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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HONBLE & SHRI SANDEEP SINGH KARHAIL, HONBLE
आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order dated 15/07/2024 by NFAC, Delhi [hereinafter “the ld. CIT(A)”] pertaining to AY 2016-17.
The grievance of the assessee reads as under:- “The appellant objects to the order, dated 15 July 2024, passed by the learned National Faceless Appeal Centre, Income Tax Department [learned CIT(A)] under section 250 of the Income tax Act, 1961 ('the Act') on the following among other grounds of appeal
. Each of the following grounds and sub-grounds of appeal are independent and without prejudice to the other. Ground No. 1 - Validity of the proceedings 1.1 That on the facts and circumstances of the case and in law, despite the department put to notice of the factum of the amalgamation during assessment proceedings, the assessment notices and the consequent assessment order dated
27. December 2018, being issued under section 142(1) [scheme became effective after notice issued under section 143(2)] and made under section 143(3) by the Deputy Commissioner of Income tax, Circle 14(2)(1) (learned AO) in the name of non- existent/amalgamating company are bad in law.
1.2 That on the facts and circumstances of the case and in law, the proceedings are bad in law as the assessment is framed in the name of the amalgamating company, which was not in existence.
1.3 That the appellant in response to the appeal hearing Notice dated 26 June 2023 has filed additional submissions on 11 July 2023 vide reply dated 10 July 2023. However, the learned CIT(A) in Para 3, page 10 of the order has stated in the remarks column that no reply was filed. Accordingly, the learned CIT(A) without considering the said reply has decided the appeal against the appellant. Thus, the appeal order should be set aside as being passed in violation of principles of natural justice.
Ground No. 2 - Addition under section 56(2)(viia) of the Act 2.1 That on the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 34,71,17,122 made by the learned AO under section 56(2)(viia) of the Act on buy back of shares, without appreciating that in case of buy back of unlisted shares, the taxability is based on distributed income as per section 115QA of the Act.
2.2 Without prejudice, the learned CIT(A) erred in not appreciating that the circumstances and conditions for invoking section 56(2)(viia) of the Act are not satisfied in the appellant's case.
Ground No. 3- Interest income from long term non-trade investments 3.1 The learned CIT(A) erred in confirming the action of the Assessing Officer of considering the interest income of Rs. 77,34,498 from long term non-trade investments as business income as against income from other sources considered in the return of income.
3.2 Without prejudice, the learned CIT(A) erred in not appreciating that the same position has been accepted by the department in the appellant's own case in earlier years and the same ought to be adopted in this year, there being no changes in facts as compared to earlier years.
Ground No. 4- Deduction under section 80GGA 4.1 The learned CIT(A) erred in upholding the action of the Assessing Officer of not allowing the deduction of Rs. 2,13,25,717 claimed under section 80GGA of the Act.
4.2 Without prejudice, the learned CIT(A) ought to have allowed the deduction of Rs. 2,67,50,000 under section 35AC of the Act.
3 Ground No. 5- Interest under section 234B 5. The learned CIT(A) erred in not directing the Assessing Officer to delete the interest under section 234B of Rs. 3,62,73,699. Ground 6- General 6.1 Each one of the above grounds of appeal is without prejudice to the other. 6.2 The appellant reserves the right to amend, alter or add to the grounds of appeal.”
3. Arguing for the issue raised vide Ground No. 1, the ld. Counsel for the assessee pointed out that vide letter dated 13/09/2017, placed as Exhibit 1 of the paper book, the assessee has informed the AO in respect of amalgamation of the company with Lupin Investments Private Limited from 01/10/2016. Again vide letter dated 04/05/2018, the assessee reiterated that the assessee is subsequently merged with Lupin Investments Private Limited w.e.f. 01/10/2016 and yet the AO framed the assessment order dated 27/12/2018 in the name of Zyma Laboratories Limited, a non-est company. It has been further pointed out that subsequent assessment order was also passed bearing the same order number and the same date in the name of Lupin Investments Private Limited as successor to Zyma Laboratories Limited. It is the say of the ld. Counsel for the assessee that the AO could not have passed the second assessment order unless the first order was withdrawn.
4. We have given a thoughtful consideration to the submissions of the ld. Counsel. Insofar as, the first order which is in the name of a non- est company is concerned, we find that the order is unsigned and, therefore, it is non-est in the eyes of law. The second order which is in the name of Lupin Investments Private Limited, is successor to Zyma Laboratories Limited, is a valid order physically signed by the AO. Therefore, we do not find any force in the contentions raised vide Ground No. 1 and the same is dismissed.
5. Coming to the grievance raised vide Ground No. 2, briefly stated the facts of the case are that while scrutinising the return of income, the AO noticed that the assessee has undertaken buy back of shares. The AO found that the board of directors had approved proposal for buy back of 190097 equity shares at a price of Rs. 10/- per share for a credit amount of Rs. 19,00,970/-. Accordingly, the company has bought back and extinguished 190097 equity shares for total consideration of Rs. 19,00,970/- on January 18th, 2016. 5.1. The assessee was asked to explain why the fair market value of shares should not be taken for the purpose of consideration to be paid for the buy back of shares in terms of Section 56(2)(via) of the Act. In its reply, the assessee strongly contended that the provisions of Section 56(2)(via) of the Act do not apply on the facts of the case in hand. Dismissing the claim of the assessee, the AO computed the fair market value of unquoted equity shares as per Rule 11UA as under:- Particulars of Zyma Laboratories Amount (Rs.) Ltd. Total Assets as per audited accounts as 3,234,408,78 on 31/03/2015 Less: Income Taxes paid 11,971,903 Less: Current liabilities 348,127,451 Less: Other current liabilities 107,418 Less: Preference share capital - TOTAL 2,874,201,966 No of shares 1,565,585 Break-up value per share 1835.86 5.2. Taking Rs. 1835.86/- rounded off to Rs.1836/-, the AO computed the addition at Rs. 34,71,17,122/-.
Assessee carried the matter before the ld. CIT(A) but without any success.
7. Before us, the ld. Counsel for the assessee reiterated that the provisions of Section 56(2)(via) of the Act do not apply on the facts of the case and placed strong reliance on other decisions of the Co- ordinate Benches. Per contra, the ld. D/R strongly supported the findings of the ld. CIT(A) and read the operative part of the decision of the ld. CIT(A).
8. We have carefully considered the orders of the authorities below. We find force in the contentions of the ld. Counsel for the assessee. On identical set of facts, the Co-ordinate Benches in the case of Vora Financial Services (P.) Ltd. Vs. ACIT [2018] 96 taxmann.com 88 (Mumbai); VITP (P.) Ltd. Vs. ACIT [2022] 143 taxmann.com 304 (Hyderabad – Trib.); DCIT vs. Venture Lighting India Ltd. [2023] 150 taxmann. Com 523 (Chennai- Trib.); DCIT vs. Globe Capital Market Ltd. [2023] 156 taxmann.com 620 (Delhi-Trib.) & DCIT vs. TPS Infrastructure Ltd. in has considered identical set of facts and decided the issue in favour of the assessee and against the revenue. It would suffice if we refer to one of the decisions of the Co-ordinate Bench Mumbai in the case of Vora Financial Services (P.) Ltd. Vs. ACIT (supra). The relevant findings read as under:- “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 Kashyap Vora 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.
24. 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: Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);" The AO noticed that consideration of Rs.316.95 lakhs has 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 Ld. CIT (A) also confirmed the same.
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 Memorandum Explaining the provisions in Finance Bill, 1999 available in (1999) 236 ITR (St.) 155.
He submitted that the provisions of sec.56(2)(vii) were introduced as counter evasion mechanism as explained in the Memorandum Explaining the provisions in the Finance Bill, 2010 (2010)(321 ITR (St.) 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 not to tax the transactions entered into in the normal course of business or trade, 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" which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient." The Ld A.R submitted that the above said explanations squarely apply to the provisions of sec. 56(2)(viia) of the Act also. He submitted that the primary condition for invoking the provisions of sec. 56(2)(viia) was that the shares should become a "Capital asset" and property in the hands of recipient. He submitted that, in the instant case, the assessee has purchased the shares under the buyback scheme and the said shares have been extinguished by writing down the share capital. Hence those shares did not become capital asset of the assessee company and hence the provisions of sec. 56(2)(viia) should not have been invoked in the hands of the assessee company.
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 taxmann.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 Dy. 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 buy back 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.
We have heard rival contentions on this issue and perused the record. The provisions of sec. 56(2)(viia) reads that "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" The words "firm or a company" "any property, being shares of a company" are important here. In this regard, we may refer to the Memorandum explaining the insertion of Provisions of sec. 56(2)(viia) by the Finance Act, 2010, which reads as under:— "Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section 56(2)( vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art. A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision.
8 In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested)."
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 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.”
On finding parity of facts, respectfully following the decision of the Co-ordinate Benches (supra), we direct the AO to delete the impugned addition. Accordingly, Ground No. 2 is allowed.
Underlying facts in the issues raised vide Ground No. 3 show that the assessee has shown interest income on Income-tax refund and interest income on long-term non-trade investments under the head “income from other sources”. The AO was of the firm belief that the assessee company is engaged in the activities of investments in shares and securities and financing to group companies. Therefore, interest income on investments made, should be offered under the business head and accordingly, taxed the interest income on long-term non- trade investments under the heard profits and gains of business and profession. Having done so, the AO denied the claim of deduction u/s 9 80 GGA of the Act. This action of the AO was confirmed by the ld. CIT(A).
Before us, the ld. Counsel for the assessee vehemently stated that in the earlier years also, the assessee has been showing interest income under the heard “income from other sources” and the same was accepted. Therefore, both the lower authorities have breached the rule of consistency.
Be that as it may, the assessee is also eligible for claim of deduction u/s 35AC of the Act which cannot be brushed aside lightly. Though, this claim was also made before the AO but the orders of the lower authorities are silent on this claim made by the assessee. Therefore, in the interest of justice and fairplay, we deem it fit to restore this issue to the file of the AO. The assessee is directed to furnish evidence in support of the claim of deduction u/s 35AC of the Act and the AO is directed to examine the same and decide the issue afresh as per the relevant provision of law and after affording reasonable and adequate opportunity of being heard to the assessee. Ground Nos. 3 & 4 taken together are allowed for statistical purposes.
Ground No. 5 relates to the charging of interest u/s 234B of the Act. Levy of interest is mandatory but consequential. Therefore, the AO is directed to charge interest as per the relevant provisions of law.