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2016 (4) TMI 962 - ITAT MUMBAI

2016 (4) TMI 962 - ITAT MUMBAI - TMI - Disallowance u/s 14A - Held that:- Identical issue had arisen in the earlier year as find that the AO had not mentioned as to how much expenditure was incurred by the assessee for earning tax free income. We are of the opinion that if the assessee had not incurred any expenditure to earn tax free income then the AO cannot invoke the provisions of section 14A r. w. Rule 8D of the Rules. First of all the AO has to record his satisfaction about invoking the pr .....

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in favour of assessee.

Disallowance of ESOP expenses - Held that:- Identical issue had arisen in the earlier year as held that stock options of the parent company were offered to the employees of the assessee company that the assessee had made payment to the parent company that during the year FBT was paid. In our opinion once a stock option is granted to and exercised by the employee of an assessee the liability in that behalf is ascertained and cost is allowable in the year in whic .....

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ct. - Decided in favour of assessee.

Buy back of shares - colourable device for the purpose of avoiding dividend distribution tax - Held that:- Transaction in question would not fall under the category of colourable device. If an assessee enters into a deal which does not violate any provision of the Act of applicable to a particular AY. the deal cannot be termed a colourable device if it result in non-payment or lesser payment of taxes in that year. The whole exercise should not lead .....

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the CIT(A)-4 Mumbai the assessee and the Assessing Officer(AO) have filed cross-appeals for the year under consideration. The assessee has raised following Grounds of appeal: 1. The Hon. Commissioner of Income Tax (Appeals) -4 grossly erred in confirming the disallowance made U/s. 14A of the Income Tax Act 1961 amounting to ₹ 3 45 910/- . 1. 1 The Hon. Commissioner of Income Tax (Appeals) erred in ignoring the fact the disallowance U/s 14A can be made only if there is actual nexus between .....

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e principle of apportionment embedded in section 14A had no application where no direct expenditure was incurred to earn exempt income and entire expenditure was incurred for business purposes only. 2 The Hon Commissioner of Income Tax (Appeals) grossly erred in confirming the disallowance of ESOP expenses amounting to ₹ 52 08 592/-. 2. 1 The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact that the amount of ₹ 52 08 592/- represents the cost of stocks gra .....

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ct that the assessee has indulged in the activity of buyback of shares as a colorable device only for the purpose to avoid dividend distribution tax. 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing the appeal of the assessee without appreciating the fact that the assessee has not declared any dividend inspite of making regular profit. 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing .....

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on'ble Apex Court in the case of M/ s. McDowell wherein it is held that the assessee can't use colourable device to mitigate its tax liability which was used by the assessee in the instant case by way of buyback of shares. 5. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. 6. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. " Assessee-company engaged in the .....

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ring before us the Authorised Representative (AR) and the Departmental Representative (DR) agreed that identical issue had arisen in the earlier year and the Tribunal had decided the issue in favour of the assessee in ITA No. 5152/Mum/2012 (AY-08-09; dt. 31/3/2016). We find that while deciding the appeal for 2008-09 the identical issue -except for the amount involved-was dealt by the Tribunal as under : 2. The first Ground of appeal is about disallowance of ₹ 2. 74 laks made u/s. 14A of th .....

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d that the assessee had made investment in Mutual Funds only that investment was made out of assessee s own funds that no other expenditure was incurred regarding dividend income. After considering the submission of the assessee and the assessment order the FAA held that no disallowance had been made under the head interest expenditure that making of investment out of own funds had no relevance that only other administrative expenses had been disallowed as per Rule 8D of the Rules. Referring to .....

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bmissions and perused the material before us. We find that the AO had not mentioned as to how much expenditure was incurred by the assessee for earning tax free income. We are of the opinion that if the assessee had not incurred any expenditure to earn tax free income then the AO cannot invoke the provisions of section 14A r. w. Rule 8D of the Rules. First of all the AO has to record his satisfaction about invoking the provisions and has to decide the issue after obtaining the explanation of the .....

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ly following the above order first effective ground is decided in favour of the assessee. 3. Next ground of appeal deals with confirming the disallowance of ESOP expenses amounting to ₹ 52 08 592/-. During the course of hearing before us the representatives of both the sides agreed that the issue stands covered by the order of the Tribunal for the earlier year (ITA/5152/Mum/2012 dtd. 31. 03. 2016). We find that the Tribunal has deliberated upon the issue and has decided it as under: 6. Nex .....

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₹ 50. 65 lakhs. The AO directed the assessee to explain as to why FBT had not been paid to whole amount. The assessee vide its letter dt. 29. 12. 12 stated that the value of FBT taken for ESOP(Rs. 50. 65lakhs) as against cost of stock awarded to KF Employees(Rs. 1. 07crores) that the amount of ₹ 50. 65 represented the value of ESOP that had been vested with the employees during FY 2007-08 and consequently considered for FBT that the amount of ₹ 1. 07crores represented the amou .....

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ld eventually increase or decrease in future that it had not produced any evidence as to the fact that amount in question was actually paid. Finally the AO made an addition of ₹ 56 40 195/- to the total income of the assessee. 7. Aggrieved by the order of the AO the assessee preferred an appeal before the FAA. Before him it was argued that allowability of ESOP expenses and payment of FBT for ESOP were two different concepts that the FBT would become payable upon vesting of the ESOP in the .....

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t as liability that ESOP would be effective only on the discretion of the employees to opt for stocks that payment for shares was either a provision or an investment that no liability in that regard had crystallised. 8. Before us the AR reiterated the arguments that were advanced before the FAA. He relied upon the case of Biocon Ltd. (144ITD21)(SB)(Bang. ); Novo Nordisk India Pvt. Ltd. (42 taxmann. com168). DR supported the order of the FAA. 9. We have heard the rival submissions and perused the .....

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case of Novo Nordisk India Pvt. Ltd. (supra) it has been held that in terms of ESOP if an assessee offers shares of its parent company to its employees the difference between the FMV of the shares of the parent company on date of issue of shares and the price at which those shares were issued by the assessee to its employees had to be regarded as expenditure incurred for business purposes allowable u/s. 37(1) of the Act. Respectfully following the above decision we decide Ground No. 2 in favour .....

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. In the appellate proceedings the FAA had upheld the disallowance of ₹ 52. 08 lakhs. But he did not agree with the AO that buyback of shares was an instrument to avoid dividend distribution tax. 5. During the course of hearing before us the DR and the AR stated that identical issue had arisen in the matter of Goldman Sachs(India) Securities Pvt. Ltd (ITA/3726/Mum/2015 AY. 2011- 12 dtd. 12. 02. 2016) that the Tribunal had decided the issue in favour of the assessee . We find that the Tribu .....

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eme whereby 4 03 93 199/- equity shares having face value of ₹ 10 each were bought back from GS-M by the assessee @Rs. 46. 79/-per share. Taking into account the face value of ₹ 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 ₹ 36. 79/-per equity share for 4 03 93 199 shares bought back amounting to ₹ 1 48 60 65 791/-was nothing but its distribution of its accumulated profits to its ul .....

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0(34) of the Act and therefore was taxable in the hands of the recipient GSM namely. He further held that on remittance of such amount to a non-resident representing its income by way of dividend tax deduction was required to be made u/s. 195 of the Act. As the assessee company had not deducted any tax while making such remittance it was held to be an 'assessee in default' in terms of the provisions of section 201 of the Act. Further the assessee was also found to be liable to pay simple .....

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section 2(22)(d) of the Act that the transaction in question was one of buy back of shares and not a case of capital reduction. After considering the submissions of the assessee and the order of the AO the FAA held the AO had obtained the annual report of the assessee company for the five preceding years and from such annual reports he noticed that it had been earning profits after tax for each of those years that the reserves and surplus increased from ₹ 81 01 34 000/- for the year ending .....

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for the non-grant of dividend in the regular course inspite of the continuous accumulation of profits in its books that the AO had specifically required the assessee to explain the commercial reason if any for the non issue of dividend although the profits were being accumulated year after year that it chose to remain silent on this show cause notice issued by the AO that by permitting the profits to accumulate in its books it had avoided the payment of DDT that would have been payable if such .....

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ition 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 o .....

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the profits of the assessee-company would be given to it not through dividend that payment of dividend would have been liable to DDT that the transaction of the receipt of its share of profits in the assessee company was given an artificial colour of capital gains that capital gain on such transaction was exempt from tax in the hands of the recipient that the non-distribution by way of dividend of the accumulated profits the transaction of buy back of shares offered by it and the exercise of su .....

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eipt of dividend but a capital gain of the concerned share holder that the arrangement was made to use of the provisions of section 46A of the Act and to claim exemption from tax in India on the basis of Article 13(4) of the India Mauritius Tax Treaty. The FAA referred to the case of a Indian Company that was decided by the AAR in Case No. P of 2010 vide its order dated 22. 03. 2012 and held that it had persuasive value. He further held that section 100 to 105 of the Companies Act dealt with red .....

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he Act that no DDT was paid by the assessee that the recipient would not be entitled to any exemption u/s. 10(34) of the Act that the receipt in its hands would be chargeable to income tax that the treatment by the AO of the assessee as an A-I-D 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 resol .....

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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 2(22) of the Act while deciding the application filed before it that the payment made by the assessee was for the purchase of shares that .....

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ng the issue before us it would be useful to consider the provisions of section 77A and100-105 of the Companies Act(CA) and section 2(22) and 46A of the Act. Section 77A of the CA deals with buying back of shares in following manner: (1) Notwithstanding anything contained in this Act but subject to the provisions of subsection (2) of this section and section 77B a company may purchase its own shares or other specified securities (hereinafter referred to as "buy-back") out of- (i) its f .....

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ion has been passed in general meeting of the company authorising the buy-back Provided that nothing contained in this clause shall apply in any case where-(A) the buyback is or less than ten per cent. of the total paid-up equity capital and free reserves of the company ; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting : Provided further that Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-f .....

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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 ( .....

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ble Jurisdictional High Court has dealt with the schemes of buyback of shares and reduction of capital in the case of Capgemini India Private Limited (Company Scheme Petition No. 434 of 2014 dated 28. 04. 2015) as under: 4. The entire case of the Regional Director revolves around his contention that the buyback of shares must be effected only under Section 77 A of the Companies Act 1956/Section 68 of the Companies Act 2013. According to the Regional Director if a buyback of shares is effected u .....

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One of the contentions raised by the petitioner is that a view of the Circular dated 15th January 2014 the Regional Director has no locus in respect of tax matters particularly when the Income tax Authorities have not raised any objection. This aspect has been considered in detail by this Court in the case of Casby CFS Pvt. Ltd. and it has-been held that the Regional Director has the requisite locus standi to raise all objections in respect of a scheme including objections pertaining to taxation .....

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with Sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the Petitioner to follow only the procedure prescribed by Section 77 A/Section 68. In any event under Section 77 /Section 68 a company can buyback only 25% of the total paid up capital 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 whi .....

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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 section 77B a company may .....

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n 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the court) the drawing up of a list of creditors of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind the introduction of section 77 A is to provide an alternative method by which a company may buy-back upto 25 per cent of its total paid- up equity capital in any financial year subject to compliance with sub-sections ( .....

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ans that notwithstanding the provisions of section 77 and sections with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 77A to indicate that the jurisdiction of the court under section 391 or 394 has taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that giv .....

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n 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 Tribuna .....

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case. 5. In the circumstances 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 Sections 100 to 104 of the 1956 Act. The contentions of the Regional Director are therefore clearly contrary to the prevailing lega1 position. The above observations of the Hon ble Court does not leave any doubt that buyback of shares cannot be equated with reduction of capital. 5. .....

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e after the end of the previous year ending next before the 1st day of April 1933 whether such accumulated profits have been capitalised or not ; 46A. Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities then subject to the provisions of section 48 the difference between the cost of acquisition and the value of consider .....

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f 1956). The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts that buyback of shares of a corporate entity cannot to be characterised as deemed dividend that profit arising out of the buyback schemes had to taxed under the head capital gains. Here it would be useful to take notice of the Speech of the Finance Minister while introducing the amendment to the Act with regard to the buyb .....

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d 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 compa .....

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) 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 far from clear and settled and there was apprehension that there will be unnecessary litigation unless the issues are clarified with finality. 28. 3 The Act therefore has amended clause (22) of section 2 of the Income-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in a .....

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cordingly apply in relation to the assessment year 2000-2001 and subsequent years. It is worth mentioning that provisions of section 115Q have been amended w. e. f. 01. 04. 2013 and profit arising out of buyback of shares is to taxed at a particular tax rate. But the AY. before us is prior to the April 1st 2013. Therefore we have to decide the issue as per the prevailing law applicable on the date of the transaction in question. There is no ambiguity about the provisions that would govern the bu .....

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he Indo-Mauritius Tax Treaty. 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-I-D. For invoking the provisions of section 201 of the Act non deduction of taxes at source is a pre-condition. 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 A .....

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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: 6. According to the Regional Director if the Scheme is sanctioned it will amount to evasion of income tax and outflow of foreign exchange to the tune of ₹ 248 crores and therefore on this ground the Scheme should be rejected. The Regional Director has not furnished any p .....

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Sections 100 to 104 of the 1956 Act the fact that the same may not attract income tax will not amount to it being a device to evade tax. 7. Even the argument of the Regional Director that foreign exchange amounting to ₹ 248 crores will be drained away if the Scheme is sanctioned is of no avail once it is held that the procedure adopted by the company is permissible in law. Moreover the Regional Director has not shown that the law prohibits the transfer of shares by a non-resident to reside .....

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