BRIEF FACTS OF THE CASE1
- For Assessment Year 2016–17, the taxpayer undertook a buyback of 1,90,097 equity shares at a consideration of INR 10 per share, aggregating to INR 19,00,970 which were cancelled as part of the buyback process. During the assessment proceedings, the Assessing Officer ('AO') determined the fair market value ('FMV') of the shares at ₹1,836 per share, as per Rule 11UA of the Income-tax Rules, 1962. Based on this valuation, the AO concluded that the shares were acquired by the taxpayer at a price significantly lower than their FMV and accordingly made an addition of approximately INR 34.71 Crore under Section 56(2)(viia) of the Incometax Act, 1961 ('the Act').
- The taxpayer's appeal before the Commissioner of Income Tax (Appeals) was dismissed, following which the matter was further challenged before the Incometax Appellate Tribunal.
OBSERVATIONS OF ITAT
- The Tribunal relied upon its earlier decision in the case of Vora Financial Services (P.) Ltd. v. ACIT [[2018] 96 taxmann.com 88 (Mumbai)], wherein the identical issue was decided in favour of the Assessee.
- In that case, the Tribunal had held that Section 56(2)(viia) of the Act is attracted only when a firm or a closely held company receives shares of another company, and such shares become "property" in the hands of the recipient. It was categorically held that a company's own shares, when bought back, do not constitute "property", as they are not capable of becoming the company's asset.
- It was further noted that that the assessee had undertaken a buyback of its own shares, which were subsequently extinguished by reducing the capital. Since a company cannot receive its own shares as property, and such shares do not survive post-buyback, the essential conditions for invoking Section 56(2)(viia) of the Act, namely (i) receipt of property and (ii) that too in the form of shares of another company, were clearly not satisfied.
- Accordingly, in the present case the Tribunal held that the provisions of Section 56(2)(viia) of the Act were not applicable to a buyback of own shares, and that the addition made by the AO in the case of the taxpayer was not justified.
- Although Section 56(2)(viia) was applicable only until 1 April 2017, later replaced by the wider provisions of Section 56(2)(x), this ruling reinforces the rationale laid down in Vora Financial Services, affirming that a company's buyback of its own shares, even if below FMV, does not trigger taxation under deeming provisions. By reiterating that such buybacks do not involve the "receipt of property", the Tribunal has once again made it clear that genuine corporate actions like buybacks should not face unnecessary tax issues.
Footnote
1. Lupin Investments Private Limited v. DCIT [I.T.A. No. 4635/Mum/2024]
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