TaxTMI 
TaxTMI 
2026 (9) TMI 253
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.... Rs.43,34,444 made under section 36(1)(iii) in respect of interest expenditure; and (iii) deletion of disallowance of Rs.12,60,17,125 representing loans and advances written off and claimed as bad debts under section 36(1)(vii) read with section 36(2) of the Act. The Revenue has raised six grounds of appeal which, for the sake of completeness, are reproduced hereunder: "I) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 43,32,82,200/- made under section 56(2)(x) of the Income Tax Act, 1961 on account of difference between the Fair Market Value of shares and the buy-back consideration holding that the Assessing Officer was bound by the directions of the GAAR Approving Panel and was precluded from invoking section 56(2)(x) of the Act, without appreciating that GAAR provisions and section 56(2)(x) of the Act operate in distinct statutory domains. II) Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in concluding that the buy-back of own shares does not result in 'receipt of property', without appreciating the plain language of section 56(2)....
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....handling facility within the premises of IGCL in Gujarat. Under the arrangement, the assessee was to erect, install, commission, operate and maintain the facility, whereas power required for operating the facility was to be supplied by IGCL. Since the facility was situated within the premises of IGCL and independent sourcing of power was commercially impracticable, the arrangement was structured keeping in view the policy of the Gujarat Electricity Board ("GEB") governing supply of captive power. Under the prevailing requirement, a captive power producer could supply power to an associate company in which it held the stipulated minimum equity participation. Consequently, IGCL was required to hold 26% of the issued share capital of the assessee-company. Towards compliance with this requirement, 7,80,000 equity shares of face value of Rs.10 each were allotted to IGCL at a premium of Rs.30 per share, aggregating to an issue price of Rs.40 per share. 3. The contemporaneous arrangement between the parties further assumes importance because the aforesaid equity participation was not conceived as an ordinary investment carrying the normal commercial incidents of participation in apprec....
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....ntertained a prima facie view that the arrangement could constitute an "impermissible avoidance arrangement" within the meaning of Chapter X-A of the Act. A reference was accordingly initiated under section 144BA and the matter ultimately came to be considered by the Approving Panel constituted under the GAAR provisions. The Approving Panel, vide directions dated 30.01.2025, examined the original agreements, the regulatory backdrop, the circumstances in which the 26% equity participation had arisen, the subsequent rights issue and the buy-back. The Panel recorded, inter alia, that the initial equity participation of 26% by IGCL was not made with a motive to earn profit or participate in the management of the assessee-company, but was undertaken to fulfil the requirement of the Gujarat Electricity Board and, in that sense, was not an investment in the conventional commercial sense but essentially a legal formality. It further observed that, having regard to the pre-existing contractual arrangement, it was not out of the ordinary for the assessee to require IGCL/HIL to return the shares at the same price at which they had originally been allotted. The Panel also found that the non-pa....
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....eferred, inter alia, to the fact that money-lending was not specifically reflected as the nature of business in Form No.3CD; the assessee was neither a banking company nor registered as an NBFC/money-lender; the monies advanced were not treated as stock-in-trade; and the interest income constituted only a relatively small component of its total revenue. The Assessing Officer noticed that interest income represented approximately 1.46% of total revenue for the relevant year and 4.39% in the immediately preceding year and held that mere advancement of monies or assessment of interest under the head "Profits and Gains of Business or Profession" would not, by itself, establish a business of money-lending. He accepted that a portion of the amount written off represented interest which had already been offered to tax and by appropriating repayments first towards interest and thereafter towards principal, computed the unpaid interest component at Rs.1,23,84,781. The remaining Rs.14,85,17,125 was regarded as principal. Since the assessee had subsequently recovered Rs.2.25 crore from certain borrowers in Assessment Years 2023-24 and 2024-25 and offered such recoveries to tax as "bad debts r....
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....took note of the entire historical arrangement as well as the categorical findings returned by the Approving Panel. He observed that the Panel had examined the commercial and regulatory genesis of the 26% equity participation and had found the arrangement to be genuine and compliance-driven rather than one designed for obtaining a tax advantage. The learned CIT(A) further examined the independent statutory contention of the assessee that a company, upon buying back its own shares which are required to be extinguished, does not "receive" property of the character contemplated by section 56(2)(x). Reliance had been placed upon Vora Financial Services (P.) Ltd. v. ACIT ( Supra). The learned CIT(A) noticed that the Assessing Officer had sought to distinguish that decision only on the ground that it concerned section 56(2)(viia), but had not demonstrated any distinction in the core reasoning relating to the consequence of extinguishment of a company's own shares. He further noticed that no contrary judicial view had been brought on record. Having regard to the factual matrix, the findings of the Approving Panel and the statutory arguments canvassed before him, the learned CIT(A) held th....
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....ncy, observing that the Revenue had accepted the business character of similar lending transactions in the earlier years as well as while taxing subsequent recoveries. 10. Insofar as the disallowance under section 36(1)(iii) is concerned, the learned CIT(A) considered the assessee's explanation regarding the availability and utilisation of funds as well as the remand report furnished by the Assessing Officer. The assessee had pointed out that, as on 31.03.2022, its reserves and surplus were approximately Rs.196.8 crore and, as on 31.03.2021, approximately Rs.109.5 crore, whereas the aggregate interest-free advances under consideration were only Rs.38.54 crore. It was further explained that the borrowings on which interest had been paid were utilised for identified business purposes: the term loans were deployed towards specified capital projects with disbursements made to the concerned vendors/beneficiaries; the housing loan was utilised for acquisition of a company-owned guest house forming part of its business assets; and the working-capital borrowings were utilised for operational requirements, including procurement of raw material, salaries and other current obligations. In ....
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....distinct event and cannot retrospectively obliterate the receipt which has already taken place. It was also emphasised that "shares and securities" stand expressly included within the statutory definition of "property". The learned CIT(DR) sought to distinguish Vora Financial Services (P.) Ltd. on the ground that it concerned section 56(2)(viia), which was materially narrower in its statutory setting, whereas section 56(2)(x) was enacted subsequently with a wider ambit. The Revenue also disputed the proposition that section 115QA constituted an exclusive code so as to oust section 56(2)(x), and alternatively contended that, if the computation of fair market value adopted by the Assessing Officer was found deficient, the matter ought to be restored for determination of FMV strictly in accordance with the applicable valuation provisions rather than the addition being deleted altogether. 12. On the disallowance under section 36(1)(iii), the learned CIT(DR) submitted that the learned CIT(A) had proceeded too readily on the presumption arising from availability of own funds without first requiring the assessee to discharge the primary onus of establishing the utilisation of the borro....
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....arose solely because of the GEB requirement governing captive power supply and was accompanied from inception by a binding commercial understanding that the shares would ultimately be returned at Rs.40 per share. The price and eventual return were thus contractually determined nearly two decades before the enactment of section 56(2)(x). He emphasised that these were not merely assertions of the assessee, but formed part of the factual findings returned by the statutory Approving Panel after examining the entire arrangement. The learned Sr. Counsel further submitted that section 144BA makes the directions of the Approving Panel binding upon the specified income-tax authorities and the Assessing Officer could not disregard the factual conclusions reached by the Panel and reconstruct the very same arrangement as an undervalued transfer undertaken for conferring an economic benefit. Without prejudice thereto, he submitted that section 56(2)(x) fails on its own statutory ingredients because a company buying back its own shares does not acquire or hold "property"; the shares are required by law to be extinguished and cannot thereafter exist as a capital asset in the hands of the company.....
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....findings given in the impugned orders of the authorities below, the directions of the Approving Panel, the written submissions filed by both sides and the material referred to before us. We have also carefully considered the statutory provisions and the judicial precedents relied upon by the parties. Since Grounds Nos. 1 to 3 arise out of the same transaction of buy-back and involve interconnected questions concerning the effect of the Approving Panel's directions, the independent scope of section 56(2)(x), and the legal consequence of a company buying back and extinguishing its own shares, they are being taken up together. Ground No. 4 relating to section 36(1)(iii) and Grounds Nos. 5 and 6 relating to the write-off of loans will thereafter be dealt with separately. 16. We shall first take up Grounds Nos. 1 to 3, which challenge the deletion of addition of Rs.43,32,82,200 made under section 56(2)(x). The controversy has to be examined against the peculiar and rather distinctive factual setting in which the buy-back took place. As noticed hereinabove, the acquisition of 26% shareholding by IGCL in the assessee-company was not an investment conceived in the ordinary course with a....
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....sed an important and somewhat distinct contention. According to him, the consequence of the Approving Panel holding that an arrangement is not an "impermissible avoidance arrangement" is confined to Chapter X-A and cannot confer immunity upon a transaction from an independent charging or deeming provision otherwise applicable under the Act. Particular emphasis has been placed upon section 100, which contemplates application of Chapter X-A in addition to, or in lieu of, any other basis for determination of tax liability. We find it unnecessary to pronounce upon the wider proposition canvassed by the assessee that once the Approving Panel has rejected application of GAAR, every other anti-abuse or substantive provision necessarily stands excluded. Even if we proceed on the premise urged by the Revenue that section 56(2)(x) operates independently of Chapter X-A and that rejection of GAAR does not, by itself, preclude recourse to another provision of the Act, it would still be incumbent upon the Revenue to demonstrate that the essential statutory ingredients of section 56(2)(x) are independently satisfied. The findings of the Approving Panel undoubtedly remain relevant insofar as they ....
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.... statutory consequence of the buy-back itself. The governing company law does not contemplate the company acquiring its own shares pursuant to a buy-back and thereafter retaining them as an investment or capital asset capable of subsequent enjoyment or transfer. The receipt and extinguishment cannot, therefore, be artificially severed so as to postulate, during an interstitial moment, the existence of property in the hands of the company when the very transaction by which the shares come back to the company necessarily culminates in their extinction. The assessee had specifically raised this aspect before the learned CIT(A), pointing out that the shares bought back could neither be held as an asset nor subsequently transferred and that the statutory architecture itself required their extinguishment. 21. The aforesaid interpretation is also consistent with the principle recognised by the Mumbai Bench of the Tribunal in Vora Financial Services (P.) Ltd. v. ACIT, [2018] 194 TTJ 746 (Mum.) [ITA No.532/Mum/2018, order dated 29.06.2018]. There, while construing section 56(2)(viia), the Tribunal held that the provision could operate only where the shares received became property in the....
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....res as a capital asset capable of being retained or exploited; the transaction results in cancellation of the proprietary interest represented by those shares and a corresponding reduction of the company's share capital. The Hon'ble Delhi High Court, while considering section 56(2)(x) itself, has rejected the Revenue's attempt to treat such buy-back as an acquisition of property merely because the buy-back price was lower than the value computed under Rule 11UA. The ratio is directly relevant to the statutory controversy before us and fortifies the conclusion reached by the learned CIT(A). 23. Once this jurisdictional ingredient fails, the further controversy regarding determination of fair market value does not survive for adjudication. Rule 11UA provides the computational mechanism once the charging/deeming provision is otherwise attracted; it cannot itself create the charge where the foundational conditions of section 56(2)(x) are absent. Therefore, whether the figure of Rs.595.49 per share adopted by the Assessing Officer represented the correct value under the prescribed methodology, whether some other value ought to have been adopted, or whether the issue should be restore....
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....is disputed, does not by itself establish diversion of borrowed capital. 26. On this aspect, the financial position recorded by the learned CIT(A) assumes significance. The assessee had reserves and surplus of approximately Rs.196.8 crore as on 31.03.2022, whereas the aggregate interest-free advances in question were Rs.38.54 crore. Even at the beginning of the year, the reserves were stated to be approximately Rs.109.5 crore. Thus, the own funds available with the assessee were substantially in excess of the impugned advances. Apart from this quantitative position, the assessee had explained the utilisation of the borrowings: term loans were stated to have been deployed towards specified capital projects, with disbursements made to the project vendors/beneficiaries; the housing loan was utilised for acquisition of a company-owned guest house; and the working-capital facility was used for operational requirements such as procurement, salaries and other current obligations. In the remand report also, the Assessing Officer did not identify any specific borrowing or drawdown which could be traced to any of the three interest-free advances. His conclusion essentially remained that, ....
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....earing borrowed funds were deployed towards those advances remains unestablished. We therefore find no reason to interfere with the conclusion of the learned CIT(A) deleting the disallowance of Rs.43,34,444 under section 36(1)(iii). Ground No.4 raised by the Revenue is accordingly dismissed. 29. We now take up Grounds Nos. 5 and 6, whereby the Revenue has challenged the deletion of disallowance of Rs.12,60,17,125 representing the principal component of loans and advances written off by the assessee. The core issue requiring adjudication is whether the debts in question represented monies lent in the ordinary course of a business of money-lending carried on by the assessee so as to satisfy section 36(2)(i), and whether the conditions prescribed under section 36(1)(vii) stood fulfilled. Section 36(1)(vii), subject to section 36(2), allows deduction of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the relevant previous year. Section 36(2)(i), in turn, provides two alternative statutory situations: first, the debt or part thereof should have been taken into account in computing the income of the assessee for the relevant or an....
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.... the nature of business in Form No.3CD; the assessee did not possess an NBFC/money-lending licence; the loans were not reflected as stock-in-trade; the interest was presented under "Other Income"; and interest income constituted only 1.46% of total revenue in the year under consideration and 4.39% in the immediately preceding year. In our opinion, these factors cannot be viewed in isolation from the actual course of activity. The expression employed by section 36(2)(i) is "money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee". The enquiry, therefore, is essentially factual: whether the assessee was actually carrying on lending as an organised commercial activity and whether the debt sought to be written off arose in the ordinary course thereof. The nomenclature adopted in one disclosure in the tax-audit report cannot override the substance of transactions evidenced by the books and accounts. Likewise, the fact that interest income constituted a smaller proportion of the assessee's overall revenue is not decisive where the assessee carries on more than one business activity. The scale of one activity relative to another ca....
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....jects. The Hon'ble Supreme Court held that the conditions of sections 36(1)(vii) and 36(2) had not been established merely on that basis. Significantly, the judgment cannot be read as laying down that registration as an NBFC or possession of a money-lending licence constitutes an independent statutory requirement under section 36(2)(i). The enquiry remains whether the particular debt represents money lent in the ordinary course of a business of money-lending actually carried on by the assessee. It is on this factual touchstone that the present case materially differs. Here, the claim is supported not merely by an enabling object clause but by a long-standing loan portfolio comprising multiple borrowers, repeated lending transactions, agreed interest rates, repayments, interest regularly offered as business income and subsequent recoveries from the written-off debts themselves. Khyati Realtors thus supplies the statutory test; applying that test to the materially different facts before us does not support the Revenue's case. 34. Once the above factual conclusion is reached, the principal-versus-interest bifurcation adopted by the Assessing Officer loses its determinative signific....
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....l decisions concerning composite debts where the interest component had already been subjected to tax, as also its alternative claim of business loss under section 28, therefore need not be independently adjudicated. Once the deduction is found admissible within the specific framework of section 36(1)(vii) read with section 36(2)(i), those alternative submissions become academic. 36. We may also deal with the Revenue's specific grievance in Ground No.6 concerning the principle of consistency. The learned CIT(A) noticed that in an earlier assessment year a loan advanced to Birla Power Solutions Ltd. had been written off and the claim had been accepted after examination in assessment proceedings; and that recovery from such written-off debt was subsequently offered and accepted as business income. The learned CIT(A) therefore regarded the Revenue's treatment of similar lending transactions in earlier and subsequent years as an additional circumstance supporting the assessee. We agree with the Revenue to the limited extent that the principle of consistency cannot substitute satisfaction of the statutory conditions in the year under appeal, nor does the rule of res judicata strictly....