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

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. Page | 3 & CO-86/D/2022 ACIT vs Magical Enterprises L.L.P. 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 :-

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.

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.

The Ld.CIT(A) thus reversed the action of the AO and granted relief on both counts.

Aggrieved, the Revenue is preferred appeal before the Tribunal.

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.

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.

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.

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.

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.

In the result, the appeal of the Revenue is dismissed. C.O.No.-86/Del/2022 [In Year : 2016-17] [[[[[ 14. We now advert to the cross-objection filed by the assessee in the Revenue’s appeal. The grounds raised

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.

In the result, the cross-objection filed by the assessee is dismissed.

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) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER