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The Income Tax Appellate Tribunal, Mumbai Bench “F”, in DCIT CC-8(3), Mumbai v. Sanjana Cryogenic Storages Ltd., ITA No. 2503/Mum/2026, has dismissed the Revenue’s appeal for Assessment Year 2022-23 and upheld relief granted by the CIT(A) on three significant issues involving Section 56(2)(x), interest disallowance under Section 36(1)(iii), and deduction of bad debts under Sections 36(1)(vii) and 36(2). The order was pronounced on 31 August 2026 by Shri Amit Shukla, Judicial Member, and Shri Arun Khodpia, Accountant Member.
Buy-Back of Own Shares and Section 56(2)(x)
The principal controversy concerned an addition of ₹43,32,82,200 under Section 56(2)(x). The assessee had bought back 7,80,000 of its own shares from Hindalco Industries Ltd. at ₹40 per share, whereas the Assessing Officer determined their fair market value at ₹595.49 per share and sought to tax the differential amount.
The Tribunal examined the historical commercial arrangement under which the 26% shareholding had originally been created to satisfy the Gujarat Electricity Board’s requirement relating to captive power supply. The arrangement contemplated from inception that the shares would ultimately be returned or bought back at ₹40 per share. The GAAR Approving Panel had also found that the arrangement was commercially and regulatorily driven and was not an impermissible avoidance arrangement.
More importantly, the Tribunal decided the issue independently on the scope of Section 56(2)(x). It held that when a company buys back its own shares, the transaction does not result in the company acquiring an investment or property capable of being held or transferred. Under Section 68(7) of the Companies Act, 2013, shares bought back are required to be extinguished. Therefore, the receipt and extinguishment cannot be artificially separated so as to treat the company as having received “property” for the purposes of Section 56(2)(x).
The Tribunal relied upon the Delhi High Court decision in PCIT v. Globe Capital Market Ltd. [2026] 185 taxmann.com 513 (Delhi) and observed that buy-back of a company’s own shares is essentially a reduction of share capital and does not constitute acquisition of property within Section 56(2)(x). Consequently, the addition of ₹43.32 crore was deleted and Revenue’s Grounds Nos. 1 to 3 were dismissed.
Interest Disallowance Under Section 36(1)(iii)
The second dispute related to disallowance of ₹43,34,444 on the ground that interest-bearing funds had allegedly been diverted towards interest-free advances aggregating to approximately ₹38.54 crore.
The Tribunal noted that the assessee had reserves and surplus of approximately ₹196.8 crore as on 31 March 2022, substantially exceeding the interest-free advances. Further, the Assessing Officer had failed to establish any specific nexus between the assessee’s interest-bearing borrowings and the impugned advances.
Following the principles laid down in CIT v. Reliance Utilities & Power Ltd. and subsequently approved by the Supreme Court in CIT v. Reliance Industries Ltd., the Tribunal held that where sufficient interest-free own funds are available, a presumption arises that the interest-free advances were made out of those funds. The deletion of the disallowance under Section 36(1)(iii) was therefore upheld.
Bad Debts From Regular Lending Activity
The Revenue also challenged deletion of a disallowance of ₹12,60,17,125, representing the principal component of loans and advances written off.
The Tribunal found that the assessee’s lending activity was not an isolated deployment of surplus funds. The record demonstrated lending to several parties over many years, charging of agreed interest, receipt of repayments, taxation of interest as business income and subsequent recovery of certain written-off debts which were again offered to tax as bad debts recovered.
It held that the absence of an NBFC registration or money-lending licence was not, by itself, determinative for Section 36(2)(i). What was material was whether lending was actually carried on as a regular and organised business activity and whether the debts arose in the ordinary course of that activity.
Since the loans were found to have arisen in the ordinary course of the assessee’s lending business and had actually been written off in the books, the conditions of Section 36(1)(vii) read with the second limb of Section 36(2)(i) were satisfied. The Tribunal accordingly upheld the deduction and dismissed the Revenue’s challenge.
Decision
The ITAT ultimately dismissed the Revenue’s appeal in its entirety. It held that the buy-back of a company’s own shares followed by mandatory extinguishment does not amount to receipt of “property” under Section 56(2)(x); proportionate interest disallowance cannot be sustained where sufficient own funds exist and no nexus with borrowed funds is established; and loans actually written off are deductible where they arise from a regular money-lending business satisfying Sections 36(1)(vii) and 36(2)(i).
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