SILGATE SOLUTIONS LIMITED,MUMBAI vs. DCIT-3(2)(1), MUMBAI

On further appeal the ld. CIT(A) confirmed the addition stating that- The contention of the assessee cannot be accepted. Section 56(2)(viia), as applicable to the relevant assessment year, clearly provided that where a company receives shares for consideration less than their fair market value, the difference is liable to be brought to tax as income. Rule 11UA of the Income-tax Rules prescribed the specific method for determining such fair market value, and the Assessing Officer has correctly applied these provisions while arriving at the value of the shares in question. The argument of the assessee that Chapter XII-DA was introduced subsequently does not exclude the applicability of section 56(2)(viia), which, even prior to such insertion. covered transactions involving receipt of shares at a value below their fair market value. The economic substance of the transaction also supports this conclusion. In the present case, the company purchased its own shares from shareholders at a consideration lower than the fair market value determined under the Act. This transaction resulted in the extinguishment of shares worth more than the outflow actually made by the company. The effect of this was that the continuing shareholders stood enriched, as the company utilised a lesser sum of money than the real worth of the shares cancelled. This conferred a tangible economic advantage upon the company, falling squarely within the mischief sought to be curbed by section 56(2)(viia). The contrary views cited by the assessee from certain decisions do not override the clear statutory language and remain confined to their own peculiar facts, and therefore such reliance does not strengthen the assessee's case.

The ld. AR submitted that, the assessee company was not doing well and certain contracts entered into by the assessee was on the verge of termination. The ld. AR further submitted that Shri GordhanTanvani & Shri Raju Tanvani were cynical about the future business and the profitability of the assessee and therefore, wanted to discontinue their investments. The ld. AR also submitted that since there were no buyers for the shares the assessee offered to buyback the shares at face Silgate Solutions limited value. The ld. AR argued that the financial and cash flow position of the company was deteriorating and hence the FMV of shares as computed by the AO does not reflect the real valuation of the assessee and that impugned transaction does result in any benefit to the assessee since the same resulted in mere capital reduction. The ld. AR also argued that the provisions of Section 56(2)(viia) of the Act, is not applicable to the present case for the reason that the words "receives" read along with the word "any property" as used in the section cannot be extended to buyback of shares resulting in capital reduction which is a mere cancellation process. The ld. AR submitted that the Companies Act does not permit a company to hold its own shares and, therefore, the shares bought back do not become the property of the assessee for it fall within the provisions of Section 56(2)(viia). The ld. AR in this regard, placed reliance on the following decisions: 1.Vora Financial Services (P.) Ltd. vs. ACIT [2018] 96 taxmann.com 88 (Mumbai) 2.VITP (P.) Ltd. vs. DCIT[2022] 143 taxmann.com 304 (Hyderabad - Trib.) 3. DCIT vs. Venture LightingIndia Ltd [2023] 150 taxmann.com 523 (Chennai - Trib.) 4.DCIT vs. Globe Capital Market Ltd.[2023] 156 taxmann.com 620 (Delhi - Trib.) 5. DCIT VS. TPS infrastructure Ltd. 6.Lupin Investments Private LimitedITA No. 4635/Mum/2024.

The ld. DR on the other hand, relied on the orders of the lower authorities.

We heard the parties and perused the material on record. The assessee bought back 3,12,500/- shares at face value during the year under consideration, from three of its shareholders. The AO held that the fair value of the shares as per Silgate Solutions limited Rules 11UA of the Rules is Rs. 60 and accordingly treated the difference as income from other sources u/s. 56(2)(viia) of the Act. The primary contention of the assessee is that the provisions of the Section 56(2)(viia) are not applicable to the impugned transactions for the reason that the assessee should have received property being shares for a consideration less than fair market value whereas in assesses case the shares bought back are not the property of the assessee. In this regard, we notice that the co-ordinate bench in a case of Vora Financial Services (P) Ltd (supra) has considered and identical situation where it has been held as - 23. The last issue urged by the assessee relates to the addition of Rs.82.89 lakhs made u/s 56(2)(viia) of the Act. The facts in brief are that the assessee, during the year under consideration, made an offer to existing shareholders for buy back of 25% of its existing share capital at a price of Rs.26/- per share. The offer was open between 8th May, 2013 and 22nd May, 2013. One of the directors Shri KashyapVora offered 12.19,075 shares under the buyback scheme and accordingly the assessee bought those shares paid a consideration of Rs 316.95 lakhs on 24.05.2013. The AO noticed that the book value of shares as on 31.3.2013 was Rs.32.80 per share, whereas the assessee company has bought back the shares at Rs.26/- per share.

The AO proposed to invoke the provisions of sec.56(2)(viia) of the Act to this transaction of buy back The said provisions read as under:- "56(2)(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested.- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property: (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

The Ld A.R submitted that the Income tax Act was amended by inserting a new clause in sec. 2(22) of the Act and also by inserting sec.46A, consequent to the insertion of sec. 77A in the Companies Act, which allows a company to purchase its own shares. Amendment in Section 2(22) provides that the dividend does not include any payment made by a company on purchase of its own shares in accordance with provisions of sec. 77 of the Companies Act. Section 46A provides for taxation of consideration received. Accordingly the Ld A.R submitted that the above said provisions only deal with the case of buy back of shares and hence the AO was not correct in invoking the provisions of sec. 56(2)(viia) of the Act in the instant case. In this regard,the Ld A.R placed reliance on the MemorandumExplaining the provisions in Finance B 1999 (1999) 236 ITR (SL) 155 26. He submitted that the provisions of see 56(2)(vii) were introduced as counter evasion mechanism as explained in the memorandum explaining the provisions in the Finance Bill. 2010 (2010)(32) ITR 110), which is extracted below:-- "B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent Laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act The provisions were intended to extend the tax net to such transactions in kind. The intent is out to tax the transactions entered unto in the normal course of business or made, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the "property"

The question of taxability of bonus shares received by a shareholder u/s 56(2)(vii)(c) of the Act came to be considered in the case of Sudhir Menon HUF v. Asstt. CIT [2014] 45 axmann.com 176/148 ITD 260 by the Mumbai bench of Tribunal. The Tribunal held that the additional shares were allotted pro rata to the existing shareholders and there was no scope for any property being received on said allotment of shares and hence provisions of sec. 56(2)(vii)(c) will not apply. The above said decision was followed by the Bangalore bench of ITAT in the case of Dv. CIT v. Dr.Rajan Pal [2017] 82 taxmann.com 347. The Ld. A.R submitted that the above said decisions were rendered in the context o taxability of bonus shares, which enhances the paid up capital, u/s 56(2)(vii)(c) of the Act. However, in the instant case, the issue involved is the buyback of shares, which reduces the paid up capital. Hence the ratio of the above said decision should apply here also.

The Ld. A.R submitted that the AO has taken the book value of shares at Rs.32.80 per share. He submitted that the assessee also got its shares valued as per which the book value of shares as on 31.3.2013 works out to Rs.25.42 per share. He further submitted that the provisions of sec. 56(2)(viia) speaks about "fair market value" of shares, which is different from book value.

The Ld. D.R, on the contrary, submitted that the assessee is relying upon a valuation certificate obtained recently and the same was not available before the AO. Accordingly he submitted that the above said valuation report should be ignored. He submitted that the assessee has purchased shares at Rs.26/- per share, while the book value as per the computation of AO was Rs.32.80 shares. Accordingly he submitted that the AO has rightly assessed the difference u's. 56(2)(viia) of the Act.

A combined reading of the provisions of sec. 56(2)(viia) and the memorandum explaining the provisions would show 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 Silgate Solutions limited 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.

Accordingly we are of the view that the provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is "shares of any other company". In the instant case, the assessee herein 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 we are of the view that the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares.

The ratio laid down by the coordinate bench in the above decision is that the own shares which are bought back does not become the property of the recipient unless it is shares of any other company and therefore the provisions of Section 56(2)(viia) cannot be applied. The facts in assesses case being identical we are of the view that the said ratio is applicable to assesses case also. Accordingly, we hold that the provisions of Section 56(2)(viia) cannot be invoked for the impugned transaction and therefore the addition made by the AO is not sustainable.

In the result, the appeal of the assessee is allowed.