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TaxTMI 
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2025 (12) TMI 179
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.... 1. General 1.1 The order passed by the learned Deputy Commissioner of Income Tax, Central Circle 2(3), Chennai (learned AD) and to the extent confirmed by the Commissioner of Income-tax (Appeals) Chennai -19 (learned CIT(A)') under Section 250 of the Income Tax Act, 1961 (the Act) to the extent prejudicial to the Appellant is erroneous, bad in law, and contrary to the facts and circumstances of the case. 2. Non-applicability of Section 115QA of the Act 2.1 The learned CIT(A) erred in interpreting that the order of the jurisdictional ITAT against the directions of the Principal Commissioner of Income Tax under Section 263 of the Act curtails the rights of the Appellant to raise grounds on applicability of Section 115QA. 2.2 The learned CIT(A) failed to appreciate the fact that the Hon'ble Chennai ITAT has addressed only the grounds raised in respect of the jurisdictional validity of the revisionary proceedings and not the merits of the case. 2.3 The learned CIT(A) erred in law and facts by arriving at a conclusion merely relying on the observations of the learned AD and the learned Principal Commissioner of Income Tax and witho....
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....ipt was with consideration which is inadequate consideration being the difference between the value of Rs. 607 per share and the transactional Rs. 273 per share multiplied by the number of shares (20,75,000) of Rs. 68,89,00,000/- (607-275*20,75,000/- = Rs. 68,89,00,000/-), as mandated by the provisions. 3. The Ld. CIT(A) erred in allowing the appeal of the assessee without appreciating that in a case of buyback of shares, shares being the property which exchanges hands from the transferor to the transferee, who had earlier issued the shares either for consideration which if found to be inadequate triggers the taxable event envisioned under Section 56(2)(via). 4. The Ld.CIT(A) erred in allowing the appeal of the assessee without appreciating the section does not foresee that the property reverend should become the property of the recipient as such a condition is neither inbuilt nor needs to built in, when one takes into consideration the intention of the legislature for having brought in section 56(2) (via), which is an anti-abuse provision. 5. The Ld.CIT(A) erred in allowing the appeal without appreciating that that all the ingredients necessary to trigge....
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....buyback price and hence, the provisions of Section 56(2)(viia) of the Act would not apply to the instant case. 2. Non-applicability of Section 36(1)(iii) of the Act 2.1 The learned CIT(A) duly examining the facts of the case rightly held that the provisions of Section 36(1)(iii) of the Act would not be applicable to the instant case. 2.2 The learned CIT(A) has rightly made a considered observation that buyback of own shares by a company would neither result in creation of any capital asset nor would result in any enduring benefit to the company and accordingly the application of the provisions of Section 36(1)(iii) of the Act to such cases is not warranted. 2.3 The learned CIT(A) after duly examining the facts of the case, has rightly observed that the Respondent had sufficient interest free equity funds, hence such funds were utilized for the buyback of shares and the same is in line with the principles upheld by the Hon'ble Apex Court 3. The Respondent craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of objections at any time before, or at the time of, hearing of the appeal. 5. The brief f....
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....e AO to redo the assessment considering the following observations: - * The scheme of buyback approved by the Madras High Court under Section 391-394 of the Companies Act, 1956 squarely falls under Section 77A of the Companies Act, 1956 and hence the provisions of Section 11QA of the Act shall be applicable to the subject buy-back; * Questioned the independence of the valuer by referring to subsequent valuations/transactions; and * The assessee has not established that the factual matrix of the how the case of Vora Financial Service Private Limited (2018) (171 ITD 646) is applicable to the Respondent's facts. 12. Aggrieved with the order of the Ld.PCIT u/s. 263 of the Act, the assessee filed an appeal before this Tribunal, which was dismissed by this Tribunal on 18.04.2023. Pursuant to the order of the Ld.PCIT u/s. 263 of the Act, the AO passed the impugned assessment order u/s. 143(3) r.w.s 263 of the Act with the following adjustments/additions: * Levy of tax of Rs. 11,06,17,190/- u/s. 115QA of the Act; * Addition of Rs. 68,89,00,000/- u/s. 56(2)(viia) of the Act; and * Disallowance of interest expenditure of Rs. 5,70,6....
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....f the Companies Act, 1956 and hence the provisions of Section 115QA of the Act shall be applicable to such buy-back; o The Appellant has not established that the factual matrix of the how the case of Vora Financial Service Private Limited (2018) (171 ITD 646) is applicable to the appellant's facts. * Giving effect to the order of the learned PCIT under Section 263 of the Act, the learned AO passed the order under Section 143(3) read with Section 263 of the Act on 30 March 2023 with the following adjustments (refer pg no. 113 to 165 of the paperbook) o Levy of tax of INR 11,06,17,190 under Section 115QA of the Act (being 20% of the distributed income as computed by the learned AO); o Addition of INR 68,89,00,000 under Section 56(2)(viia) of the Act; and o Disallowance of interest expenditure of INR 5,70,62,500 under Section 36(1)(iii) of the Act, being computed at 10% of the buyback value, i.e., 57,06,25,000 * Pursuant to the appeal filed by the Company, the Hon'ble Commissioner of Income Tax (Appeals) (CIT(A)') passed an order under Section 250 of the Act dated 27 March 2025 (refer pg no. 199 to 287 of the paperbook)....
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....owing capital asset of the assessee, namely: (i) Immovable property being land or building or both; (ii) Shares and securities * From the above definition it is clear that for shares and securities to fall within the ambit of property as defined under Section 56(2)(vii), they must constitute a "capital asset" in the hands of the person receiving such shares. * It is a well settled position that shares would constitute a capital asset only when they are shares of another Company (held as investment) and not own shares. Further, upon buyback of shares the capital of the Company stands reduced and the shares so bought back cannot be accounted as an investment (i.e., capital asset) in the balance sheet. * The aforesaid position was affirmed by the Hon'ble Mumbai Tribunal in the case of Vora Financial Services (P.) Ltd ([2018] 96 taxmann.com 88) wherein the following observations were made by the tribunal (refer para 31 & 32 of the judgment, page no. 121 of the case laws paper book): * Therefore, it follows the shares should become "property" of recipient company and in that case, it should be shares of any other company and coul....
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....e shares bought back for Section 56(2)(viia) would be Rs. 607 per share (refer para 6.7 of the order passed by the learned AQ, pg no. 154 of the paperbook). * Therefore, the difference between INR 607 per share and the buyback price (i.e., INR 275 per share) was wrongly assessed as income under Section 56(2)(viia) of the Act. The learned AO failed to note that the valuation of INR 607 determined under the DCF method is not in accordance with the valuation methodology prescribed under the Act. * If one were to compute the FMV of the shares bought back under the NAV method as prescribed under Rule 11UA, it works out to INR 68.48 per share and the consideration paid by the Company is considerably higher than the same. (refer pg. no 298 to 303 of the paperbook) 2.1.3. Observations of the Hon the CIT(A) in this regard: * The observations of the Hon'ble CIT(A) in the order passed has been summarized below (refer para 6.3.11 and 6.3.12 of the CIT(A) order, pg no. 273 of the paperbook): o The actual consideration paid by the Company (i.e. Rs. 275 per share) is significantly higher that the FMV of the shares determined as per Rule 11UA which ....
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....790 100,366,090 Reserves and Surplus 4 819,943,100 596,186,705 1,348,117,890 696,552,795 * From the above, it can be observed that the Company had sufficient noninterest bearing equity funds (of INR 69,65,52,795) to meet the consideration paid for buyback of shares being INR 57,06,25,000 (1.e., the non-interest bearing equity funds were greater than the consideration paid for buyback). * It is a well settled principle that when the amount of equity funds is greater than the borrowed funds, there shall be an implicit presumption that funds were utilized from equity and not borrowed funds * The aforesaid position has been upheld by the Hon'ble Supreme Court in the case of South Indian Bank Ltd ([2021] 130 taxmann.com 178 (SC)), wherein it was held as follows (refer para 17 of the judgement, pg no. 149 of the case laws paperbook): "....In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way....
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....er, Pg no. 285 & 286 of the paperbook): o The Company had sufficient equity funds to meet the consideration paid on the buyback of shares undertaken and accordingly, the principles established by the Apex Court would apply to the instant case. o Further, buyback did not create any capital asset that would provide enduring benefits to the Company and accordingly, expenditure on buyback would not qualify as a capital expenditure and hence, the question of applicability of Section 36(1)(iii) shall not arise. * Basis the above submissions, we humbly pray before this Hon'ble Bench to uphold the decision of the CIT(A) in this regard. 2.3. Levy of buyback, tax under Section 115QA of the Act (Ground no. 1 of the Company Appeal) 2.3.1. Section 391-394 vs. Section 77A of the Companies Act, 1956 * The Company filed for a scheme of arrangement before the Hon'ble Madras High Court for buyback of its own shares and the same was approved by the court on 28 April 2016 (refer pg no. 33 of the paperbook). * Under Section 77A of the Companies Act, 1956 a buyback is subject to the following conditions: o The number shares ....
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....away any part of the pre-existing jurisdictions of the Company Court to sanction a scheme for such reduction under Sections 100-104 and Section 191 * A similar position was taken by the Hon'ble Bombay High Court in the case of Capgemini India (P.) Ltd (2016) 67 taxmann.com 1 (Bombay)) (refer para 5 of the judgement, pg no. 31 of the case laws paperbook). * Further, It is a settled principle that once a scheme of arrangement is approved by the court to be well within the corners of law, it shall be binding on the tax authorities (refer Hon'ble Madras High Court ruling in the case of Pentamedia Graphics Limited (236 CTR 204)) (refer para 21 of the judgement, pg no. 24 of the case laws paperbook). * Basis the above, it is evident that buyback of shares under Section 77A of the Companies Act, 1956 is different from buyback of shares undertaken through a court approved scheme of arrangement under Section 391-394. 2.3.2. Reliance placed by the learned AO on the Delhi NCLT ruling in the case of RS live Media (2017] 79 taxmann.com.461) * The leamed AO has failed to appreciate the fact that in the above mentioned case, the NCLT dealt with....
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..... [2022] 141 taxmann.com 289 Delhi Court Para 5,6 & 8 Pg no. 138 * As stated earlier, the scheme of buyback in the instant case was approved by the Hon'ble Madras High Court on 28th April 2016 (refer pg no. 33 of the paperbook) (i.e., before the amendment came into force) under Section 391 to 394 of the Companies Act, 1956 and accordingly Section 115QA of the Act would not apply to the instant case. * For the reasons cited above, it is humbly prayed before this Hon'ble Bench to delete the levy of tax under Section 115QA of the Act to the instant transaction. 16. The Ld.DR, appearing on behalf of the Revenue, vehemently supported the findings and conclusions arrived at by the AO. The Ld.DR further contended that the Ld.CIT(A) erred in adjudicating the appeal without calling for a remand report from the AO, especially in light of various additional evidence and fresh facts which were admittedly produced by the assessee for the first time before the Ld.CIT(A). It was the submission of the Ld.DR that the failure to seek a remand report from the AO in such circumstances amounts to a procedural infirmity, as it deprived the AO of an opportunity to....
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....CIT. The primary reason for invoking Section 263 was that the assessment order lacked proper enquiries and verification, making it erroneous and prejudicial to the interest of revenue. The claim that the AO was aware of all documents were found irrelevant since the issues were never raised in the Section 142(1) notices. Furthermore, the final assessment order did not discuss the applicability of Sections 115QA, 56(2)(vii)(a), or the proportionate disallowance of interest. Therefore, it was concluded that the assessment was completed without the necessary scrutiny, warranting revision u/s. 263 of the Act. The ld.PCIT passed order u/s. 263 of the Act dated 30.03.2022 set aside the assessment order passed u/s. 143(3) of the Act dated 26.12.2019 with the direction to the AO to redo the assessment after considering the observation made on the issues for which proceedings u/s. 263 of the Act was initiated. The ld.PCIT directed the AO to call for additional details, afford reasonable opportunity to the assessee company and revise the assessment. 19. During the course of set aside assessment proceedings, the AO issued show cause notices relating to three issues viz.. i. The ass....
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....on the ground that the buyback was not conducted u/s. 77A of the Companies Act, but rather through a Scheme of Arrangement u/s. 301 to 304, which had received High Court sanction. 22. The AO observed that in this case, the buyback was executed as a scheme of arrangement, whereby the company repurchased a specific number of shares at a fixed price. When the scheme was implemented, the repurchased shares were extinguished and a capital redemption reserve, equal to the face value of the bought back shares, was created. The payment of buyback was met using the profit and loss account credit balance and general reserve, with the securities premium account reduced correspondingly. This process resulted in exhausting the entire general reserve of Rs. 9,48,81,000/- and nearly all of the profit and loss account credit balance, which ended at Rs. 45,49,94,000/- out of a balance of Rs. 45,93,12,295/-. The buy back, covering 20.67% of the equity basket with a total payout of Rs. 57,06,25,000/-, would have otherwise left accumulated profits available for distribution as dividends amounting to Rs. 54,98,75,000/-. The assessee company explained that it restored to seeking High Court Sanction u....
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.... the income and brought to tax as income under the head "other sources" by invoking the provisions of section 56(2)(vii)(a) of the Act. In response, the assessee company vide submission dated 18.03.2021 filed Valuer's submission to justify the correctness of valuation. The AO observed in the valuation report that the valuation was finalized on 21.03.2016 for a buyback transaction with M/s.Tangi Facility Solutions Private Limited, a related party under common control with the assessee. With Mr.T.Raghunandana and Mrs.T.Shanthi holding significant stakes in both entities, the transaction needed to meet the arm's length standard regarding the consideration. The buyback was executed at a consideration of Rs. 275/- per share, as per the valuation report, yet the valuer did not disclose the basis of this valuation. This omission is particularly significant given that a subsequent share issuance to an uncontrolled third party was priced at Rs. 607/- per share in the first tranche, prior to bonus shares. The valuer failed to explain the revenue projections, discount factor, growth rate, and terminal value assumptions that led to a 2.2 times increase in valuation within just eight months. Th....
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....olders and added back to the total income of the assessee company for the A.Y.2017-18 and completed the set aside assessment proceedings by passing order u/s. 143(3) r.w.s 263 of the Act on 30.03.2023. 29. We observed that the Ld.CIT(A) has sustained the action of the AO in levying additional tax amounting to Rs. 11,06,17,190/- u/s. 115QA of the Act. The Ld.CIT(A) has noted that the assessee did not contest the quantum of distributed income as determined by the AO, nor were any specific arguments advanced before him challenging the correctness or accuracy of the computation of such additional tax. On careful consideration of the rival submissions and the material available on record, we are of the considered opinion that the authorities below have not properly appreciated the following: - detailed computations of NAV valuation under Rule 11UA; - financial statement extracts relating to availability of non-interest-bearing funds; - various High Court and Tribunal decisions not cited before AO; - workings relating to Section 77A ceiling and buy-back under Companies Act; - explanations regarding factual distinction between Court-approved....