2024 (1) TMI 749 - AT - Income Tax

Chargeability of taxation u/s 115QA - capital reduction carried on by the assessee u/s 100 104 of the companies act 1956 on or before 31st of May 2016 - CIT(A) deleting the levying tax u/s 115QA on the capital reduction transaction undertaken by the company during the year made by the AO - as per AO share capital reduction by payments to the shareholders is buy-back of shares and provisions of section 115QA of the Act is attracted - HELD THAT - According to the provisions of section 115QA of the income tax act if a domestic company distributes any amount on buyback of shares of unlisted shares from its shareholders, the domestic company is required to pay tax, which is an additional income tax at the rate of 20% on the distributed income. What is buyback is defined in explanation (i) of the section to show that buyback means purchase by a company of its own shares in accordance with the provisions of section 77A of the companies act 1956. This was the definition of buyback from 1 June 2013 till 31 May 2016. With effect from 1 June 2016 by the finance act 2016, the definition of buyback under explanation (i) to that section reads that buyback means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies. Thus, it is clear that prior to 31st of May 2016 if the company purchases its own shares in accordance with the provisions of section 77A of the companies act, such domestic companies are required to pay tax under section 115QA of the act. After 1/6/2016 if the company purchases its own shares in accordance with any of the provisions of any law relating to the companies, the buyback tax liability will arise in the hence of the company. Thus, it is clear that prior to 1/6/2016 buyback under section 77A of the companies act is covered by the provisions of taxes in the hence of the company under section 115QA of the act. In the present case, the assessee has not carried out the buyback under section 77A of the companies act 1956 but has carried out capital reduction under the provisions of section 100 104 of the companies act. All the conditions of reduction of share capital were concluded on 31st of May 2016. This event schedule is not in dispute between the parties. Therefore, apparently the capital reduction was completed by the assessee on 31st of May 2016 under the provisions of section 100 104 of the companies act. As in case of Capegemeini India private limited in company scheme petition number 434 of 2014 dated 28 April 2015 2015 (4) TMI 1069 - BOMBAY HIGH COURT holding that it is open to a company to buy back its own shares by following the procedure prescribed u/s 77A/section 68 or by following the procedure prescribed under section 391 read with section 100-104 of the companies act 1956. Thus we hold that in the present case such capital reduction is not covered in the definition of buyback as per explanation (i) to section 115QA of the income tax act and tax on distributed income to the shareholders is not payable by the assessee company. Hence, we uphold the order of the learned CIT A. Decided against revenue.

Summary

Issues Involved:
1. Applicability of Section 115QA on capital reduction transactions.
2. Determination of the nature of the transaction: buy-back of shares versus capital reduction.
3. Validity of the CIT(A)'s decision based on previous judicial decisions.
4. Tax implications for shareholders under the Double Tax Avoidance Agreement (DTAA).

Summary:

1. Applicability of Section 115QA on Capital Reduction Transactions:
The primary issue is whether the capital reduction transaction undertaken by the company during the year attracts the provisions of Section 115QA of the Income-tax Act, 1961. The Assessing Officer (AO) contended that the payment of Rs. 94,99,99,930 for reducing the share capital is akin to a buy-back of shares and should be taxed under Section 115QA. The CIT(A) disagreed, stating that the transaction was a capital reduction approved by the High Court and not a buy-back under Section 77A of the Companies Act, 1956.

2. Determination of the Nature of the Transaction:
The AO argued that the capital reduction was essentially a buy-back of shares, attracting Section 115QA. The CIT(A) and the assessee maintained that the reduction was conducted under Sections 100 to 104 of the Companies Act, 1956, and not under Section 77A, which governed buy-backs. The Tribunal noted that the definition of "buy-back" was amended effective June 1, 2016, to include any law relating to companies, but the transaction in question was completed before this date.

3. Validity of the CIT(A)'s Decision Based on Previous Judicial Decisions:
The CIT(A) relied on the decision in Goldman Sachs (India) Securities Pvt. Ltd. vs. ITO, which held that buy-back provisions under Section 77A do not apply to capital reductions under Sections 100 to 104. The Tribunal upheld the CIT(A)'s view, noting that the capital reduction was completed on May 31, 2016, before the amendment to Section 115QA. Therefore, the transaction did not attract the buy-back tax under the pre-amendment law.

4. Tax Implications for Shareholders under the DTAA:
The assessee argued that the capital gains arising from the transaction were not taxable in India for the Mauritius shareholder under Article 13 of the India-Mauritius DTAA. The AO did not dispute this claim during the assessment. The Tribunal noted that the capital gains tax was addressed correctly in the shareholders' returns, and no further tax under Section 115QA was applicable to the company.

Conclusion:
The Tribunal concluded that the capital reduction transaction completed on May 31, 2016, did not fall under the definition of buy-back as per the pre-amendment Section 115QA. Thus, the company was not liable for the additional income tax under this section. The appeal of the AO was dismissed, and the CIT(A)'s order was upheld.