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Facts
M/s. Updater Services Limited, engaged in manpower/facility management, bought back 20,75,000 shares for Rs. 57.06 Crores through a High Court approved scheme in AY 2017-18. Following a revision order by the PCIT (u/s 263), the AO levied tax under Section 115QA, added income under Section 56(2)(viia) due to alleged inadequate consideration (FMV of Rs. 607 vs buyback price of Rs. 275), and disallowed interest u/s 36(1)(iii) for funds used in the buyback. The Ld. CIT(A) upheld the 115QA tax but deleted the additions under 56(2)(viia) and 36(1)(iii), leading to cross-appeals by both the assessee and the revenue before the Tribunal.
Held
The Tribunal observed the complexity of the issues, including valuation under Rule 11UA, the factual link between borrowed funds and buyback payment, and the nature of the Companies Act scheme, necessitating thorough factual verification by the AO. Consequently, the Ld. CIT(A)'s order was set aside, and the matter was remitted back to the AO for a de novo assessment on the three primary issues, granting the assessee adequate opportunity and considering judicial precedents.
Key Issues
1. Applicability of Section 115QA of the Income Tax Act on buyback of shares. 2. Applicability of Section 56(2)(viia) regarding receipt of shares for inadequate consideration in a buyback. 3. Disallowance of proportionate interest under Section 36(1)(iii) for funds utilized in the buyback of shares.
Sections Cited
115QA, 56(2)(viia), 36(1)(iii), 263, 143(3), 142(1), 133A, 250, 14A, 391, 394, 77A, 230(10), 430, 11UA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI S.S. VISWANETHRA RAVI & SHRI S. R. RAGHUNATHA
:-24-: ITA Nos.:1339, 1616/Chny/2025 & C.O.No.66/Chny/2025 does not adequately rebut the allegations made in the order u/s.263 of the Act and rejected the same.
The AO held that all the ingredients necessary to trigger the tax incidence are present in the transaction in question to attract the provisions of section 56(2)(vii)(a) of the Act and therefore the inadequate consideration being the difference between the value of Rs.607/- per share and the transaction value of Rs.275 per share multiplies by the number of shares (20,75,000). The AO brought to tax a sum of Rs.68,89,00,000/- u/s.56(2)(vii)(a) of the Act for the A.Y.2017-18.
Secondly, the AO observed from the records that during the previous year relevant to A.Y.2017-18, a sum of Rs.57,06,25,000/- was paid to M/s.Tangi Faility Solutions Private Limited by the assessee company to buy back its own shares. As the working capital has been utilized for the buyback of shares, the proportionate interest needs to be disallowed. Therefore, a show cause notice was issued to the assessee company. In response to the show cause notice the assessee company responded vide submission dated 07.03.2023.
The assessee’s response was reviewed, and their contention that the ld.PCIT did not address the disallowance of proportionate interest was rejected.
This claim was not acceptable because the case was set aside with directions for a re-assessment, and the interest issue was one of the reasons for initiating proceedings u/s.263 of the Act. Furthermore, the assessee claimed that the interest expenditure incurred for the buyback of shares should be allowable as :-25-: ITA Nos.:1339, 1616/Chny/2025 & C.O.No.66/Chny/2025 it relates to the business and not to the acquisition of a capital asset. However, as per the provisions of Section 36(1)(iii) of the Act, interest on capital borrowed for business is allowable, the proviso disallows any interest on funds borrowed for acquiring an asset until the asset is first put to use. In the case of the assessee company, a sum of Rs.57,06,25,000/- was paid for the buyback, and it is evident from internal communications that the working capital was used for this buyback and therefore is not allowable as a deduction. Accordingly, the AO disallowed a sum of (10% of Rs.57,06,25,000/-) Rs.5,70,62,500/- being the proportionate interest attributable to the amount paid to purchase the company’s share from its shareholders and added back to the total income of the assessee company for the A.Y.2017-18 and completed the set aside assessment proceedings by passing order u/s.143(3) r.w.s 263 of the Act on 30.03.2023.
We observed that the Ld.CIT(A) has sustained the action of the AO in levying additional tax amounting to Rs.11,06,17,190/- u/s.115QA of the Act. The Ld.CIT(A) has noted that the assessee did not contest the quantum of distributed income as determined by the AO, nor were any specific arguments advanced before him challenging the correctness or accuracy of the computation of such additional tax. On careful consideration of the rival submissions and the material available on record, we are of the considered opinion that the authorities below have not properly appreciated the following:
- detailed computations of NAV valuation under Rule 11UA;
:-26-: ITA Nos.:1339, 1616/Chny/2025 & C.O.No.66/Chny/2025 - financial statement extracts relating to availability of non-interest-bearing funds; - various High Court and Tribunal decisions not cited before AO; - workings relating to Section 77A ceiling and buy-back under Companies Act; - explanations regarding factual distinction between Court-approved scheme and Section 77A buy-back.
Therefore, in our considered view in the present factual matrix of the case and the contentions raised by the assessee as well as the revenue, we are inclined to set aside the order of the ld.CIT(A) and remit the matter back to the files of AO for framing the assessment denovo considering the size and complexity of the issues, particularly valuation under Rule 11UA, factual nexus between borrowed funds and buy-back payment, and nature of the scheme under Companies Act, are such that proper factual verification by the AO is indispensable.
Before parting, we also clarify that we have not expressed any opinion on the merits of the additions or deletions. All legal and factual grounds raised by both parties remain open. The AO shall provide adequate opportunity to the assessee, examine all materials including those filed before ld.CIT(A) and before us, consider judicial precedents cited and pass a reasoned order on all three following issues:
(i) applicability of section 115QA, (ii) addition under section 56(2)(viia), and (iii) disallowance under section 36(1)(iii) of the Act.
:-27-: ITA Nos.:1339, 1616/Chny/2025 & C.O.No.66/Chny/2025
In the result, the grounds of appeal raised by both the assessee and the Revenue, as well as the grounds raised in the cross-objections filed by the assessee, are treated as allowed for statistical purposes.
In the result, the appeals of both the revenue and assessee and cross objections of the assessee are allowed for statistical purposes.
Order pronounced in the court on 14th November, 2025 at Chennai.