By TIOL News Service

MUMBAI, AUG 24, 2018: THE ISSUE IS - Whether sec. 56(2)(viia) is not applicable on buy back of own shares by company. YES IS THE VERDICT.

Facts of the case

The assessee company, engaged in the business of trading in shares and derivatives had filed return for relevant AY. During the relevant year, AO made an offer to existing shareholders for buy back of 25% of its existing share capital at a price of Rs. 26/- per share. One of the directors Shri Kashyap Vora offered 12,19,075 shares under the buyback scheme and accordingly the assessee bought those shares back under scheme. The AO noticed that the book value of shares as on 31.3.2013 was Rs. 32.80 per share, whereas the assessee company had bought back the shares at Rs. 26/- per share. The AO noticed that consideration of Rs. 316.95 lakhs had been reinvested in the assessee company in the form of loan. Hence the AO took the view that the entire exercise was carried out to reduce the liability of the company by purchasing shares below the fair market value. Accordingly the AO assessed the difference between the book value of shares and purchase price of shares amounting to Rs.82.89 lakhs as income of the assessee u/s 56(2)(viia) of the Act. The CIT(A) also confirmed the same.

Tribunal held that,

++ the provisions of sec. 56(2)(viia) would be attracted when "a firm or company (not being a company in which public are substantially interested)" receives a "property, being shares in a company (not being a company in which public are substantially interested)". Therefore, it follows the shares should become "property" of recipient company and in that case, it should be shares of any other company and could not be its own shares. Because own shares cannot be become property of the recipient company. In the instant case, the assessee has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of "becoming property" and also "shares of any other company" fail in this case. Accordingly, tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. In the result, the appeal filed by the assessee is allowed.

(See 2018-TIOL-1342-ITAT-MUM)