ACIT, CHENNAI vs. UPDATER SERVICES LIMITED, CHENNAI

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ITA 1616/CHNY/2025Status: DisposedITAT Chennai14 November 2025Bench: SHRI S.S. VISWANETHRA RAVI (Judicial Member), SHRI S. R. RAGHUNATHA (Accountant Member)1 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal found that the authorities below had not properly appreciated the complex issues involved, including valuation, financial statements, and the nature of the scheme under the Companies Act. Therefore, the matter was set aside and remitted back to the Assessing Officer for de novo assessment.

What were the facts?

The appeals by the assessee and revenue, along with cross-objections, concern the assessment year 2017-18. The core issues revolve around the applicability of Section 115QA (buyback tax), Section 56(2)(viia) (tax on receipt of property for inadequate consideration), and Section 36(1)(iii) (disallowance of interest on borrowed capital).

What were the issues?

The key legal issues are the applicability of buyback tax under Section 115QA, taxability under Section 56(2)(viia) for share transactions, and the allowability of interest deduction under Section 36(1)(iii) for funds used in share buyback.

Which sections of the Income-tax Act were involved?

Section 115QA,Section 56(2)(viia),Section 36(1)(iii),Section 263,Section 77A

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(10)Show list

Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.

Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI

Before: SHRI S.S. VISWANETHRA RAVI & SHRI S. R. RAGHUNATHA

For Appellant: Shri. K. Prasanna, C.A
Hearing: 20.08.2025Pronounced: 14.11.2025

:-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.

26.

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.

27.

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.

28.

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.

29.

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.

30.

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.

31.

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

32.

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.

33.

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.

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