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TMI Blog2016 (3) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... , 93, 199/- equity shares having face value of Rs. 10 each were bought back from GS-M by the assessee @Rs. 46. 79/-per share. Taking into account the face value of Rs. 10 per share, the AO in his order, passed u/s. 201(1) and 201(1A) r. w. s. 195 of the Act, on 27. 01. 2014 held that the excess payment of Rs. 36. 79/-per equity share for 4, 03, 93, 199 shares bought back amounting to Rs. 1, 48, 60, 65, 791/-was nothing but its distribution of its accumulated profits to its ultimate beneficiary and the only shareholder i. e. GS-M, that the buyback of equity shares by the assessee from its holding company was a colourable transaction to avoid the payment of dividend distribution tax (DDT). The excess payment of Rs. 1, 48, 60, 65, 791/-was held by the AO to be in the nature of dividend as per provisions of section 2(22)(d) of the Act. As the assessee had not deducted any DDT u/s. 115 of the Act, such dividend income was found by the AO not to qualify for exemption u/s. 10(34) of the Act and therefore, was taxable in the hands of the recipient GS-M, namely. He further held that on remittance of such amount to a non-resident representing its income by way of dividend, tax deduction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit was finally passed on to the sole shareholder on 24. 11. 2010 by way of payment on account of buy back of shares, that it had claimed the exemption available u/s. 2(22)(iv) of the Act that excluded any payment made by a company on the purchase of its own shares from a shareholder in accordance with the provisions of section 77-A of the Companies Act, 1956. The FAA further observed that the definition of dividend given in section 10(22) of the Act was an inclusive definition that sought to extend the scope of amounts chargeable to tax as deemed dividend but payments in the nature of dividend would always be coming within the ambit of the term dividend, that the commercial significance of a transaction of a buyback of equity shares was normally for the purposes of consolidating the share-holding of the remaining share holders and to enhance the value of the shares remaining in the hands of the continuing share holders, that GS-M was the sole equity share holder of the assessee-company both prior to and after the buyback of shares by the it, that the arrangement of buy-back of shares would not lead to any consolidation or a change in the value of its holdings in the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to income tax, that the treatment by the AO of the assessee as an A-ID and the raising of demand u/s. 201(1) and 201(1A) r. w. s. 195 of the Act was justified. Finally, he decided the issue against the assessee. 4. Before us, the Authorised Representative(AR)argued that the assessee had bought back the shares as per the resolution passed in the general meeting in the Board of Directors on 4. 11. 2010 (Pg 14 of PB), that the offer for buy back opened on 5. 11. 2010 and closed on 20. 11. 2010, that the shareholder tendered the shares on 23/. 11. 2010, that after the amendment to section 77A of the Company's Act there was no need to approach the courts to buy back the shares if the percentage of buy bought shares were less that a certain limit, that correspondingly provisions of sec. 2(22)(d) of the Act were amended w. e. f 1. 6. 2001, that sub clause of (iv) of Section 2(22)(d) of the Act dealt with the dividends, that the amount in question was to be assessed under the head capital gains, that even after amendment to section 115QA of the Act burden of payment of tax has not been shifted to shareholders , that the AAR had not considered the provisions of sub clause (iv) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the board referred to in the first proviso ; (c) the buy-back is of less than twenty-five per cent. of the total paid-up capital and free reserves of the company : Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent. of its total paid-up equity capital in that financial year ; (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back : Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies. XXXXXXX (5) The buy-back under sub-section (1) may be- (a) from the existing security holders on a proportionate basis ; or (b) from the open market ; or (c) from odd lots, that is to say, where the lot of securities of a pub-lic company whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange ; or (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. " Section 100-105r. w. s. 391of the CA deal with reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and free reserves of the company whereas under the Scheme the company proposes buyback of 30% of its paid up capital and free reserves, which is not possible under Section 77 /Section 68. Consequently the only manner in which the company can buyback the said shares is by following the procedure under Section 391 read with Sections 100 - 104 of the 1956 Act. In support of its contentions the Petitioner has relied upon the decision of the Division Bench of this Court in the case of SEBI V/s. Sterilite Industries (India) Limited. 7. The Division Bench of this Court in the case of Sterilite Industries (supra) has held that a Company may either follow the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act or the procedure under Section 77A (now Section 68). It is not mandatory for a company to buy back its shares only by following the procedure prescribed by Section 77 A. In this regard paragraphs 22 and 23 of the Sterilite decision are relevant and the same are reproduced below for convenience: "22. The opening words of Section 77A, viz. "notwithstanding anything contained in this Act, but subject to the provisions of sub-section(2) of this section and sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into or made applicable to a buy-back under section 77A. Similarly the conditions for a buy-back under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields". 4. However, it is necessary to note that the above was the position in law under the1956 Act in view of the language of the provisions of Section 391 and Section 77 A of that Act. In the 2013 Act Sub-section 10 of Section 230 provides as follows :- "10. No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68. " This provision may have an impact on the law as laid down by this Court in the Sterilite case. However, at present Section 230 has not come into force and hence this question does not arise for consideration in this question does not arise for consideration in this case and hence the same need not to be considered. At present the law as laid down in Sterilite Industries prevails and will be applicable to the present case. 5. In the circumstances it is open to a company to buy back its own shares by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the buyback of shares. Relevant part of the speech of the FM reads as follow: "95. Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax. " Central Board of Direct Taxes had issued a circular(Circular no. 779, dated 14. 09. 2099) with regard to taxability arising out of the buyback of shares and circular reads as under: "28 Clarification of tax issues arising out of the provision to allow buy-back of shares by the companies 28. 1 The Companies (Amendment) Ordinance, 1998 [subsequently enacted as the Companies (Amendment) Act, 1999] inserted section 77A in the Companies Act, 1956 which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and the company is precluded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 13 of the said DTAA provides that capital gains would not be taxable in the hands of GS-M. If the assessee was not liable to deduct taxes as per the provisions of section 195 of the Act, it cannot be held A-ID. For invoking the provisions of section 201 of the Act, non deduction of taxes at source is a precondition. We also find force in the alternate argument raised by the assessee. Even if the payment to GSM is considered as dividend u/s. 2(22)(d) of the Act, then the taxes on the same have to be charged by way of DDT as per section 115-O of the Act. As per section 10(34) of the Act, any income by way of dividend referred to in section 115-O of the Act does not form part of total income in the hands of the recipient and company declaring dividend will be in default as per section 115Q. So, the provisions of TDs would not be applicable for dividend covered under section 2(22)(d) of the Act. 5. 3. We would also like to discuss the issue of the alleged colourability of the transaction. We find that in the matter of Capgemini India Private Limited(supra), the Hon'ble Bombay High Court has deliberated upon the almost identical facts and circumstances and has held as under: ..... 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