Question And Answer
Subject: whether provisions of section 56(2)(X) and section 50CA of IT act. will be applicable in case buy back of shares.
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Date: June 19, 2021
Query asked by CA S.P.AGARWAL


In case of a unlisted company, buying back it’s own shares at face value of Rs.10/- when the fair market value of share  as per income tax rules, is  Rs.300/ and the  said share ,was allotted at a premium of Rs.90/-.


Whether provisions of section 56(2)(X) and section 50CA of IT act providing deeming fiction of income ,  shall be applicable ?

Whether benefit of the Hon’ble  Mumbai Bench ITAT decision in case of VORA FINANCE  shall be available to the assessee company and also the shareholder and the difference  in the buy back price and FMV shall escape assessment as income, either in the hands of company or in  the hands of shareholder.?

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Section 56(2)(viia) of the Income-tax Act, 1961 (Act) being the erstwhile provision before introduction of 56(2)(x) of the Act, the observation of the Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of M/s Vora Financial Services Pvt Ltd v. ACIT ITA [2018] 171 ITD 646 (Mum) will still hold good. Therefore, section 56 of the Act is not applicable to buy back of shares.

Further, section 115QA of the Act pertaining to buy back of shares was introduce vide introduced by Finance Act, 2013. The said section starts with a non-obstante clause and therefore overrides the other provisions of the Act.
Further, section 10(34) of the act also introduced via Finance Act, 2013 exempts a shareholder from computation of tax on the incidence of buyback. Thereby not attracting the provisions under the head Capital Gain. Therefore since section 48 of the Act is not invoked; section 50CA of the Act has no applicability

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