SILGATE SOLUTIONS LIMITED,MUMBAI V. DCIT-3(2)(1), MUMBAI

ITA 5367/MUM/2025

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Silgate Solutions Limited appealed against the order of the Commissioner of Income Tax Appeals/National Faceless Appeal Centre (NFAC), which had confirmed the addition of Rs. 1,44,75,000 under Section 56(2)(viia) of the Income Tax Act, 1961, due to the buyback of shares at par value which was below their fair market value as determined by Rule 11UA. The Tribunal examined whether the provisions of Section 56(2)(viia) apply to the buyback of shares by a company from its shareholders. The Tribunal concluded that these provisions do not apply as the shares do not become the property of the company when bought back and extinguished, thus allowing the appeal and reversing the addition made by the Assessing Officer.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 783459 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2013-2014
• Appeal Filed On: 29-08-2025
• Other Referred Cases: Vora Financial Services (P.) Ltd. vs. ACIT, VITP (P.) Ltd. vs. DCIT, DCIT vs. Venture Lighting India Ltd, DCIT vs. Globe Capital Market Ltd, DCIT vs. TPS Infrastructure Ltd, Lupin Investments Private Limited vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SWAPNIL CHOUDHARY
• Assessee Lawyers: PARAS S. SAVLA
• Keywords: Capital asset; Fair market value; Income from undisclosed sources; Gift; Principle of natural justice; Valuation report
• Section: 56; 56(2); 234B

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFOREHON’BLE SHRI SAKTIJIT DEY, VICE PRESIDENT & MS PADMAVATHY S, AM I.T.A. No. 5367/Mum/2025 (Assessment Year: 2013-14) Silgate Solutions Limited 102, A Block, Ranjit Studio, D.S. Phalke Road, Dadar East, Mumbai 400014 PAN: AAFCS6294J Vs. Deputy Commissioner of Income Tax 3(2)(1), Mumbai. Room No. 608, 6th Floor, Aayakar Bhavan, Maharshi Karve Road, Mumbai 400020 Appellant) : Respondent) Assessee by : Shri Paras S. Savla Revenue by : Shri. SwapnilChoudhary Sr. AR Date of Hearing : 27.10.2025 Date of Pronouncement : 04.11.2025 O R D E R Per Padmavathy S, AM: This appeal by the assessee is against the order of the Commissioner of Income Tax Appeals/National Faceless Appeal Centre (NFAC), Delhi passed u/s. 250 of the Income Tax Act, 1961 (the 'Act') dated 18.08.2025 for AY 2013-14. The grounds raised by the assessee are as under – “1. General On the facts and circumstances of the case and in law, the National Faceless Appeal Centre / Commissioner of Income Tax (Appeals) [NFAC/CIT(A)] has erred in dismissing the appeal. Printed from counselvise.com 2 ITA No. 5367/Mum/2025 Silgate Solutions limited 2. Natural justice violated On the facts and circumstances of the case and in law, the Ld. NFAC/CIT(A) failed to grant sufficient opportunity to present the case and thus principles of natural justice are grossly violated. 3. Addition of Rs. 1,44,75,000/- u/s 56(2)(viia) On the facts and circumstances of the case, and in law, the Ld. NFAC/CIT(A) erred in confirming the addition of Rs. 1,44,75,000/- u/s 56(2) (viia) of the Income tax Act, 1961, on account of buyback of shares during the year. 4.Interest u/s 234A, 234B and 234C On merits, the Appellant denies its liability to the levy of penal interest u/s. 234A, 234B and 234C, hence the interest levied may be directed to be deleted. The Appellant submits that all the above grounds are without prejudice to each other.The Appellant craves leave to add, amend, alter, delete or substitute any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal.” 2. The assessee is a company engaged in the business of international call centre. The assessee filed a return of income for AY 2013-14 on 24.10.2013, declaring total income of Rs.92,36,060/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. During the assessment proceedings the AO noticed that there was change in the shareholding pattern of the assessee wherein the assessee had bought back Rs.3,12,500/- equity shares of 10 each from Shri GordhanTanvani, GordhanTanvani HUF & Shri Raju Tanvani. The AO further noticed that the shares were bought back at par value and was of the view that the purchase price does not commensurate with the financial condition of the company. The AO computed the fair market value of the shares at Rs. 60 per share by applying Rule 11UA of the Income Tax Rule, 1962 (the ‘Rules’) and made addition as given below: FMV per shares Rs.60/- Total shares brought back 312500 shares Printed from counselvise.com 3 ITA No. 5367/Mum/2025 Silgate Solutions limited FMV of total shares Rs.1,87,50,000/- Actual consideration paid (312500 x Rs.10/-) Rs.31,25,000/- Difference Rs.1,46,25,000/- Less: Expenses Rs.1,50,000/- Taxable u/s 56(2) (viia) Rs.1,44,75,000/- 3. On further appeal the ld. CIT(A) confirmed the addition stating that- The contention of the assessee cannot be accepted. Section 56(2)(viia), as applicable to the relevant assessment year, clearly provided that where a company receives shares for consideration less than their fair market value, the difference is liable to be brought to tax as income. Rule 11UA of the Income-tax Rules prescribed the specific method for determining such fair market value, and the Assessing Officer has correctly applied these provisions while arriving at the value of the shares in question. The argument of the assessee that Chapter XII-DA was introduced subsequently does not exclude the applicability of section 56(2)(viia), which, even prior to such insertion. covered transactions involving receipt of shares at a value below their fair market value. The economic substance of the transaction also supports this conclusion. In the present case, the company purchased its own shares from shareholders at a consideration lower than the fair market value determined under the Act. This transaction resulted in the extinguishment of shares worth more than the outflow actually made by the company. The effect of this was that the continuing shareholders stood enriched, as the company utilised a lesser sum of money than the real worth of the shares cancelled. This conferred a tangible economic advantage upon the company, falling squarely within the mischief sought to be curbed by section 56(2)(viia). The contrary views cited by the assessee from certain decisions do not override the clear statutory language and remain confined to their own peculiar facts, and therefore such reliance does not strengthen the assessee's case. 4. The ld. AR submitted that, the assessee company was not doing well and certain contracts entered into by the assessee was on the verge of termination. The ld. AR further submitted that Shri GordhanTanvani & Shri Raju Tanvani were cynical about the future business and the profitability of the assessee and therefore, wanted to discontinue their investments. The ld. AR also submitted that since there were no buyers for the shares the assessee offered to buyback the shares at face Printed from counselvise.com 4 ITA No. 5367/Mum/2025 Silgate Solutions limited value. The ld. AR argued that the financial and cash flow position of the company was deteriorating and hence the FMV of shares as computed by the AO does not reflect the real valuation of the assessee and that impugned transaction does result in any benefit to the assessee since the same resulted in mere capital reduction. The ld. AR also argued that the provisions of Section 56(2)(viia) of the Act, is not applicable to the present case for the reason that the words \"receives\" read along with the word \"any property\" as used in the section cannot be extended to buyback of shares resulting in capital reduction which is a mere cancellation process. The ld. AR submitted that the Companies Act does not permit a company to hold its own shares and, therefore, the shares bought back do not become the property of the assessee for it fall within the provisions of Section 56(2)(viia). The ld. AR in this regard, placed reliance on the following decisions: 1.Vora Financial Services (P.) Ltd. vs. ACIT [2018] 96 taxmann.com 88 (Mumbai) 2.VITP (P.) Ltd. vs. DCIT[2022] 143 taxmann.com 304 (Hyderabad - Trib.) 3. DCIT vs. Venture LightingIndia Ltd [2023] 150 taxmann.com 523 (Chennai - Trib.) 4.DCIT vs. Globe Capital Market Ltd.[2023] 156 taxmann.com 620 (Delhi - Trib.) 5. DCIT VS. TPS infrastructure Ltd. ITA No. 6433/Delhi/2018 6.Lupin Investments Private LimitedITA No. 4635/Mum/2024. 5. The ld. DR on the other hand, relied on the orders of the lower authorities. 6. We heard the parties and perused the material on record. The assessee bought back 3,12,500/- shares at face value during the year under consideration, from three of its shareholders. The AO held that the fair value of the shares as per Printed from counselvise.com 5 ITA No. 5367/Mum/2025 Silgate Solutions limited Rules 11UA of the Rules is Rs. 60 and accordingly treated the difference as income from other sources u/s. 56(2)(viia) of the Act. The primary contention of the assessee is that the provisions of the Section 56(2)(viia) are not applicable to the impugned transactions for the reason that the assessee should have received property being shares for a consideration less than fair market value whereas in assesses case the shares bought back are not the property of the assessee. In this regard, we notice that the co-ordinate bench in a case of Vora Financial Services (P) Ltd (supra) has considered and identical situation where it has been held as - 23. The last issue urged by the assessee relates to the addition of Rs.82.89 lakhs made u/s 56(2)(viia) of the Act. The facts in brief are that the assessee, during the year under consideration, made an offer to existing shareholders for buy back of 25% of its existing share capital at a price of Rs.26/- per share. The offer was open between 8th May, 2013 and 22nd May, 2013. One of the directors Shri KashyapVora offered 12.19,075 shares under the buyback scheme and accordingly the assessee bought those shares paid a consideration of Rs 316.95 lakhs on 24.05.2013. The AO noticed that the book value of shares as on 31.3.2013 was Rs.32.80 per share, whereas the assessee company has bought back the shares at Rs.26/- per share. 24. The AO proposed to invoke the provisions of sec.56(2)(viia) of the Act to this transaction of buy back The said provisions read as under:- \"56(2)(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested.- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property: (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration: Printed from counselvise.com 6 ITA No. 5367/Mum/2025 Silgate Solutions limited Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation. For the purposes of this clause, \"fair market value\" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);\" The AO noticed that consideration of Rs.316.95 lakhs has been reinvested in the assessee company in the form of loan. Hence the AO took the view that the entire exercise was carried out to reduce the liability of the company by purchasing shares below the fair market value. Accordingly the AO assessed the difference between the book value of shares and purchase price of shares amounting to Rs.82.89 lakhs as income of the assessee u/s. 56(2)(viia) of the Act. The Ld. CIT (A) also confirmed the same. 25. The Ld A.R submitted that the Income tax Act was amended by inserting a new clause in sec. 2(22) of the Act and also by inserting sec.46A, consequent to the insertion of sec. 77A in the Companies Act, which allows a company to purchase its own shares. Amendment in Section 2(22) provides that the dividend does not include any payment made by a company on purchase of its own shares in accordance with provisions of sec. 77 of the Companies Act. Section 46A provides for taxation of consideration received. Accordingly the Ld A.R submitted that the above said provisions only deal with the case of buy back of shares and hence the AO was not correct in invoking the provisions of sec. 56(2)(viia) of the Act in the instant case. In this regard,the Ld A.R placed reliance on the MemorandumExplaining the provisions in Finance B 1999 (1999) 236 ITR (SL) 155 26. He submitted that the provisions of see 56(2)(vii) were introduced as counter evasion mechanism as explained in the memorandum explaining the provisions in the Finance Bill. 2010 (2010)(32) ITR 110), which is extracted below:-- \"B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent Laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act The provisions were intended to extend the tax net to such transactions in kind. The intent is out to tax the transactions entered unto in the normal course of business or made, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the \"property\" Printed from counselvise.com 7 ITA No. 5367/Mum/2025 Silgate Solutions limited which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.\" The Ld A.R submitted that the above said explanations squarely apply to the provisions of sec. 56(2)(vita) of the Act also. He submitted that the primary condition for invoking the provisions of sec. 56(2)(vita) was that the shares should become a \"Capital asset\" and property in the hands of recipient. He submitted that, in the instant case, the assessee has purchased the shares under the buyback scheme and the said shares have been extinguished by writing down the share capital. Hence those shares did not become capital asset of the assessee company and hence the provisions of sec. 56(2)(viia) should not have been invoked in the hands of the assessee company. 27. The question of taxability of bonus shares received by a shareholder u/s 56(2)(vii)(c) of the Act came to be considered in the case of Sudhir Menon HUF v. Asstt. CIT [2014] 45 axmann.com 176/148 ITD 260 by the Mumbai bench of Tribunal. The Tribunal held that the additional shares were allotted pro rata to the existing shareholders and there was no scope for any property being received on said allotment of shares and hence provisions of sec. 56(2)(vii)(c) will not apply. The above said decision was followed by the Bangalore bench of ITAT in the case of Dv. CIT v. Dr.Rajan Pal [2017] 82 taxmann.com 347. The Ld. A.R submitted that the above said decisions were rendered in the context o taxability of bonus shares, which enhances the paid up capital, u/s 56(2)(vii)(c) of the Act. However, in the instant case, the issue involved is the buyback of shares, which reduces the paid up capital. Hence the ratio of the above said decision should apply here also. 28. The Ld. A.R submitted that the AO has taken the book value of shares at Rs.32.80 per share. He submitted that the assessee also got its shares valued as per which the book value of shares as on 31.3.2013 works out to Rs.25.42 per share. He further submitted that the provisions of sec. 56(2)(viia) speaks about \"fair market value\" of shares, which is different from book value. 29. The Ld. D.R, on the contrary, submitted that the assessee is relying upon a valuation certificate obtained recently and the same was not available before the AO. Accordingly he submitted that the above said valuation report should be ignored. He submitted that the assessee has purchased shares at Rs.26/- per share, while the book value as per the computation of AO was Rs.32.80 shares. Accordingly he submitted that the AO has rightly assessed the difference u's. 56(2)(viia) of the Act. Printed from counselvise.com 8 ITA No. 5367/Mum/2025 Silgate Solutions limited 30. We have heard rival contentions on this issue and perused the record. The provisions of sec. 56(2)(vita) reads that \"where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested\" The words \"firm or a company\" \"any property, being shares of a company\" are important here. In this regard, we may refer to the Memorandum explaining the insertion of Provisions of sec. 56(2)(viia) by the Finance Act, 2010, which reads as under- \"Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head income from other sources. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section. 56(2)( vii) includes immovable property being land or building or both, shares and securities, jewellery, archaeological collection, drawings,paintings, sculpture or any work of art A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested).\" 31. A combined reading of the provisions of sec. 56(2)(viia) and the memorandum explaining the provisions would show that the provisions of sec. 56(2)(viia) would be attracted when \"a firm or company (not being a company in which public are substantially interested)\" receives a \"property, being shares in a company (not being a company in which public are substantially interested)\". Therefore, it Printed from counselvise.com 9 ITA No. 5367/Mum/2025 Silgate Solutions limited follows the shares should become \"property\" of recipient company and in that case, it should be shares of any other company and could not be its own shares. Because own shares cannot be become property of the recipient company. 32. Accordingly we are of the view that the provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is \"shares of any other company\". In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of \"becoming property\" and also \"shares of any other company\" fail in this case. Accordingly we are of the view that the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. 7. The ratio laid down by the coordinate bench in the above decision is that the own shares which are bought back does not become the property of the recipient unless it is shares of any other company and therefore the provisions of Section 56(2)(viia) cannot be applied. The facts in assesses case being identical we are of the view that the said ratio is applicable to assesses case also. Accordingly, we hold that the provisions of Section 56(2)(viia) cannot be invoked for the impugned transaction and therefore the addition made by the AO is not sustainable. 8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 04-11-2025. sd/- sd/ (SAKTIJIT DEY) (PADMAVATHY S) Vice President Accountant Member Divya R. Nandgaonkar Stenographer Copy of the Order forwarded to: 1. The Appellant 2. The Respondent Printed from counselvise.com 10 ITA No. 5367/Mum/2025 Silgate Solutions limited 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "