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TMI Blog2012 (3) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 47(iv) and income is chargeable to tax in terms of Section 46A r.w.s. 48. Also, applicant is not entitled to receive the amount on buy-back of shares without any deduction of tax at source and Section 115JB has no application in this case. - A.A.R. No. 1067 of 2011 - - - Dated:- 27-2-2012 - Mr Justice P.K. Balasubramanyan, Mr. V.K.Shridhar, JJ. Present for the applicant : Mr. Rajan Vohra ,C.A.[S.R.Batliboi Co.] Mr. Vinesh Kirplani,C.A.[S.R. Batliboi Co.] Mr. Srirupa Tandon, C.A.[S.R.Batliboi Co.] Present for the Department : Ms. V.S. Sreelekha, Addl.DIT(Int.Taxn) Bangalore R U L I N G [By Justice P.K. Balasubramanyan] The applicant is a company incorporated in Germany with limited liability. It is a part of a Group of companies. The applicant files income-tax returns in India as a non-resident. According to it, it has a wholly owned subsidiary in India, which is a public limited company incorporated under the Indian Companies Act (hereinafter, Companies Act‟). 2. The applicant holds 43,83,994 shares in the Indian company being 99.99986% of the shareholding. One share each is held by 6 other companies, each constituting 0.00002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the shares get extinguished on buyback, Section 47(iv) of the Act has no application. Section 47 also does not override Section 46A of the Act. Hence, the gain as postulated by Section 46A of the Act would be taxable in India. 5. In its reply, the applicant has reiterated that Section 46A is not a charging section and that buyback of shares would be chargeable to tax under section 45(1) of the Act read with Section 46A for computation thereof. The liability to be taxed was under section 45 and section 47(iv) of the Act would be attracted and hence, the transaction was not taxable in India. 6. At the hearing, it was submitted on behalf of the applicant, that the applicant and its nominees together held 100% of the shares in the Indian subsidiary and in the case of a buyback, the transfer would stand exempted from taxation under section 47 (iv) of the Act. In the context of Section 77A of the Companies Act, the proposed buyback was a valid transaction and the proceeds will not be dividend in view of the amendment to the definition of dividend under the Act. It would be capital gains. Section 46A of the Act was only clarificatory and when the gain is not taxable, going by Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company to hold shares in its subsidiary in the name or names of a nominee or nominees of the company so as to ensure that the number of members of the subsidiary is not reduced below seven, if it is a public company, and below two, if the subsidiary is a private company. Sub-section7 clarifies that securities includes stock and debentures. 10. The Indian subsidiary here, is a public company. That means that it has to have at least seven members, to be a legal entity in terms of Sec49(3) of the Companies Act. It is the case of the applicant that the other six members of the subsidiary are its nominees and they hold one share each. The definition of public company‟ in Sec3(iv) of the Act is not relevant in the present context. 11. In A.Ramaiya‟s Guide to the Companies Act (16th Edition Reprint 2006) at page 614 the following passage occurs: When the investment of a company consists of shares in another company the question arises whether shares held by the company in the name of its nominee must be deemed to be held by the company and whether the investments should be transferred to the name of the company. In considering this question, it is necessary to bear i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 47(iv) of the Income-tax Act to contend that it is enough if the applicant and its nominees together hold 100% shares in the subsidiary for claiming the benefit of that provision. Section 77B of the Companies Act introduced along with Section 77A prohibits a buyback through any subsidiary company including its own subsidiary. The applicant wants the words the parent company or its nominees read as the parent company and its nominees. A transfer of a capital asset by a company to its subsidiary would not be hit by section 45 of the Act, if the parent company or its nominees, hold the whole of the share capital of the subsidiary company [emphasis supplied] and the holding company is an Indian company. Such a reading, it is urged, will alone make Section 47 (iv) of the Act workable. In the context of Section 49 (3) of the Companies Act, there cannot exist a subsidiary Indian company, whether public or private, in which the parent company could legally hold 100% of the shares. 15. Section 47(iv) postulates that a company must hold 100% shares in a subsidiary Indian company, either directly or through its nominees. If under Indian law, a parent company cannot hold 100% in a subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an illegality. 18. Section 46A of the Act is plain and clear. It provides that if a shareholder receives any consideration from any company for purchase of its own shares, then subject to Section 48 of the Act, the difference between the cost of acquisition and the value of consideration received by the shareholder shall be deemed to be the capital gains arising to such shareholder. Thus, in the case of a company buying back its shares, a fiction or yardstick for computing the capital gains has been enacted. Section 45 of the Act similarly says, in cases of transfer of capital assets, the profits arising therefrom would be the capital gains arising out of that transaction. Section 45 is a general provision dealing with transfer of all capital assets. Section 46A in that context can be understood only as a special provision dealing with purchase of its own shares by a company. This being a special provision dealing with such buybacks, it has to prevail over the general provision incorporated in section 45 of the Act. 19. It is argued based on the principle stated in CIT v. Gotla [(1985) 156 ITR 323] that where a plain literal interpretation of a statutory provision produces a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only understand Sec 45 as the charging section. The section says what the capital gains is, arising out of such a transaction and mandates resort to Sec 48. Sec 48 only deals with the mode of computation and Sec 46A having determined the capital gains, the tax needs alone to be computed as provided for therein. 21. The applicant has relied on the speech of the Finance Minister, while introducing Section 46 A of the Act. The Hon‟ble Finance Minister stated: Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax. According to us, this speech, if at all, makes it clear that the gain from such a transaction is taxable as capital gain and not as dividend. Section 46A obviously provided the means of determining the capital gains arising from such a transaction. Simila ..... X X X X Extracts X X X X X X X X Extracts X X X X
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