Section 56(2)(viia) – Provisions of section 56(2)(viia) are attracted only in case of “shares of any other company”
2018] 194 TTJ (Mumbai) 746
Vora Financial Services (P.) Ltd. vs. ACIT
ITA No.: 532/Mum/2018
- Y.: 2014-15 Dated: 29thJune, 2018
Section 56(2)(viia) – Provisions of section 56(2)(viia) are attracted only in case of “shares of any other company” and could not be its own shares as own shares cannot become property of the recipient company; buy-back of own shares by a company cannot attract the provisions of section 56(2)(viia) as the same does not satisfy the tests of “becoming property” and “shares of any other company”
During the year under consideration the assessee made an offer to existing shareholders for buy-back of 25% of its existing share capital at a price of Rs.26 per share. One of the directors of the company offered 12,19,075 shares under the buy-back scheme for a consideration of Rs.3,16,95,950 on 24.05.2013. The AO noticed that the book value of shares as on 31.03.2013 was Rs.32.80 per share, whereas the assessee-company had bought back the shares at Rs.26 per share.
The AO observed that consideration of Rs. 3,16,95,950 had been reinvested in the company in the form of loan. Hence, the AO took the view that the entire exercise was carried out to reduce the liability of the company by purchasing shares below the fair market value. Accordingly, the AO assessed the difference between the book value of shares and purchase price of shares amounting to Rs.82,89,710 lakhs as income of the assessee company u/s. 56(2)(viia) of the Income-tax Act, 1961.
Aggrieved by the assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the action of the AO.
The Tribunal held that a combined reading of section 56(2)(viia) and the memorandum explaining the provision of it would show that the section 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, 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. Own shares could not become the property of the recipient company.
Accordingly, section 56(2)(viia) would be applicable only in cases where the receipt of shares became property in the hands of recipient and the shares would become property of the recipient only if they were “shares of any other company”.
In the instant case, the assessee had purchased its own shares under buyback scheme and the same had been extinguished by reducing the capital and hence the tests of “becoming property” and also “shares of any other company” failed in this case. Accordingly, the Tribunal took a view that the tax authorities were not justified in invoking the section 56(2)(viia) for buyback of own shares.
In the result, the Tribunal set aside the order passed by CIT(A) on this issue and directed the AO to delete the addition made u/s. 56(2)(viia) of the Income-tax Act, 1961.