2022 (12) TMI 693 - AT - Income Tax

Addition u/s 56(2)(viia) - buy back of its own shares by the assessee company as property in the hand within the meaning of Section 56(2)(viia) - assessee company has bought back its own shares under buy back scheme and the same has to be extinguished by reducing the paid-up capital of the assessee company - HELD THAT -Respectfully following the order of M/s Vohra Financial Services Pvt. Ltd. 2018 (7) TMI 64 - ITAT MUMBAI . We hold that the provisions of section 56(2)(viia) of the Act are applicable only in the cases where the purchased share become property in the hands of the buyer company and if the shares are of any other company. In the present case the assessee purchased its own shares under buyback scheme and as per the submissions made by the ld. Counsel at the bar the same has been extinguished by reducing the paid up capital of the assessee company. The fact remains that the factum of extinguishment of the purchased shares by reducing the paid up capital of the assessee company has not been examined and verified at the level of the AO. Therefore the issue is restored to the file of the AO for a limited purpose of examining and verifying the fact of extinguishment of shares by reducing the paid-up capital of the assessee in the accounts of the assessee. AO is directed to delete the addition in case the said fact is found to be correct - Appeal filed by the Revenue is allowed for the limited purpose of verification.

Summary

Issues:
1. Addition under Section 56(2)(viia) of the Income Tax Act, 1961.
2. Treatment of buy back of own shares as "property" under Section 56(2)(viia).
3. Exemption from Section 56(2)(viia) due to buy back and cancellation under Company Act.

Analysis:
1. The Revenue challenged the deletion of an addition of Rs.5,62,93,450 made by the AO under Section 56(2)(viia) of the Income Tax Act, 1961. The Revenue argued that the buy back of shares should be considered as "property" under this provision. The First Appellate Authority was criticized for granting relief to the assessee without considering the conditions of Section 56(2)(viia).

2. The Assessee contended that the buy back of its own shares did not meet the criteria of "property" under Section 56(2)(viia). The Assessee relied on a similar case decided by the ITAT Mumbai in favor of the assessee. The Assessee argued that the shares were extinguished by reducing the capital, making them different from shares of another company.

3. The ITAT analyzed the provisions of Section 56(2)(viia) and the related memorandum to determine that the provision applies when a firm or company receives shares from another company. It was established that the shares must become the property of the recipient, and in this case, they should be shares of another company, not the buyer's own shares. The ITAT concluded that the provision should only apply when purchased shares become the property of the buyer company, and if they are shares of another company. The case was remanded to the AO to verify the extinguishment of shares by reducing the paid-up capital of the assessee.

In conclusion, the appeal filed by the Revenue was allowed for the limited purpose of verifying the extinguishment of shares by reducing the paid-up capital. The decision was based on the interpretation of Section 56(2)(viia) and the specific circumstances of the case, aligning with the findings of a similar case decided by the ITAT Mumbai.