2019 (12) TMI 981 - AT - Income Tax

Gains arising on buy-back of shares taxable u/s 46A or under section 45 - Transfer in section 46A - charging provision for gains arising from buy-back of shares - HELD THAT - Sections 45 and 46A operates in a different field. Section 45 of the Act is applicable regarding transfer of a capital asset whereas section 46A is applicable in respect of receipt of consideration from any company for purchase of its own shares. Since there is no requirement in section 46A of the Act that there has to be a transfer of shares, section 47(iv) of the Act is not applicable in connection with the issue covered by section 46A of the Act and hence, there is no merit in the argument that because of section 47(iv) of the Act, the capital gain in the present case is not chargeable to tax. We deal with the applicability of the judgment of the Hon ble Bombay High Court rendered in the case of Cadell Wvg. Mill Co. (P.) Ltd., Vs. CIT 2001 (2) TMI 105 - BOMBAY HIGH COURT on which reliance has been placed by the learned AR of the assessee - Section 46A of the Act has been introduced in the statute book from 01.04.2000 and the issue involved is different and therefore, this judgment is not applicable in the present case where section 46A is applicable as per the department and in our considered opinion also. When shares can be held by nominees also, it is not impossible to hold entire shares of the subsidiary company by the holding company along with one or more nominees or by the nominees only without holding of any share by the parent company. Second reasoning given by us about non applicability of section 47 (iv) is this that in section 46A, there is no requirement of transfer of any capital asset being shares. Only requirement is that a shareholder receives a consideration from a company for purchase of its own shares and in that situation, subject to section 48, the difference between the cost of acquisition and value of consideration received by the shareholder shall be deemed to be the capital gains arising to such shareholder in the year in which, the shares are purchased by the company. There is no mention of the term Transfer in section 46A. Section 47 (iv) is regarding non applicability of section 45 to a transfer of a capital asset by a company to its subsidiary company if the parent company or its nominees hold the whole of the share capital of the subsidiary company. We have noted above that section 45 and section 46A operate in different fields. Section 45 covers actual capital gain on transfer of a capital asset but section 46A is about Deemed Capital gains on buy back of shares. We hold that in the facts of the present case, section 46A is applicable and therefore, we find no reason to interfere in the order of the CIT(A). - Decided against assessee.

Issues Involved:
1. Applicability of Section 47(iv) vs. Section 46A of the Income Tax Act, 1961, for taxation of gains arising from buy-back of shares.
2. Satisfaction of conditions for availing exemption under Section 47(iv) of the Income Tax Act, 1961.
3. Chargeability of interest under Section 201(1A) of the Income Tax Act, 1961.

Detailed Analysis:

1. Applicability of Section 47(iv) vs. Section 46A of the Income Tax Act, 1961:

The primary issue was whether the gains arising from the buy-back of shares should be taxed under Section 46A or exempted under Section 47(iv) of the Income Tax Act, 1961. The assessee argued that the transaction should be covered under Section 47(iv), which exempts certain transfers of capital assets between a parent company and its subsidiary. The CIT(A) concluded that Section 46A, specifically dealing with gains from buy-back of shares, should prevail over the general provision of Section 45 for taxation of capital gains.

The Tribunal upheld the CIT(A)'s decision, stating that Section 46A is applicable as it specifically addresses the taxation of gains arising from the buy-back of shares. It was noted that Section 46A does not require a transfer of a capital asset but rather focuses on the receipt of consideration from the company for purchasing its own shares. Therefore, Section 47(iv), which deals with transfers of capital assets, was deemed inapplicable in this context.

2. Satisfaction of Conditions for Availing Exemption under Section 47(iv):

The assessee contended that the exemption under Section 47(iv) should apply because the entire share capital, except for one share required by the Companies Act, 1956, was held by the parent company. However, the CIT(A) denied this benefit, arguing that the entire share capital was not held by the parent company or its nominees, as required by Section 47(iv).

The Tribunal agreed with the CIT(A), emphasizing that Section 47(iv) requires the whole share capital to be held by the parent company or its nominees. In this case, the parent company held 99.99% of the shares, and the remaining 0.01% was held by another company, not as a nominee of the parent company. Therefore, the conditions for exemption under Section 47(iv) were not satisfied.

3. Chargeability of Interest under Section 201(1A):

The second appeal concerned the chargeability of interest under Section 201(1A) of the Act. The Tribunal noted that it is a settled position of law that interest under Section 201(1A) is mandatory. Consequently, the Tribunal found no reason to interfere with the CIT(A)'s order on this issue.

Conclusion:

Both appeals by the assessee were dismissed. The Tribunal upheld the CIT(A)'s decision that Section 46A applies to the gains from the buy-back of shares, and the conditions for exemption under Section 47(iv) were not met. Additionally, the chargeability of interest under Section 201(1A) was affirmed as mandatory.

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