Buy-back - Definition / Legal Terminology - Income Tax

Explanation.(i) - For the purposes of section 115QA of the Income tax Act 1961,- buy-back 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; PRINCIPAL COMMISSIONER OF INCOME TAX [ 2023 (5) TMI 1290 - CALCUTTA HIGH COURT] Buy-back means, the purchase by the companies of its own shares in accordance with the provisions of the Section 77 of the Companies Act. Thus, Tribunal noted that as per the said provision in force during the relevant assessment year, the buy-back pursuant to order of Company Law Board will appear under Section 402 of the Companies Act was not included. IN RE : PQR GMBH- [ 2019 (10) TMI 1437 - AUTHORITY FOR ADVANCE RULINGS] Whether the shares buy-back transaction is covered under exemption under section 47(iv) of the Income-tax Act. A brief historical perspective would be in order to appreciate the laws on buy-back of shares. The provisions regulating buy-back of shares are contained in sections 77A, 77AA and 77B of the Companies Act, 1956. These sections were inserted by the Companies (Amendment) Act, 1999. The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy-Back of Securities) Regulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public before Company (Buy-Back of Securities) Rules, 1999 pursuant to section 77A(2)(f) and (g) respectively. Consequently in the Income-tax Act, amendments were brought in section 2(22) and by insertion of section 46A, with effect from April 1, 2000. By these amendments buy-back of shares was excluded from the definition of dividends in section 2(22) and was specifically taxed as capital gains in section 46A of the Income-tax Act. These amendments were brought to clarify the ambiguity in regard to the taxation of buy-back of shares. The considerations received on buy-back of shares are clearly taxable under section 46A of the Act. The Central Board of Direct Taxes Circular No. 779 of 1999 and Circular No. 3 of 2016 have made it abundantly clear that the purpose of inserting section 46A in the Act and amending clause (22) of section 2 of the Act is to avoid unnecessary litigation and to bring clarity on the matter. .................... As the shares are destroyed after the buy-back, there is no capital asset remaining with the transferee company. Therefore there is no further capital gains tax that can be imposed as the capital asset itself ceases to exist after the buy-back, thus making sections 47A, 49 and 155(7B) redundant. This being so, the taxation of the shares subjected to a buy-back as per section 77A of the Companies Act, 1956 can never be covered as per section 47A as the shares cease to exist after the buy-back. Such impossibility of application of section 47A, section 49 and section 155 could never be the intention of Legislature. The intention of the Legislature can never be to render any provision of the Act otiose.