2023 (9) TMI 947 - ITAT CHENNAI

Deemed dividend u/s. 2(22)(a)/2(22)(d) r.w.s. 115-O - transactions of purchase of its own shares - assessee contends that the purchase of own shares amounts to buyback but not u/s. 77 of the Companies Act, 1956 - HELD THAT:- In the present case, if you go by the scheme, the conditions prescribed u/s. 77A of the Companies Act, 1956, are not satisfied, because, the purchase of its own shares by the assessee is more than 25% of the total paid up share capital and free reserve which is evident from the facts brought on record by the authorities, where, it has been observed that 54.70% of capital has been reduced after the scheme was given effect. Therefore, once the buyback is not u/s. 77A of the Companies Act, 1956, then, it will fall back u/s. 391-393 r.w.s.100-104 of the Companies Act, 1956, because, without any reference to Sec. 100-104 of the Companies Act, 1956, no company can buy back its shares u/s. 391-393 alone. Therefore, in our considered view, the AO & the Ld.CIT(A) have rightly held that the transactions of purchase of its own shares is nothing but distribution of accumulated profits and reduction of capital which falls under the definition of dividend u/s. 2(22)(d).

Further, the term ‘buyback’ is used in the Companies Act, 1956, only in Sec. 77A and not in any other place. Similarly, the term ‘buyback’ was defined u/s. 115-QA of the Income Tax Act, 1961, to mean buyback u/s. 77A only. The arguments of the Ld. Counsel for the assessee that purchase of own shares by a ‘Scheme of Arrangement & Compromise’ u/s. 391-393 of the Companies Act, 1956, is taxable u/s. 115QA of the Act, only after amendment to the term ‘buyback’ by the Finance Act, 2016 w.e.f. 01.06.2016 is in correct. Because, there is no dispute on the law in so far as buyback of shares u/s. 77A of the Act, and therefore, the amendment to Sec. 115QA by the Finance Act, 2016, is nothing to do with the present tax treatment, when the companies Act has amended by insertion of Sec. 77A of the Act, in the year 2016. Simultaneously, a new provision has been inserted under the Income Tax Act, 1961, by way of Sec. 115QA to tax consideration paid for buyback of shares to shareholders in the hands of the company. The provisions of Sec. 115QA has been amended so as to include all forms of buyback of shares under any provisions of the Companies Act, 1956, because, there are some divergent views has been expressed by various Courts & Tribunals on this issue and to overcome such views amendment has been made to extenuation buyback u/s. 115QA. Therefore, the arguments of the Ld. Counsel for the assessee that purchase of own shares u/s. 391-393 is de hors provisions of Sec. 77 r.w.s.100-104 of the Companies Act, 1956, is incorrect. In any event, assuming without conceding that purchase of own shares amounts to buyback, but not buyback u/s. 77A, which would still be taxable u/s. 115-O of the Act. It is to be noted that as per the proviso to Sec. 2(22), only buyback u/s. 77A is excluded from the definition of dividend u/s. 2(22). In other words, any other form of buyback, including purchase of own shares u/s. 391-393 would fall back under the definition of Sec. 2(22), because, which entails release of all or part assets of a company to its shareholders. This is further fortified with the fact that there was reduction of share capital and distribution of accumulated profits, and thus, purchase of own shares would come within the ambit of dividend u/s. 2(22).

The assessee had also taken another stand that the consideration paid for purchase of its own shares is to be taxed only in the hands of the shareholders u/s. 46A of the Income Tax Act, 1961, as capital gains - The words used in Sec. 46A are identical to the language in Sec. 77A and a reading of the Memorandum explaining the provisions of the Finance Act, inserting Sec. 46A, makes it clear that it was done to clarify that buybacks u/s. 77A necessitated a clarification as to whether the same ought to be taxed as capital gains or dividends. The insertion of Sec. 46A was contemporaneous to the insertion of Sec. 77A and in the proviso to Sec. 2(22) excluding the same within ambit of dividends. Lastly, the explanation to Sec. 46A also states that even the words ‘specified securities’ would have the same meaning attached to it u/s. 77A. Therefore, normally words in parimateria, would have to be construed in the same sense, and therefore, Sec. 46A can only apply to buy-back u/s. 77Aof the Companies Act, 1956. In any event, assuming without conceding that Sec. 46A applies to all forms of buyback, but Sec. 115-O contains a non-obstante clause which would override the provisions of Sec. 46A of the Act. Therefore, the contention of the assessee that consideration paid for purchase of its own shares, is only taxable in the hands of the shareholders as per provisions of Sec. 46A of the Act, is devoid of merits.

Sec. 115QA was amended in 2016 and the present transaction would only be taxable as per the amended provision - Firstly, there is a distinction between purchase of own shares upon reduction of share capital and buyback. ‘Buyback’ is a term used only in respect of transactions covered u/s. 77A. In fact, assessee itself stated in the scheme that it is not a buyback of shares in terms of provisions of Sec. 77A of the Act. Therefore, the object behind amendment of Sec. 115QA has to be read. In our considered view, the amendment to Sec. 115QA was brought in to clarify that the provisions would apply to buyback of shares u/s. 77A as well as to buyback of shares u/s. 391-393 of the Companies Act, 1956. Secondly, assuming without conceding that Sec. 115-QA would govern the transactions from the date of amendment, it would not preclude the transaction from being subject to tax u/s. 115-O of the Act, because, amendment can also be brought in to shift tax incidence from one provision to another. If all conditions of Sec. 115-O r.w.s.2(22) are satisfied, the same cannot be impliedly excluded on the basis of the amendment to Sec. 115QA of the Act.

We are of the considered view that consideration paid by the assessee for purchase of its own shares in accordance with scheme sanctioned by the Hon’ble High Court of Madras in terms of provisions of Sec. 391-393 of the Companies Act, 1956, amounts to distribution of accumulated profits which entails release of all or part of assets of a company on reduction of capital which attracts provisions of Sec. 2(22) of the Income Tax Act, 1961.

CIT(A) has discussed the issue at length in light of plethora of judicial precedents and held the transaction of purchase of own shares by the appellant company is distribution of accumulated profits within the meaning of section 2(22) - Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to treat the transactions of the assessee as dividend u/s. 2(22)(a)/2(22)(d) r.w.s. 115-O of the Income Tax Act, 1961, and thus, we are inclined to uphold the findings of the CIT(A) and dismiss appeal filed by the assessee.