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Facts
The Assistant Commissioner of Income Tax (AO) filed an appeal against the order of the CIT(A) which partly allowed the assessee's appeal against the assessment order. The dispute concerns the taxability of a capital reduction transaction under Section 115QA of the Income-tax Act, 1961. The AO contended that the capital reduction was essentially a buy-back of shares attracting tax under Section 115QA, while the assessee argued it was a capital reduction as per court order, not a buy-back.
Held
The Tribunal held that the capital reduction in this case, completed on May 31, 2016, was not covered by the definition of 'buy-back' under Explanation (i) to Section 115QA of the Income-tax Act, which was applicable prior to June 1, 2016. The definition at that time required the buy-back to be in accordance with Section 77A of the Companies Act, 1956, which was not the case here, as the procedure followed was under Sections 100-104 of the Companies Act for capital reduction. Therefore, tax under Section 115QA was not payable.
Key Issues
Whether the capital reduction carried out by the assessee under sections 100-104 of the Companies Act, 1956, prior to June 1, 2016, is taxable as 'buy-back' of shares under Section 115QA of the Income-tax Act, 1961.
Sections Cited
Section 115QA, Section 115QB, Section 143(3), Section 100-104, Section 77A, Section 115QC, Section 2(22)(d), Section 10(34A)
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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Assistant Commissioner of Income Tax (ld AO ) against the appellate order passed by the National Faceless Appeal Centre, Delhi [the learned CIT (A)] for A.Y. 2017-18 on 11th January, 2023, wherein the appeal filed by the assessee against the assessment order dated 28th December, 2019, passed under Section 143(3) of the Income-tax Act, 1961 (the Act) by the Deputy Commissioner of Income Tax, Circle 1(2)(2), Mumbai, was partly allowed.
“1. "Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the levying tax of Rs. 19,92,58,167 under section 115QA of the Act, on the capital reduction transaction undertaken by the company during the year- made by the A.O. without appreciating the fact that the share capital reduction by payments to the shareholders is buy-back of shares and provisions of section 115QA of the Act is attracted."
"Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the alleged reduction was of 86,36,363 shares with Face Value of Rs. 10/-, which amounts to Rs. 8,63,63,630/- of the capital & the amount paid to reduce this capital was of Rs. 110/- per share amounting to Rs.94,99,99,930/- which clearly pin points that the reduction has been made to profit the shareholder."
3. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that if a scheme is allowed as per the directions of the Hon. High Court which was adjudicated on the basis of petition moved by the assessee, it does not imply that tax u/s. 115QA would not be payable."
4. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate a
"Whether on the facts and circumstances of the case the Ld.CIT(A) was justified in deleting tax and interest levied under section 115QB of the Act amounting to Rs.8,56,81,012/- when the A.O. has rightly invoked the provisions of section 115QA of the Act and determined the tax liability of Rs. 28,49,39,179/-."6. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that reduction in share capital is exigible to tax u/s. 115QA of the Act.
7. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restore
The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”
The brief fact shows that assessee is a private limited company engaged in the business of operation and maintenance of information Technology Park. For A.Y. 2017-18, it filed return of income on 31st October, 2017 declaring income of ₹3,71,14,350/-. The return of income was picked up for scrutiny by issuing notice under Section 143(2) of the Income-
In the assessment proceedings, the dispute was with respect to reduction of equity share capital of Rs 94,99,99,930/- and its taxability u/s 115 QA and also interest u/s 115QB of the Act amounting to Rs. 28,49,39,179/- 05. Brief facts pertaining to the transactions shows that i. as per the order of the Hon'ble Bombay High Court dated 16th April, 2016, in company scheme petition no.160 of 2016 filed for capital reduction u/s 101-104 of The Companies Act, 1956 on 4/02/2016, assessee was permitted to reduce its share capital by cancelling up to a maximum of 91 lacs equity shares or 10% aggregating to amount not exceeding ₹100 crores. ii. Pursuant to the scheme the assessee reduced its 1,44,38,037 equity shares to 58,01,674 equity share by cancelling 86,36,363 equity shares and returned capital to the equity shareholders at ₹110/- per equity share aggregating to ₹94,99,99,930/-.
iv. The above sum of premium of Rs 100/- per share for 8636363 equity shares amounting to Rs. 86,36,44,409/- was adjusted against security premium account of Rs 369682071/- and revaluation reserve of Rs. 493962338/- . v. There was no surplus in the profit and loss account in the company.
The learned Assessing Officer on the above transaction issued a notice on 21st December, 2019, holding that the payment of ₹94,99,99,930/- attracts the provision of Section 115QA of the Income-tax Act, 1961 (the Act) and asked to furnish certain other details.
The assessee responded stating that i. capital reduction is by way of order of the Hon'ble Bombay High Court.
ii. Such capital reduction has been completed prior to 1st June, 2016.
The assessee aggrieved with the order preferred the appeal before the learned CIT (A), who decided the i. Section 115QA provides for the levy of additional income tax at the rate of 20% of the distributed income on account of buy back of unlisted shares be a company.
ii. It was submitted that the amendment with effect from 1st June, 2016, is only to provide clarity. It was stated that the fact of buy back being in the nature of distribution of income is relevant rather than particular provisions of the iii. relied on the decision of the Hon'ble Supreme Court in case of Goldman Coins Health Food Pvt. Ltd. specifically referring to paragraph no.15 stating that the learned CIT (A) has incorrect in deleting the tax demand u/s 115QA by merely showing that the buy back is not under Section 77A of the Act, it is under Section 100 to 104 of the Companies Act. iv. Such distinction is not in accordance with the law, because the assessee has reduced its share capital by cancelling its shares and paying consideration to the shareholders by distributing its income. v. Once the primary intention is ascertained and the object and the purposes of the legislators is known it is the duty of the court to give the statute to a purposefully or functional interpretation. vi. The learned Departmental Representative relied on the decision of the Hon'ble Supreme vii. Thus, the learned Departmental Representative vehemently supported the order of the learned Assessing Officer.
The learned Authorized Representative
i. referred to provisions of section 77A of the Companies Act, 1956, pertaining to power of company to purchase its own securities and stated that such provisions are applicable when the shares are purchased by the company. ii. He further referred to the Provisions of Section 100-104 of the Companies Act with respect to reduction of share capital, he referred to the provisions in detail to show that the provisions of Section 77A of the Act as well as to section 100 to 104 of the Companies Act by a tabular composition of provisions governing buyback of shares and reduction of capital. It was the claim that in the Companies Act, 1956, the provisions of buy back of shares are cover under Section 77A of the Act and provision of reduction of capital are coverd under Section 100 to 104 read with section 391 of the Companies Act. The Companies Act, 1956 has now been replaced by Companies Act, 2013, wherein Section 68 of the Act with effect from iv. He submits that earlier even in the buyback of shares as well as in the return of capital there was no incidence of taxation in the hands of the company. Prior to that date, the buyback was taxable in the hands of the shareholder as capital gain under Section 46 A of the Act. The reduction of share capital was taxable in the hands of the shareholders as deemed dividend under Section 2(22) of the Act to the extent of accumulated profit and any balance amount was chargeable to tax in the hands of the share holders on reduction of share capital as capital gain. v. He further stated that after the introduction of Section 115QA of the Act with effect from 1st June, 2013, the buyback tax has to be paid by the Companies Act 115QA of the Act and in the hands of the share holder same is exempt under Section 10(34A) of the Act. vii. Thus, provisions of Section 115QA of the Act inserted with effect from 1st June, 2013, has not made any difference in the taxation of reduction of capital in the hands of the shareholders. viii. Therefore till 1/6/2016 , in case of reduction of share capital, there is no tax incidence in the hands of the company but it shall be taxable in the hands of the share holder under Section 2(22)(d)of the Act to the extent of accumulated profit as deemed dividend and balance sum is taxable as capital gain. ix. He further referred to the decision of the co- ordinate Bench in case of Goldman Sachs India Pvt. Ltd. vs. ITO 70 taxmann.com 46, holding that it was rendered with respect to A.Y. 2011- 12 as correctly been applied by the learned CIT (A). x. The learned Authorized Representative further referred to the decision of the co-ordinate xi. He therefore, submitted that buyback of shares if governed by the Provisions of Section 77A of the Act prior to amendment [up to 1/6/2016] provisions of Section 115QA of the Act can be applied. After 1/6/2016, any form of purchase by a company of its shares is covered. xii. He submitted and referred to the page no 18 of the ld CIT (A)‟s order to show that capital reduction in this case has been completed on 31/05/2016, so it is prior to 1/6/2016. Hence, amended provisions do not apply to capital reduction made by assessee. xiii. He further referred to the company‟s scheme petition to show that it was not under Section 77A of the Act but was with specific reference to the capital reduction only. He therefore submitted that learned CIT (A) is correct in
On specific query that whether the amount of capital gain tax has been paid by the shareholders or not, the assessee submitted a copy of no.15CB, wherein remittance was made to Mauritius shareholding stating that such capital gain on capital reduction is not chargeable to tax in India according to Article 13 of India Mauritius DTAA. He submitted that 15CA and 15CB submitted on 30th May, 2016, whereas the actual amount of remittance of ₹113,47,80,000/- was made. He submitted that there is no query on this issue by the learned Assessing Officer. With respect to Kotak advisor as certificate was submitted stating PAN number that they have offered the gain under the head capital gain in their return of income. Thus, in nutshell, the claim of Assessee is that capital gain arising to the Mauritius shareholder is not subject to tax under Section 115QA of the Act. Further, such income is also not chargeable to tax in India in the hands of such shareholder in terms of Article 13 of the Double Tax Avoidance Agreement.
We have carefully considered the rival contention and perused the orders of the lower authorities. The only dispute in this appeal is with respect to the chargeability of taxation under section 115QA of the income tax act on capital reduction carried on by the assessee under the provisions of section 100 – 104
According to the provisions of section 115QA of the income tax act if a domestic company distributes any amount on buyback of shares of unlisted shares from its shareholders, the domestic company is required to pay tax, which is an additional income tax at the rate of 20% on the distributed income.
What is „buyback” is defined in explanation (i) of the section to show that buyback means purchase by a company of its own shares in accordance with the provisions of section 77A of the companies act 1956. This was the definition of buyback from 1 June 2013 till 31 May 2016.
With effect from 1 June 2016 by the finance act 2016, the definition of buyback under explanation (i) to that section reads that “buyback” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies. Thus, it is clear that prior to 31st of May 2016 if the 017. company purchases its own shares in accordance with the provisions of section 77A of the companies act, such domestic companies are required to pay tax under section 115QA of the act. After 1/6/2016 if the company purchases its own shares in accordance with any of the provisions of any law relating to the ii. Further, on 29 January 2016 the shareholders have given their consent to convene the extraordinary general meeting for reduction of equity share capital by maximum of 91 lakh shares. iii. On 30 January 2016, board resolution was passed of proving the capital reduction under section 100 – 104 of the companies act, which was approved by the Board of Directors.
viii. On 2 May 2016 the shareholders granted their consent to reduce the share capital for which may 2016 board meeting was convened approving the capital reduction of 86,36,363 shares. ix. On 19 May 2016 the registrar of companies registered the scheme of reduction of share capital and x. on 30th of May 2016 bank was requested to make remittance to the shareholders on
Therefore, apparently the capital reduction was completed by the assessee on 31st of May 2016 under the provisions of section 100 – 104 of the companies act. The honourable Bombay High Court in case of capegemeini India private limited in company scheme petition number 434 of 2014 dated 28 April 2015 holding that it is open to a company to buy back its own shares by following the procedure prescribed under section 77A/section 68 or by following the procedure prescribed under section 391 read with section 100-104 of the companies act 1956.
The honourable Calcutta High Court in case of Principal Commissioner of Income-tax V C. M. Rajgarhia (P.) Ltd.* 2023] 151 taxmann.com 525 (Calcutta)/[2023] 294 Taxman 288 had held that “4. The issue was pertaining to levy of tax under section 115QA, which was examined by the assessing officer in the assessment proceedings. The Tribunal noted that assessment order having been passed on 28- 12-2017, PCIT could have exercised its
In view of above facts, we hold that in the present case such capital reduction is not covered in the definition of buyback as per explanation (i) to section 115QA of the income tax act and tax on distributed
In the result, appeal of the AO is dismissed.
Order pronounced in the open court on 12.01. 2024.