2023 (9) TMI 1513 - AT - Income Tax

Addition u/s 56(2)(x) - deemed income on buyback of its own share by a closely held company - whether CIT(A) is correct on facts and in law in it's own shares through buyback of shares @ Rs. 313.40 per share against the fair market value of Rs. 370.46 per share determined as per Rule 11UA? - HELD THAT - Identical issue came up for consideration before co-ordinate Benches of Delhi, Mumbai, Hyderabad and Chennai Tribunals. In TPS Infrastructure Ltd. 2022 (12) TMI 693 - ITAT DELHI as followed the order of M/s Vohra Financial Services Pvt. Ltd. 2018 (7) TMI 64 - ITAT MUMBAI and held that the provisions of section 56(2)(viia) of the Act are applicable only in the cases where the purchased shares became property in the hands of the buyer company and, if the shares are of any other company. However, in the case under consideration 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. Hyderabad Bench of the Tribunal in VITP Private Limited 2022 (8) TMI 220 - ITAT HYDERABAD followed the decision in Vohra Financial Services Pvt. Ltd. (supra) and held that with reference to buying back of own shares by a company which become extinguished by reducing the capital, it is clear that the test of becoming property and also shares of any other company fails thereby rendering the provisions of section 56(2)(viia) of the Act inapplicable to the cases of buy back of own shares. Appeal of the Revenue is dismissed.

Issues Involved:
1. Deletion of addition under Section 56(2)(x) of the Income Tax Act, 1961.
2. Determination of Fair Market Value (FMV) under Rule 11UA.
3. Applicability of Section 56(2)(x) on buyback of shares.
4. Classification of buyback shares as "property" under Section 56(2)(vii).
5. Nature of shares during buyback as immovable property.
6. Overall tenability of the CIT(A)'s order.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 56(2)(x):
The Revenue challenged the deletion of an addition of Rs. 16,33,34,250/- made by the AO under Section 56(2)(x), which was deemed income from the buyback of shares. The CIT(A) deleted this addition, holding that the provisions of Section 56(2)(x) were not applicable to the buyback of shares by the assessee company.

2. Determination of Fair Market Value (FMV) under Rule 11UA:
The AO determined the FMV of the shares at Rs. 370.46 per share as per Rule 11UA, while the buyback price was Rs. 313.40 per share, resulting in a difference of Rs. 57.06 per share. The AO added this difference as income under Section 56(2)(x). The CIT(A) found that Rule 11UA's applicability is contingent on Section 56(2)(x) being applicable, which was not the case here.

3. Applicability of Section 56(2)(x) on Buyback of Shares:
The CIT(A) and various ITAT benches (Delhi, Mumbai, Hyderabad, and Chennai) consistently held that Section 56(2)(x) does not apply to buyback transactions. The buyback results in the reduction of share capital rather than the acquisition of property. The Tribunal upheld this view, noting that Section 56(2)(x) applies to the receipt of property, and buyback does not result in the acquisition of property by the company.

4. Classification of Buyback Shares as "Property" under Section 56(2)(vii):
The CIT(A) and supporting ITAT decisions clarified that buyback shares do not constitute "property" as defined under Section 56(2)(vii). The transaction reduces the company's share capital rather than acquiring a capital asset. The Tribunal agreed, emphasizing that the shares bought back are extinguished and do not become property in the hands of the buying company.

5. Nature of Shares During Buyback as Immovable Property:
The Revenue argued that the shares during buyback were akin to immovable property. However, the CIT(A) and Tribunal found this argument unconvincing, as the buyback process does not involve acquiring immovable property but rather reducing share capital.

6. Overall Tenability of the CIT(A)'s Order:
The Tribunal upheld the CIT(A)'s order, finding it legally and factually tenable. The CIT(A) had correctly applied the law and followed precedents set by various ITAT benches, which consistently held that Section 56(2)(x) does not apply to buyback transactions.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 16,33,34,250/- under Section 56(2)(x). The Tribunal's decision was based on consistent judicial precedents and a clear interpretation of the relevant provisions, confirming that buyback transactions do not attract the provisions of Section 56(2)(x). The order was pronounced in the open court on 25th September, 2023.

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