SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTION OF INCOME

[Mr. M. GOVINDARAJAN]

Finance Act, 2013 inserted new Chapters viz., Chapter XII-DA and Chapter XII-EA.   Chapter XII – DA deals with special provisions relating to tax on distributed income of domestic company for buy-back of shares and Chapter XII-EA deals with special provisions relating to tax on distributed income by securitization trusts.

Salient features of the new Chapter XII – DA are as follows:

• Notwithstanding anything contained in any other provisions of Income Tax Act, 1961, in addition to the income chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy back of shares (not being listed on a recognized stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income tax at the rate of 25% on the distributed income;
• Even if the company is not liable to pay any income tax the tax on distributed income shall be payable by such domestic company;
• The Principal Officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government;
• The tax shall be payable within 14 days from the date of payment of any consideration to the shareholder on buy back of shares;
• The tax on the additional income by the company shall be treated as final payment of tax in respect of the said income and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid;
• No deduction under any other provisions of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax;
• If tax is not paid within the due date interest at the rate of 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid;
• If tax is not paid by the Principal Officer or the company then he or the company shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income tax shall apply.

For the purposes of this Chapter ‘distributed income’ is defined as the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares.

Salient features of Chapter XII – EA are as follows:

• Notwithstanding anything contained in any other provisions of the Act, any amount of income distributed by the securitization trust to its investors shall be chargeable to tax and such securitization trust shall be liable to pay additional income tax on such distributed income at the rate of-

• 25% on income distributed to any person being an individual or a Hindu Undivided family;
• 35% on income distributed to any other person.

• The above shall not apply in respect of any income distributed by the securitization trust to any person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act;
• The person responsible for making payment of the income distributed by the securitsation trust shall be eligible to pay tax to the credit of the Central Government within 14 days from the date of distribution or payment of such income, whichever is earlier;
• The person responsible for making payment of the income distributed by the securitization trust shall, on or before 15^th day of September in each year, furnish to the income tax authority a statement in the prescribed form and verified in the prescribed manner, giving the details of the amount of income distributed to investors during the previous year, the tax paid thereon and such other relevant details as may be prescribed;
• No deduction under any of the provisions shall be allowed to the securitization trust in respect of the income which has been charged to tax;
• Where the tax is not payable interest shall be liable to pay at the rate of 1% for every month or part thereon on the amount of such tax for period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid;
• If any person responsible for making payment of the income distributed by the securitization trust and the securitization trust does not make payment, then he or it shall be deemed to be an assessee in default in respect of the tax payable by him or it and all the provisions of this Act for the collection and recovery of income tax shall apply.

For this purposes of this Chapter ‘securities’ is defined as debt securities issued by a Special Purpose Vehicle as referred to in the guidelines on securitsation of standard assets issued by the RBI. The term ‘securitized debt instrument’ is defined as having the same meaning as assigned to it in clause (s) of sub regulation (1) of regulation 2 of the SEBI (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008, made under the SEBI Act and the Securities Contracts (Regulation) Act, 1956. The term ‘investor’ is defined as a person who is holder of any securitized debt instrument or securities issued by the securitization trust.

Discussions to this article

[DEV KUMAR KOTHARI]

Learned author Mr. M. GOVINDARAJAN has analyzed provisions in an easy to understand manner. The new provisions in sections 115QA - 115QC  are about assumed income in case of  Buyback of shares and S. 115TA t- 115TC are for assumed income by way of income distributed by Securitisation Trusts.The assumed income will be assessed in hands of company  or the Trust as the case may be.These provisions as well as provisins have come into force w.e.f.01.06.2013.The question for consideration is whether these provisions are valid or ultra virse the Constitution of India (COI). Under COI tax on income can be levied by the UOI. however, under the referred chapters or sections what is being taxed cannot be called income of company or the Trust.

Sppose a company issued shares of Rs. one crore and thereater over a period issued bonus shares from time to time and at present share capital is Rs. ten crore. Now suppose company buyback shares of paid up value of Rs. five crore and pay Rs. fifteen crore to share hodlers. As per provisions, company will have to pay tax on Rs. 14 crore. That is 15 crore minus 1 crore received by company on original shares.The sum of Rs. 14 crore cannot be called income in hands of company, The sum of Rs.15 crore cannot be called income in hands of shareholders. 

Similarly  in case of Securitisation Trusts income distributed by Trust is not income of Trust.

Tax so levied is not tax on income and in nay case income of Trust. Therefore, these provisions appears to be ultravirse the COI and the I.T.Act itself.

However now -a-days any thing is just included in definition of income or deemed as income and a tax is levied, This must come to an end.