2025 (7) TMI 751 - AT - Income Tax

Assessment order invalid when unsigned and issued to non-existent company, valid when signed for successor company

Lupin Investments Private Limited (Successor to Zyma Laboratories Limited) Versus Deputy Commissioner of Income Tax – 14 (2) (1), Mumbai

ITAT Mumbai held that an unsigned assessment order in the name of a non-existent company was invalid, while a signed order in the successor company's name ... Assessment passed in the name of non-est company - notice in name of amalgamating company - second order which is in the name of successor company - HELD THAT:- Insofar as, the first order which is in the name of a nonest company is concerned, we find that the order is unsigned and, therefore, it is non-est in the eyes of law. The second order which is in the name of Lupin Investments Private Limited, is successor to Zyma Laboratories Limited, is a valid order physically signed by the AO. Therefore, we do not find any force in the contentions raised vide Ground No. 1 and the same is dismissed. Addition made u/s 56(2)(viia) - buyback of own shares -computation of fair market value of unquoted equity shares - AO found that the board of directors had approved proposal for buy back of 190097 equity shares at a price of Rs. 10/- per share for a credit amount - HELD THAT:- We find force in the contentions of assessee. On identical set of facts, case of Vora Financial Services (P.) Ltd. [2018 (7) TMI 64 - ITAT MUMBAI]; VITP (P.) Ltd. [2022 (8) TMI 220 - ITAT HYDERABAD] Venture Lighting India Ltd. [2022 (12) TMI 696 - ITAT CHENNAI] Globe Capital Market Ltd. [2023 (9) TMI 1513 - ITAT DELHI] & TPS Infrastructure Ltd [2022 (12) TMI 693 - ITAT DELHI] has considered identical set of facts and decided the issue in favour of the assessee and against the revenue as held 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. Interest income on Income-tax refund and interest income on long-term non-trade investments - “income from other sources” OR 'Business income' - AO was of the firm belief that the assessee company is engaged in the activities of investments in shares and securities and financing to group companies, therefore, interest income on investments made, should be offered under the business head and accordingly, taxed the interest income on long-term nontrade investments under the heard profits and gains of business and profession. Having done so, the AO denied the claim of deduction u/s 80 GGA - HELD THAT:- Assessee vehemently stated that in the earlier years also, the assessee has been showing interest income under the heard “income from other sources” and the same was accepted. Therefore, both the lower authorities have breached the rule of consistency. Assessee is also eligible for claim of deduction u/s 35AC of the Act which cannot be brushed aside lightly. Though, this claim was also made before the AO but the orders of the lower authorities are silent on this claim made by the assessee. Therefore, in the interest of justice and fairplay, we deem it fit to restore this issue to the file of the AO. Assessee is directed to furnish evidence in support of the claim of deduction u/s 35AC of the Act and the AO is directed to examine the same and decide the issue afresh as per the relevant provision of law and after affording reasonable and adequate opportunity of being heard to the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the assessment proceedings and orders passed in the name of a non-existent/amalgamating company are valid and legally sustainable, given the amalgamation had taken effect prior to the assessment order.Whether the addition made under section 56(2)(viia) of the Income Tax Act, 1961 (the Act) on account of buyback of shares is justified, particularly whether the provisions of section 56(2)(viia) apply to buyback of unlisted shares or whether taxability should be governed by section 115QA.Whether interest income from long-term non-trade investments should be treated as business income or income from other sources, and the consequent impact on deductions claimed under sections 80GGA and 35AC of the Act.Whether the interest levied under section 234B of the Act is justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Assessment Proceedings in the Name of Amalgamating CompanyRelevant legal framework and precedents: The validity of assessment orders hinges on the correct identification of the assessee. Where amalgamation has taken effect, assessments must be framed in the name of the successor company. Section 142(1) and 143(3) of the Act govern the issuance of notices and framing of assessment.Court's interpretation and reasoning: The Tribunal observed that the first assessment order was passed in the name of the amalgamating company, which was non-existent at the time of assessment, and was unsigned, thus non-est in law. The subsequent order was passed in the name of the successor company and was duly signed.Key evidence and findings: The assessee had informed the Assessing Officer (AO) about the amalgamation through letters dated 13/09/2017 and 04/05/2018. Despite this, the AO initially passed an unsigned order in the name of the non-existent company, followed by a valid order in the name of the successor company.Application of law to facts: The Tribunal held that the unsigned order in the name of the amalgamating company was invalid, and the valid signed order in the name of the successor company was effective. Hence, the assessment proceedings were not vitiated.Treatment of competing arguments: The assessee argued invalidity due to proceedings in the name of a non-existent entity; the Tribunal rejected this on the basis that the valid order superseded the invalid unsigned order.Conclusion: The Tribunal dismissed the ground challenging the validity of proceedings, holding that the valid signed assessment order in the name of the successor company is legally sustainable.Issue 2: Addition under Section 56(2)(viia) on Buyback of SharesRelevant legal framework and precedents: Section 56(2)(viia) of the Act applies to receipt of shares by a firm or company for inadequate consideration or without consideration, targeting anti-abuse of unlisted shares transactions. Section 115QA governs tax on distributed income on buyback of shares. The Memorandum Explaining the Provisions of the Finance Act, 2010 clarifies the anti-abuse intent of section 56(2)(viia). Precedents from Coordinate Benches in similar factual scenarios (e.g., Vora Financial Services (P.) Ltd., VITP (P.) Ltd., Venture Lighting India Ltd., Globe Capital Market Ltd.) have held that buyback of own shares does not attract section 56(2)(viia).Court's interpretation and reasoning: The Tribunal noted that section 56(2)(viia) applies when a firm or company receives shares as property from another company. The buyback involves the company purchasing and extinguishing its own shares, which do not become property of the company. Thus, the essential conditions for invoking section 56(2)(viia) are not met.Key evidence and findings: The AO computed the fair market value (FMV) of shares as Rs. 1836 per share based on Rule 11UA, resulting in an addition of Rs. 34.71 crores. The assessee argued that taxability should be governed by section 115QA, and the shares extinguished on buyback do not become property of the company.Application of law to facts: Following the consistent judicial view, the Tribunal held that buyback of own shares leading to extinguishment does not attract section 56(2)(viia). The shares do not become property of the company, and the taxability under section 115QA is the correct treatment.Treatment of competing arguments: The AO and Revenue argued for applicability of section 56(2)(viia) based on FMV and book value differences. The assessee relied on judicial precedents and the legislative intent to exclude buyback transactions from section 56(2)(viia). The Tribunal sided with the assessee.Conclusion: The Tribunal allowed the ground and directed deletion of the addition under section 56(2)(viia) related to buyback of shares.Issue 3 & 4: Treatment of Interest Income and Deduction under Sections 80GGA and 35ACRelevant legal framework and precedents: Income from interest can be classified either as business income or income from other sources depending on the nature of the assessee's activities. Section 80GGA allows deduction for donations for scientific research or rural development, while section 35AC provides deduction for expenditure on specified projects or schemes.Court's interpretation and reasoning: The AO treated interest income from long-term non-trade investments as business income, denying deduction under section 80GGA. The Tribunal noted that the assessee had consistently declared such interest under income from other sources in earlier years, accepted by the department, invoking the principle of consistency.Key evidence and findings: The assessee claimed deduction under section 80GGA and also under section 35AC. The lower authorities did not address the claim under section 35AC.Application of law to facts: The Tribunal found merit in the assessee's contention regarding classification of interest income and restoration of the issue relating to deduction under section 35AC to the AO for fresh adjudication with opportunity of hearing.Treatment of competing arguments: The AO and CIT(A) upheld their views without considering the deduction under section 35AC. The assessee argued for consistency and proper consideration of all claims.Conclusion: The Tribunal allowed these grounds for statistical purposes and remanded the matter to the AO to decide the deduction claim under section 35AC afresh.Issue 5: Interest under Section 234BRelevant legal framework: Section 234B mandates levy of interest for default in payment of advance tax.Court's interpretation and reasoning: The Tribunal noted that levy of interest under section 234B is mandatory but consequential to default in advance tax payment.Application of law to facts: The AO was directed to levy interest as per the statutory provisions.Conclusion: The Tribunal did not interfere with the levy of interest under section 234B.3. SIGNIFICANT HOLDINGSOn the validity of assessment proceedings, the Tribunal held that 'the order is unsigned and, therefore, it is non-est in the eyes of law' and that 'the second order which is in the name of Lupin Investments Private Limited, is successor to Zyma Laboratories Limited, is a valid order physically signed by the AO.'On the applicability of section 56(2)(viia) to buyback of own shares, the Tribunal stated:'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 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.'On the treatment of interest income and deductions, the Tribunal emphasized the principle of consistency and the need for the AO to consider the claim under section 35AC afresh, stating:'Though, this claim was also made before the AO but the orders of the lower authorities are silent on this claim made by the assessee. Therefore, in the interest of justice and fairplay, we deem it fit to restore this issue to the file of the AO. The assessee is directed to furnish evidence in support of the claim of deduction u/s 35AC of the Act and the AO is directed to examine the same and decide the issue afresh as per the relevant provision of law and after affording reasonable and adequate opportunity of being heard to the assessee.'On interest under section 234B, the Tribunal held that levy is mandatory but consequential and directed the AO to charge interest as per law.