concessional rate of tax claimed by the assessee as available under the provisions of the Act. The findings of the Ld.CIT(A) in our view, is based on sound footing and thus, does not call for any interference. The appeal of the Revenue is thus, liable to be struck down on both counts. 13. In the result, the appeal of the Revenue is dismissed. C.O.No.-86/Del/2022 [In ITA No.1059/Del/2022] [Assessment Year : 2016-17] [[[[[ 14. We now advert to the cross-objection filed by the assessee in the Revenue’s appeal. The grounds raised by the assessee in this cross-objection read as under:- 1. “The impugned assessment is invalid and without jurisdiction as the said assessment is completed without complying with legal requirements of the provisions of section 143(2) of the Income Tax Act therefore such assessment is void ab initio and liable to be quashed. (Rs. 1,38,03,111/-). 2. The impugned assessment is invalid and without jurisdiction as the said assessment is completed without issue of mandatory jurisdictional notice u/s 143(2) of IT Act by the Ld AO therefore, such ITA No.1059/D/2022 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. Page | 10 assessment is void ab initio and liable to be quashed. (Rs. 1,38,03,111/-).” 15. In the course of hearing, Ld. Counsel for the assessee fairly submitted that such cross-objections need not be adjudicated where the Tribunal is of the view that the Revenue’s appeal has no legal basis to contest the findings of the Ld.CIT(A). Hence, in view of the dismissal of the Revenue’s appeal, the cross- objection of the assessee is dismissed as infructuous. 16. In the result, the cross-objection filed by the assessee is dismissed. 17. In the combined result, appeal by the Revenue and cross-objection by the assessee, both are dismissed. Order pronounced in the open Court on 20th December, 2024. Sd/- Sd/- (VIMAL KUMAR) JUDICIAL MEMBER (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER * Amit Kumar * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "