1 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

A. Y.: 2014-15     Dated: 29^th June, 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”

FACTS

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.

HELD

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.