Case Law Details

Case Name : DCIT Vs TPS Infrastructure Ltd (ITAT Delhi)
Appeal Number : ITA. No.6433/Del/2018
Date of Judgement/Order : 14/12/2022
Related Assessment Year : 2013-14

DCIT Vs TPS Infrastructure Ltd (ITAT Delhi)

Undisputedly, the assessee company, during the relevant financial period had purchased its own 130915 shares @ Rs.78/- per share from its associate concerns in the month of March, 2013. The AO picked up the issue and made addition u/s 56(2)(viia) of the Act by taking out of Rs.292/- per share. It is the claim of the assessee before the ld.CIT(A) that the assessee company has bought back its own shares under buy back scheme and the same has to be extinguished by reducing the paid-up capital of the assessee company.

A combined reading of the provisions of sec. 56(2)(viia) and the memorandum explaining the provisions would show that the provisions of sec. 56(2)(viia) would be attracted when “a firm or company (not being a company in which public are substantially interested)” receives a “property, being shares in a company (not being a company in which public are substantially interested)”. Therefore, it follows the shares should become “property” of recipient company and in that case, it should be shares of any other company and could not be its own shares. Because own shares cannot be become property of the recipient company.

Accordingly we are of the view that the provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is “shares of any other company”. In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of “becoming property” and also “shares of any other company” fail in this case. Accordingly we are of the view that the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares.

ITAT held that provisions of section 56(2)(viia) of the Act are applicable only in the cases where the purchased share become property in the hands of the buyer company and, if the shares are of any other company. But, in the present case, the assessee purchased its own shares under buy­back scheme, and, as per the submissions made by the ld. Counsel at the bar, the same has been extinguished by reducing the paid up capital of the assessee company. Therefore, the facts and circumstances of the present case are identical to the facts and circumstances noted by the coordinate Bench of the ITAT Mumbai Bench in the case of M/s Vohra Financial Services Pvt. Ltd. (supra). However, the fact remains that the factum of extinguishment of the purchased shares by reducing the paid up capital of the assessee company has not been examined and verified at the level of the AO. Therefore, the issue is restored to the file of the AO for a limited purpose of examining and verifying the fact of extinguishment of shares by reducing the paid-up capital of the assessee in the accounts of the assessee. The AO is directed to delete the addition in case the said fact is found to be correct.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by Revenue is directed against the Order of the Ld. CIT(A)-9, New Delhi, dated 16.07.2018 relating to the A.Y. 20 13-14.

2. The ground of appeal taken by the Revenue reads as under:-

1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.5,62,93,450/- made by the AO by applying the provisions of Section 56(2) (viia) of the Income Tax Act, 1961, without appreciating the detailed reasons given in the assessment order.”

2. “The Ld. CIT(A) has erred in law and on facts by not treating the buy back of its own shares by the assessee company as “property” in the hand within the meaning of Section 56(2)(viia) of the Income Tax Act,

3. “The Ld. CIT(A) has erred in law and on facts by ignoring the fact that the buy back of its own shares by the assessee company and subsequently cancelling them under the provisions of the Company Act doesn’t exempt it from fulfilling the conditions laid down in Section 56(2)(viia) of the Income Tax Act, 1961.

4. “That the appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

3. The ld. Sr. DR submitted that the ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.5,62,93,450/- made by the AO by applying the provisions of Section 56(2) (viia) of the Income Tax Act, 1961 (for short, ‘the Act’), without appreciating the detailed reasons given in the assessment order which clearly shows the buy back of its own shares by the assessee company as “property” in hand within the meaning of Section 56(2)(viia) of the Income Tax Act, 1961. The ld. Sr. DR also pointed out that the Ld. First appellate authority has also erred in granting relief to the assessee ignoring the fact that the buy back of its own shares by the assessee company and subsequently cancelling them under the provisions of the Company Act doesn’t exempt it from fulfilling the conditions laid down in Section 56(2)(viia) of the Income Tax Act, 1961. The ld. Sr. DR finally submitted that the impugned first appellate order may kindly be set aside and the appeal may be restored to the file of the AO.

4. Replying to the above, the ld. Counsel for the assessee, drawing our attention to the detailed synopsis spread over 33 pages, submitted that the issue is squarely covered in favour of the assessee by the order of the ITAT, Mumbai in the case of M/s Vora Financial Services Pvt. Ltd. vs. ACIT, order dated 29.06.2018, in ITA No.532/Mum/2018 and, therefore, the appeal of the Revenue may kindly be dismissed. He also drew our attention towards various judgements and orders on the issue and also drew our attention to relevant operative paras 30-32 of the order of the coordinate Bench of ITAT Mumbai in the case M/s Vora Financial Services Pvt. Ltd. vs. ACIT (supra) and submitted that the provisions of section 56(2)(viia) should be applicable only in cases where the recipient of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is ‘shares of any other company.’ The ld. Counsel also submitted that the assessee in the present case has purchased its own shares under buy-back scheme and the same has been extinguished by reducing the capital and, hence, the tests of ‘becoming property’ and also ‘shares of any other company’ fails in the present case. Therefore, the facts and circumstances of the present case are quite identical and similar to the case of M/s Vohra Financial Services Pvt. Ltd. (supra)

5. Placing a rejoinder to the above, the ld. Sr. DR submitted that the onus was on the assessee to show that the shares purchased by the assessee has been extinguished by reducing the paid-up capital of the assssee and this fact has not been examined at the level of the AO, therefore, for limited purpose, the said facts required to be examined and verified by the AO.

6. On careful consideration of the rival arguments, first of all, we note that undisputedly, the assessee company, during the relevant financial period had purchased its own 130915 shares @ Rs.78/- per share from its associate concerns in the month of March, 2013. The AO picked up the issue and made addition u/s 56(2)(viia) of the Act by taking out of Rs.292/- per share. It is the claim of the assessee before the ld.CIT(A) that the assessee company has bought back its own shares under buy back scheme and the same has to be extinguished by reducing the paid-up capital of the assessee company. From the relevant paras 30-32 of the order of the ITAT, Mumbai Bench in the case of M/s Vohra Financial Services Pvt. Ltd. (supra), we observe that under identical facts and circumstances the Tribunal has adjudicated the issue in favour of the assessee as follows:-

30. We have heard rival contentions on this issue and perused the record. The provisions of sec. 56(2)(viia) reads that “where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested” The words “firm or a company” “any property, being shares of a company” are important here. In this regard, we may refer to the Memorandum explaining the insertion of Provisions of sec. 56(2)(viia) by the Finance Act, 2010, which reads as under:-

“Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head ‘income from other sources’. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision.

The existing definition of property for the purposes of section 56(2)( vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art.

A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision.

In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested).”

31. A combined reading of the provisions of sec. 56(2)(viia) and the memorandum explaining the provisions would show that the provisions of sec. 56(2)(viia) would be attracted when “a firm or company (not being a company in which public are substantially interested)” receives a “property, being shares in a company (not being a company in which public are substantially interested)”. Therefore, it follows the shares should become “property” of recipient company and in that case, it should be shares of any other company and could not be its own shares. Because own shares cannot be become property of the recipient company.

32. Accordingly we are of the view that the provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is “shares of any other company”. In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of “becoming property” and also “shares of any other company” fail in this case. Accordingly we are of the view that the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. “

7. Therefore, respectfully following the order of the coordinate Bench of the ITAT, Mumbai in the case of M/s Vohra Financial Services Pvt. Ltd. (supra), we hold that the provisions of section 56(2)(viia) of the Act are applicable only in the cases where the purchased share become property in the hands of the buyer company and, if the shares are of any other company. But, in the present case, the assessee purchased its own shares under buy­back scheme, and, as per the submissions made by the ld. Counsel at the bar, the same has been extinguished by reducing the paid up capital of the assessee company. Therefore, the facts and circumstances of the present case are identical to the facts and circumstances noted by the coordinate Bench of the ITAT Mumbai Bench in the case of M/s Vohra Financial Services Pvt. Ltd. (supra). However, the fact remains that the factum of extinguishment of the purchased shares by reducing the paid up capital of the assessee company has not been examined and verified at the level of the AO. Therefore, the issue is restored to the file of the AO for a limited purpose of examining and verifying the fact of extinguishment of shares by reducing the paid-up capital of the assessee in the accounts of the assessee. The AO is directed to delete the addition in case the said fact is found to be correct.

8. In the result, the appeal filed by the Revenue is allowed for the limited purpose of verification in the manner as indicated above.

Order pronounced in the open court on 14.12.2022.

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