BAO VALUE FUND,MUMBAI vs. ACIT, INTERNATIONAL TAX, CIRCLE-1(2)(1), MUMBAI

On the facts and circumstances of the case and in law, the AO had erred in assessing the sale value of equity shares of Kushal Lad of 42.21.000 as unexplained cash credit as per the provisions of Section 68 of the Act under the head 'Income from other sources simply based on the information flagged in insight portal and the information gathered or evidence obtained during the course of search and seizure action, carried out under Section 132 of the Act on Kushal group, without appreciating the fact that the provisions of Section 68 of the Act were not applicable to the appellant since the appellant being a company incorporated in Mauritius and registered with the Securities and Exchange Board of India as a Foreign Portfolio Investor for the purposes of making investment in India, was not required to maintain books of accounts as per the applicable provisions of the Companies Act, 2013 as well as the applicable provisions of the Act, which is a pre requisite for invoking the provisions of Section 68 of the Act. The appellant prays that the assessment of sale value of equity shares of Kushal Lad of 42,21.000 as unexplained cash credit as per the provisions of Section 68 of the Act was without any application of mind and should be deleted.

On the facts and circumstances of the case and in law, the AO had erred in assessing the sale value of equity shares of Kushal Ltd of ₹ 42,21,000 as unexplained cash credit as per the provisions of Section 68 of the Act under the head 'Income from other sources simply based on the information flagged in insight portal and the information gathered or evidence obtained during the course of search and seizure action carried out under Section 132 of the Act on Kushal group, without appreciating the fact that the appellant had earned short-term capital gain on sale of equity shares of Kushal Ltd and not long- term capital gain that was exempt from tax as per the provisions of Section 10(38) of the Act, which was alleged to have been earned by several investors in equity shares of Kushal Lid by way of accommodation entries, account of Kushal Lid. The appellant prays that the assessment of sale value of equity shares of Kushal Ltd of ₹ 42.21,000 as unexplained cash credit as per the provisions of Section 68 of the Act was without any application of mind and should be deleted.

On the facts and circumstances of the case and in law, the AO had erred in not applying the provisions of the India-Mauritius tax treaty while assessing the sale value of equity shares of Kushal Ltd of Rs. 42,21,000 as unexplained cash credit as per the provisions of Section 68 of the Act when the appellant was a tax resident of Mauritius during the AY and in determining the taxation of income of Rs. 42,21,000, the provisions of the Act or the provisions of the India Mauritius tax treaty, whichever are more beneficial to the appellant, shall apply. The appellant prays that it was not the case of the AO that the appellant was not a tax resident of Mauritius and hence, while determining the taxation of sale value of equity shares of Kushal Ltd of Rs. 42,21,000 as unexplained cash credit as per the provisions of Section 68 of the Act, the provisions of the India-Mauritius tax treaty should also be taken into consideration.

On the facts and circumstances of the case and in law, the AO had erred in computing the tax liability on sale value of equity shares of Kushal Lid of Rs. 42,21,000 assessed as unexplained cash credit as per the provisions of Section 68 of the Act under the head 'Income from other sources', as per the provisions of Section 115BBE of the Act, without appreciating the fact that the provisions of Section 68 of the Act were not applicable to the appellant. The appellant prays that such computation of tax liability was without any application of mind and should be deleted.

On the facts and circumstances of the case and in law, the AO had erred in levying surcharge 25% on the tax liability computed as per Section 115BBE of the Act, without appreciating the fact that the provisions of Section 115BBE of the Act were not applicable and the total taxable income of the appellant was not exceeding Rs. 1 crore. The appellant prays that such levy of surcharge was without any application of mind and should be deleted.

On the facts and circumstances of the case and in law, the AO had erred in initiating penalty proceedings under Section 270A of the Act for misreporting of income when there was no misreporting of income on the part of the appellant i.e. short term capital gain earned on sale of equity shares of Kushal Ltd was reported in the return of income that was filed. The appellant prays that the penalty proceedings initiated should be dropped. 8. On the facts and circumstances of the case and in law, the AO had erred in initiating penalty proceedings under Section 272A(1)(d) of the Act for failure to comply with notices issued under Section 142(1) of the Act or Section 143(2) of the Act or direction issued under Section 142(2A) of the Act when there was no failure on the part of the appellant to comply with the notices issued during the course of the proceedings. The appellant prays that the penalty proceedings initiated should be dropped.

On the facts and circumstances of the case and in law, the AO had erred in levying interest as per Section 234A of the Act of Rs. 4,23,891 for default in furnishing the return of income when there was no default in furnishing the return of income on the part of the appellant i.e. the return of income was filed within the due date prescribed in Section 139 of the Act. The appellant prays that the levy of interest under Section 234A of the Act should be deleted.

On the facts and circumstances of the case and in law, the AO had erred in levying interest as per Section 234B of the Act of Rs. 22,82,490 for default in payment of advance tax when there was no default in payment of advance tax on the part of the appellant. The appellant prays that the levy of interest under Section 234B of the Act should be deleted.”

The assessee is a company incorporated in Mauritius and registered as a Foreign Portfolio Investors (FPI) registered with Securities and Exchange Board of India (SEBI). The Assessing Officer (AO) received information that the assessee has traded in the shares of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) and has received the consideration of Rs. 42,21,000/- towards the sale of these shares. The AO further noticed that a search and seizure action under section 132 of the Act was conducted on 05.02.2019 in the case of Kushal Group of Ahmadabad and it has been found that the share prices of Kushal Ltd. has been artificially rigged without commensurate increase in fundamentals. Therefore, the AO initiated the reassessment proceedings in assessee's case and passed an order under section 148A(d) of the Act along with notice under section 148 on 26.03.2022. The AO called on the assessee to furnish details pertaining to the impugned transaction and the assessee submitted the details as called for by the AO. The AO elaborately discussed the SEBI order in the case of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) and also the findings of the search action. The AO concluded on the basis of the material found during the course of search and the statement recorded to the effect that there was systematic and synchronized trading in the shares of Kushal Ltd. in Stock Exchange where various people closely connected with Kushal Ltd. were involved. The AO gave a finding based on the SEBI order and the search operation that the share prices of Kushal Ltd. was manipulated and unaccounted cash transactions have been accommodated through bogus transactions. Since the assessee during the year under consideration has made a transaction to the tune of Rs. 42,21,000/- towards sale of the shares of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) the same was added by AO under section 68 of the Act. The assessee raised further objections before the DRP who vide order dated 30.12.2023 upheld the findings of the AO. The primary reason given by the DRP for upholding the addition is that the company in which the assessee has transacted is tainted scrip and hence the addition has been correctly made by the AO. The DRP in this regard relied on the decision of the Hon'ble Superme Court in the case of CIT Vs. Durga Prasad More (82 ITR 540) & 3. The ld. AR submitted that the assessee is incorporated in Mauritius and licensed by financial service commission of Mauritius. The ld. AR submitted that the assessee holds a tax residency certificate and therefore, the Short Term and the Long Term Capital Gain subject to grandfathering provision are exempt under Article-13(4) of India Mauritius DTAA. The ld. AR also submitted that the assessee being an FPI is in the sole activity of investing in shares and that the shares of Kushal Ltd. forms only 0.34% of the total investment in shares made by the assessee. The ld. AR drew our attention to the computation statement and the details of transactions pertaining to M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) (page 1 & 2 of the PB). The ld. AR also submitted the Paper Book with the SEBI order in the case of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) (page 302 to 326 of PB). The ld. AR brought to our attention that the SEBI order pertains to the transactions carried out by several individuals between 01.08.2014 and 11.03.2015 (page 327 of PB) to submit that the impugned transactions in assessee's case pertain to 13.10.2016 to 01.06.2017 and therefore, the AO purely relying on the order of the SEBI ought not to have made the addition under section 68 in the hands of the assessee. It is also submitted by the ld. AR that assessee's name or the assessee's involvement are not found in neither the statement recorded during the course of search nor in the SEBI report. Therefore, treating the investment made by the assessee in its regular course of business as bogus without any corroborative evidence linking the assessee to the sham transactions, the AO is not correct in making the addition in the hands of the assessee. The ld. AR relied on various decisions of the Co-ordinate Bench to submit that the gain arising out of purchase and sale of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) have been held by the Tribunal as not to be added under section 68. The ld. AR without prejudice submitted that Kushal Ltd. has a full-fledged manufacturing facility having subsidiaries in India and abroad with huge turnover, profit and tax payments year after year. The ld. AR further submitted that Kushal Ltd. has declared a dividend year after year and involved in CSR activity and its shareholder include Banks, FPIs, etc. The ld. AR in this regard took the Bench through the financial statements of Kushal Ltd. (page 28 to 282 of PB). 4. The ld. DR on the other hand relied on the order of AO and the directions of the DRP.

We heard the parties and perused the material on record. The assessee during the year under consideration has sold 20,000 shares of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) for a consideration of Rs. 42,16,600/- and after deducting the cost of acquisition at Rs. 21,26,200/- arrived at the gain of Rs. 20,90,400/-. The assessee being a tax resident of Mauritius claimed the treaty benefits and accordingly treated the STCG as exempt under Article-13(4) of India Mauritius DTAA. Based on search and seizure operation conducted in the case of Kushal Group where it was found that the share prices of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) was manipulated, the AO treated the transaction carried out by the assessee as bogus. Accordingly, the AO treated the entire sale consideration as addition under section 68 of the Act. From the perusal of the AO's order, we notice that the addition has been made by the AO by mainly placing reliance on the findings of the SEBI order dated 22.12.2017, statement recorded during the course of search and the documents seized during the course of search. Though the AO has recorded a detailed finding with regard to the SEBI order, we notice that the assessee's name has not been linked to the SEBI report and the entire finding is with regard to the modus operandi as to how the share prices have been rigged in the case of Kushal Ltd. We further notice that the statement recorded and the seized material relied on by the AO to make the addition do not contain anything connecting the assessee to the sham transactions carried out by various parties. The assessee is a registered FPI and the impugned transaction as per AO's own admission forms part of only 0.34% of the total investments in shares by the assessee. The primary allegation of the AO for making the addition is that there is a synchronized operation carried out by few individuals due to which the share prices of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) have been rigged. However, the AO in his order has not recorded any factual finding connecting the assessee to the alleged synchronized trading of the impugned shares. We also notice that the AO other than elaborately discussing the SEBI order and the findings of the search operation has not recorded any finding to impute the assessee to be alleged bogus transactions. Therefore, we see merit in the submission of the ld. AR that the transactions made by the in the regular course of business cannot be treated as unexplained for the reason that the scrip is allegedly is a penny stock. It is a settled position that unless the assessee is connected with the synchronized operation of price rigging no addition can be made under section 68 merely for the reason that the assessee as a regular investor has transacted in the impugned shares. In view of this discussion and following the ratio laid down in various judicial pronouncements in this regard we hold that the AO is not correct in making addition under section 68 of the Act.

In result, the appeal of the assessee is allowed.