| Question And Answer | |
|---|---|
| Subject: | 56(2)(10) in case of Buy back of shares |
| Category: | Income-Tax |
| Querist: | CA Subodh Vora |
| Answered by: | Advocate Shashi Ashok Bekal |
| Tags: | buy back of shares, Capital Gains |
| Date: | March 16, 2022 |
In Vora Financial Services Pvt Ltd Vs ACIT (ITAT Mumbai) at para no 32 observed as under:
Accordingly we are of the view that the provision of section 56(2)(viia) should be applicable only in the case of where the receipt of share becomes property in the hands of recipient and the shares shall become property of the receipt only it is is shares of any other company, In the instant case the assesses herein has purchased its own shares under the buy back scheme and same has been extinguished by reducing the capital and hence the test of becoming property and share of any other company fails in this case. Accordingly we are of the view that the tax authorities are not justified in invoking the provision of section 56(2) (viia) for buy back of own shares.
query-In this case the difference per share was small Rs 6.80 (Rs 32.8minues 26). There was no valuation rules. The assess had given its own valuation report which was near Rs 26. This case was for Assessment year 2014-15 when this section was applicable to only Individual and HUF. On buyback the shares become property of Company and then same is cancelled / extinguishes.
Please confirm that after the introduction of section 56(2)(10 ) to company this judgment holds good. Is there any adverse judgment on this issue. Any reference is filed against the above judgment
As per the language in section 56(2)(x) of the Income-tax Act, 1961, the same is applicable to transactions which are without consideration or in adequate consideration. In case of a buyback where there is a buyback, there is a premium paid by the company to the shareholder. Therefore there is no question of inadequate consideration.
Further, the gains on such transactions are chargeable under the head ‘Capital Gains’.
Furthermore, section 56 (2)(x) and erstwhile section 56(2)(vii) are anti-abuse provisions, which should not attract in the case of bona fide transactions, especially when the transaction of buyback is being done within the framework of Companies Act, 2013 and rules framed thereunder.
Further, the gains on such transactions are chargeable under the head ‘Capital Gains’.
It may be noted that buy back of shares is not chargeable to capital gain
56 (X) will not apply in case of buy back and company (unlisted) which buy back its own shares receives no property whereas it is prerequisite to apply sec 56 (X) that property being unlisted shares must be received by the company here in case of buy back relevant shares and rights associated with such shares are extinguished.