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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: DR. BRR KUMAR & MS. ASTHA CHANDRA
PER ASTHA CHANDRA, JM
The appeal filed by the Revenue is directed against the order dated 04.07.2022 of the Ld. Commissioner of Income Tax (Appeals)-42, Delhi [“Ld. CIT(A)”] pertaining to Assessment Year (“AY”) 2018-19. The Revenue has raised the following grounds: 2.
“1. Whether on the facts and in the circumstances of the cause, the Ld. CIT(A) is correct in holding that the genuineness of the transaction is established whereas the Assessing officer in the Assessment order has made observations regarding the discrepancies in the valuation report?
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta 2. Whether on the facts and in the circumstances of the case, the Ld CIT(A) is correct in holding that the genuineness of the transaction is established, whereas the Assessing Officer in the Assessment Order has made observations regarding the lack of genuineness of the transaction? 3. The appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal.”
Briefly stated, the assessee is a non-resident individual. He derived income from salary, house property, capital gains, dividend and interest in India. He filed his return for A.Y. 2018-19 on 19.07.2018 declaring income of Rs. 6,28,87,870/-.Subsequently, he revised his return on 05.03.2019 declaring income of Rs. 4,23,71,630/- and claimed refund of Rs. 24,41,900/-. His case was selected for scrutiny which was carried out through E-assessment. Statutory notice u/s 143(2) of the Income Tax Act, 1961 (“the Act”) was served. Notice u/s 142(1) of the Act with questionnaire was issued to which the assessee responded. The Ld. Assessing Officer (“AO”) found that during the year the assessee received the consideration amount of Rs. 2,34,48,938/- on buyback of 46 shares @ of Rs. 6,07,500/- per share from Uday Management Services Pvt. Ltd. (“UMS”) and filed Balance Sheet and P&L Account of UMS. Vide show-cause notice issued on 23.09.2021, the Ld. AO sought information from the assessee and explanation as to how the net worth of UMS which was Rs. 22,92,86,536/- as on 31.03.2017 became Rs. 90,97,97,002/- as on 30.11.2017 and was reduced to Rs. 15,38,48,289/- as on 31.03.2018. The assessee submitted reply on 24.09.2021, some contents of which the Ld. AO reproduced in para 6 of the Assessment Order.
The explanation of the assessee was not acceptable to the Ld. AO who held that the receipt of buyback amount of Rs. 2,34,48,938/- by the assessee is not genuine and proposed to add the same to the income of the assessee u/s 68 of the Act with the following observations:
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta “7. The assessee has sale 500 shares of M/s Knaup Management Services Private Limited @ 66,250/-. On perusal of valuation report, it was observed that at the time of valuation, the books value of M/s Knaup Management Services Private Limited is Rs.3,45,50,000/-. The KMS owns a commercial property at plot No. 80, Sector-32, Gurgaon, Haryana-122001 thereafter made the valuation of KMS. The valuation has done on 06.11.2017 and enhance the value of property by making valuation report amounting to Rs.87,35,55,420/-.Further, made the valuation of KMS on 30.11.2017 and enhance the book value of assets of KMS amounting to Rs.88,62,55,291/-. On the same date, valuation was done of Uday Management Services Pvt. Ltd and increased the book value of assets amounting to Rs.92,78,29,212/-. Uday Management Services Pvt. Ltd is wholly owned subsidiary company of M/s Knaup Management Services Private Limited. Later on, the Board Meeting was held on 04/12/2017 for Buy Back and the same was approved by the members on 05.12.2017 to buy back of 82 equity share @ Rs.6,07,500/- per equity share. Thereafter, company has declared the dividend on 11.12.2017 & 15.02.2018 resultant dividend received to the assessee. The assessee received buy back amount to Rs. 2,34,48,938/- is not genuineness. So the Buy back amount of Rs.2,34,48,938/- is disallowed u/s 68 of the IT Act, 1961 and added back to his income.”
Accordingly, the Ld. AO passed the final assessment order on 18.11.2021 at total income of Rs. 6,58,20,568/- u/s 144C(3) read with section 143(3) of the Act as the assessee did not file objection to the draft assessment order within the prescribed time limit.
Aggrieved, the assessee filed appeal before the Ld. CIT(A) challenging the impugned addition u/s 68 of the Act. During the appellate proceedings, the assessee filed written submissions which have been reproduced by the Ld. CIT(A) in para 5 at page 4-19 of the appellate order. The Ld. CIT(A) deleted the addition holding it to be without any basis and unjustified. The observations and findings of the Ld. CIT(A) contained in paras 8, 9, and 10 are reproduced below.
“8. It has been submitted that during the year, the appellant received an amount of Rs. 2,34,48,398/- in respect of the buyback of 46 shares of a Private Ltd Company, Uday Management Services Pvt Ltd (UMS), which is exempt from tax under section 10(34A) of the Act as the company paid tax under 115QA of the Act to the tune of Rs.1,14,93,317/- which pertains to tax on distributed income of domestic company for buy-back of shares. It is submitted that these shares were bought back by UMS at a value of Rs Page 3 of 8
ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta 6,07,500/- per share which was determined as per Rule 11UA of the Income Tax Rule. It is stated that UMS was incorporated in 1983 and had been running business of business centers successfully and has got huge reserves and surplus created from the profits earned during its lifetime. These reserves have been utilized for the payments for dividend income and buy back its shares. During the year under consideration, the company also paid income distribution taxes on these income under section 115 -O & 115 QA and therefore, these distributed incomes are exempt u/s 10(34) & 10(34A) of the Act in the hands of shareholders. It is submitted that UMS owns 100% shareholding in Knaup Management Services Pvt. Ltd (KMS) whose shares were also valued as per Rule 11UA of the Income Tax Rules in order to arrive at FMV of Rs. 6,07,200/- per share of UMS the valuation of shares at FMV of UMS and KMS was done in accordance with the Income Tax Rules. 8.1 The AO held that buy back was not genuine and added back the buyback amount as unexplained income under section 68 of the Income Tax Act. 8.2 It was contended that it was a simple case of buy back of shares which is exempt from tax under section 10(34A) of the Act in the hands of the shareholder and the company had duly paid taxes of Rs 1,14,93,317/- under section 115QA of the Act (tax on distributed income to shareholders by way of back of shares) on such buy back. It was argued that the action of the AO is unjustified and against the provisions of the law as the provisions of section 68 were not applicable in the facts of the case. 9. As per section 68 of Income Tax Act, 1961, any sum found credited in the books of accounts of an assessee, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income tax as the income of the assessee of that year. 9.1 It is trite that for invoking provisions of section 68 and thus treating an amount credited in the books of accounts as unexplained, the necessary ingredients are that either the identity of creditor is not established; or credit worthiness established; or the genuineness of the transaction is not proven of the creditor is not established. In any case, the AO has not raised any doubt as to the identity of UMS. 9.2 It is observed that the money has been received from Uday Management Services Pvt. Ltd., a company registered under the Companies Act. Therefore, the identity of the donor is established. In any case, the AO has not raised any doubt as to the identity of UMS. 9.3 UMS has Reserve & Surplus of Rs. 24,63,67,378/- as per Audited balance sheet as on 30.11.2017. Therefore, from the capacity/ creditworthiness of UMS is also established. The AO has also not doubted the creditworthiness of the company.
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta 9.4 For effecting the buyback of shares, it has been shown that UMS duly complied with the provisions of the Companies Act for buy back of shares. Accordingly, the company was authorized by Articles of Association to Buy Back its own share; Board Resolution and Special Resolution was passed for this purpose; Form MGT-14 as required, was filed with the Registrar within 30 days of passing the Special Resolution; after the Special Resolution but before the buy-back of shares, company had also filed with the Registrar of Companies a letter of offer in Form No. SH-8; declaration was filed with the Registrar of solvency in Form SH-9, along with the letter of offer, the company filed a return Form No. SH. 11 after the completion of the buy-back file with the Registrar. 9.5 Thus, as per law, copy of Board Resolution, copy of Shareholder Resolution, copy of Valuation Report, Form SH-8 (Letter of Offer), Form SH-9 (Declaration of Solvency). Form SH-11 (Return of Buy Back) etc. were duly filed with the Registrar of Companies who after scrutinizing such documents gave the approval for the buy back shares. All the statutory documents along-with approval obtained from the ROC have been filed. 9.6 Thus, this was a simple case of buyback of shares but the AO has without assigning any reasons has concluded "So the assessee received buyback amount to Rs. 2,34,48,938/- is not genuineness so the buyback amount of Rs. 2,34,48,938/- is disallowed u/s 68 of the IT Act, 1961" The buyback of shares was done as per law and following the requisite statutory procedure. The same was duly approved by the Registrar of Companies. Therefore, there is no reason to doubt the genuineness of the transaction. The AO has also not given any reason or basis of doubting the genuineness of the transaction. 9.7 It is pertinent to note that the amount was paid by UMS for the buyback of its shares for which UMS also paid Rs. 1,14,93,317/- tax under section 115QA of the Act. As per section 10(34A) of the Act, any income arising to an assessee, being a shareholder, on account of buyback of shares by the company as referred to in section 115QA is exempt from tax. 9.8 Thus, it is observed that it was a clear case of buyback of shares and section 68 does not apply to a case of buy back of shares. As in this case, the identity of UMS is established. The genuineness of the transaction is established as buyback was carried out as per the procedure prescribed under the Companies Act and approval from the Registrar of Companies was also taken for the same, and income distribution tax on the buyback under section 115QA was duly paid. The creditworthiness is established from the financials of UMS i.e. Balance Sheet of UMS & KMS as at 31.03.2017. 30.11.2017and 31.03.2018; and Valuation Report u/r Rule 11UA of UMS& KMS etc. 9.9 It is also observed that UMS also paid dividend during the year twice. Rs 2,00,00,000/- was paid on 15.12.2017, out of which Rs. 1,12,00,000/- was received by the appellant. The company also paid dividend distribution tax amounting to Rs. 40,71,516/- on 16.12.2017 under section 115-0 of the Act.
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta Further, Rs. 1,00,00,000/- was paid on 20.02.2018, out of which Rs. 56,00,000/- was received by the appellant. On this also, the company paid dividend distribution tax amounting to Rs. 20,35,758/-under section 115-O of the Act on 20.02.2018.
In view of the above, it is concluded that the AO completely misunderstood a plain and simple case of buyback of shares effected after duly complying with the statutory procedure prescribed by the Companies Act and obtaining approval from the Registrar of Companies. The company has paid due tax on such buyback of shares u/s 115QA of the Act and the income arising to the appellant/ shareholder as a result of buyback is exempt u/s 10(34A) of the Act. By no stretch of imagination, the buyback amount received by the appellant can be termed as unexplained. The addition made by the AO is without any basis and is unjustified. The addition is deleted.”
The Revenue is dissatisfied and is in appeal before the Tribunal and both the grounds relate thereto.
The appeal came up for hearing on 18.04.2023, 06.06.2023, 05.10.2023, 13.12.2023 and finally on 18.12.2023. None of the hearing was attended either by the assessee or by his Authorised Representative, though Ld. Sr. DR was present on all the hearings. We, therefore proceeded to decide the appeal ex- parte after hearing the Ld. Sr. DR.
We have considered carefully the submission of the Ld. Sr. DR who supported the order of the Ld. AO and perused the records. The first thing which strikes us is that the Ld. AO’s show-cause notice was issued on 23.09.2021 and reply was sought latest by next date i.e. 24.09.2021. The assessee did respond by furnishing reply by letter dated 24.09.2021.This is not fair. Reasonable opportunity to the assessee is a must. Secondly, the facts have not been marshalled and appreciated in right perspective.
Admittedly, the Ld. AO incorporated in the assessment order only some contents of the reply dated 24.09.2021 furnished by the assessee to his show-
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta cause notice dated 23.09.2021 and hastened to conclude that buyback was not genuine and added back the buyback amount as unexplained income u/s 68 of the Act. This is not correct. The Ld. CIT(A) has given clear finding that the identity of UMS is established; genuineness of transaction is also proved as buyback was carried out as per the procedure prescribed under the Companies Act and approval from the Registrar of Companies was also taken; income distribution tax on buyback u/s 115QA was duly paid; the creditworthiness is established from the financials of UMS i.e. Balance Sheet at 31.03.2017, 30.11.2017 and 31.03.2018 of UMS and Knaup Management Services Pvt. Ltd. (“KMS”) which is 100% wholly owned subsidiaries of UMS and lastly, Valuation Report of UMS and KMS etc. under Rule 11UA of the Income Tax Rules, 1962. We endorse the findings of the Ld. CIT(A) that income arising to the assessee sharesholder as a result of buyback is exempt u/s 10(34A) of the Act by virtue of amendment brought on the statute book by the Finance Act, 2013 w.e.f. 01.04.2014. Accordingly, we sustain the order of the Ld. CIT(A) and reject the appeal of the Revenue.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 14th March, 2024.
sd/- sd/- (DR. BRR KUMAR) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 14/03/2024 Pooja Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A)
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ITA no.-2371/Del/2022 ACIT vs. Anand Swarup Gupta 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order
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