2022 (12) TMI 696 - AT - Income Tax

Addition of payment of commission and claiming the same as expenses - HELD THAT - We noted that the assessee before CIT(A) submitted the complete details in regard to payment of commission and even TDS was deducted on the above said commission. Assessee also filed agreements, details of service rendered, payment made in regard to each sale i.e., calculation of commission based on invoices of sales. Even now before us, the ld. Senior DR could not controvert the above stated fact. Hence, we confirm the order of CIT(A) deleting the disallowance. Therefore, this issue of Revenue s appeal is dismissed. Addition u/s 56(2)(viia) - taking fair market value of buy back of shares by assessee from its holding company a company incorporated in USA, as valued by assessee at Rs.89/- per share as against fair market value adopted by AO at Rs.115.59 per share - HELD THAT - As argued by DR, that by receiving the shares of its own i.e., buyback for a consideration less than the book value, the assessee has earned hidden asset from the parent company by giving up its right to obtain the true value of its shares transferred, we do not agree because the provisions of section 2(22)(d) r.w.s.115O of the Act would not apply in the hands of the assessee, since the shareholders have received the money in lieu of buyback of shares by assessee of the parent company. According to us, said provision would not apply in the hands of the assessee who has brought back this shares and in any eventuality, the very provision of section 2(22)(d) of the Act also craved out exception i.e., dividend . In our view, the assessee has not received any property being shares in a company and once, there is no property of recipient company it should be share of any other company and could not be its own share, because any share cannot become property of recipient company on buyback. In the given facts and as arguments made the assessee has earned hidden asset, we do not agree that on the issue of buyback of shares, assessee has acquired any share of any other company which would become property of the recipient company. Actually it will be reduction in capital and nothing more. Hence, we affirm the order of CIT(A) and this issue of Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Deletion of addition made by AO regarding payment of commission claimed as expenses.
2. Deletion of addition made by AO on the basis of fair market value of buyback of shares by the assessee from its holding company.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO Regarding Payment of Commission Claimed as Expenses:

The Revenue appealed against the order of the CIT(A) which deleted the addition made by the AO concerning the payment of commission claimed as expenses by the assessee. The assessee, engaged in the manufacture and export of Metal Halide Lamps, claimed to have paid a commission amounting to Rs. 23,21,665/-. During the assessment proceedings, the AO asked the assessee to provide detailed evidence of the commission payments, including agreements, proof of services rendered, and related bills and vouchers. The assessee failed to submit any evidence except a break-up of the commission paid, leading the AO to disallow the entire commission. The assessee appealed to the CIT(A), providing comprehensive details, including agreements, payment proofs through banking channels, TDS deductions, identities of the commission recipients, invoices, and the computation of commission based on these invoices. The CIT(A) requested a remand report from the AO, which was not submitted. Consequently, the CIT(A) accepted the assessee's explanation and deleted the disallowance. The Tribunal, upon hearing the rival contentions and reviewing the facts, noted that the assessee had provided complete details and even deducted TDS on the commission. The Revenue's Senior DR could not counter these facts. Therefore, the Tribunal confirmed the CIT(A)'s order, dismissing the Revenue's appeal on this issue.

2. Deletion of Addition Made by AO on the Basis of Fair Market Value of Buyback of Shares by the Assessee from its Holding Company:

The second issue involved the CIT(A)'s deletion of the addition made by the AO based on the fair market value of shares bought back by the assessee from its holding company, M/s. Advance Lighting Technology Inc. The AO had invoked section 56(2)(viia) of the Income Tax Act, determining the fair market value of the shares at Rs. 115.59 per share, against the assessee's valuation of Rs. 89/- per share, adding the differential amount of Rs. 4,13,87,867/- to the assessee's income. The CIT(A) held that the buyback of shares did not attract the provisions of section 56(2)(viia) as it did not constitute the purchase of any property. The CIT(A) noted compliance with section 77A of the Companies Act and the filing of necessary forms with the ROC. The Tribunal, after hearing the rival contentions, noted that the assessee had adopted the fair market value of buyback at Rs. 89.11 per share, while the AO revalued it at Rs. 115.59, invoking section 56(2)(viia). The Tribunal observed that section 56(2)(viia) applies only when an assessee receives property for inadequate consideration. In this case, the assessee had merely bought back its own shares, reducing its share capital, which did not amount to acquiring property. The Tribunal referred to a similar decision by the Mumbai Tribunal in Vora Financial Services (P.) Ltd., which held that section 56(2)(viia) applies only when shares become the property of the recipient, which is not the case with buyback of own shares. The Tribunal concluded that the buyback did not result in the assessee acquiring any property and upheld the CIT(A)'s order, dismissing the Revenue's appeal on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal on both issues, confirming the CIT(A)'s orders regarding the deletion of additions related to the payment of commission and the fair market value of buyback of shares. The Tribunal emphasized that the provisions of section 56(2)(viia) did not apply to the buyback of shares, as it did not constitute the acquisition of property.