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Clarification regarding nature of share Buy-back transactions under Income-tax Act 1961

Income Tax - 3/2016 - Dated:- 26-2-2016 - CIRCULAR NO. 03/2016 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES North Block, New Delhi, the 26th of February, 2016 Subject:-regd. As per provisions of Section 46A of the Income-tax Act, 1961 ('Act'), applicable with effect from 01.04.2000, any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares/other specified securities s .....

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s shall be charged to tax and the company so distributing its income shall be liable to pay additional income-tax at the rate of twenty percent of the distributed income. 2. It has been brought to the notice of the Board that the provisions of law regarding buy-back of shares since introduction of dividend distribution tax ('DDT') under section 115Q of the Act w.e.f. 01.04.2003 till 31.05.2013 are being interpreted in a conflicting manner by the tax authorities and taxpayers, thereby giv .....

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ined. Between the period 01.04.2000 till 31.05.2013 as mentioned in para 1 above, provisions of section 46A read with section 2(22)(iv) of the Act clearly provide that the income arising to a shareholder on buy-back of shares was to be treated as income from capital gains and not dividend income. Further clarity on this issue emerges on perusal of Circular No. 779 dated 14.09.1999 of CBDT, which in Para 28 has mentioned following reasons for introducing section 46A in the Statute: "28 Clari .....

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f 24 months from such buy-back. 28.2 The above newly introduced provisions of buy-back of shares threw up certain issues in relation to the existing provisions of the income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the income-tax Act and whether any capital gains would arise in the hands of the shareholder. The legal position on both the issues were for from clear and settled and there was apprehension that there will be unnecessa .....

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