9911796707
TMI Blog2016 (3) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... any income by way of dividend referred to in section 115-O of the Act does not form part of total income in the hands of the recipient and company declaring dividend will be in default as per section 115Q. So, the provisions of TDs would not be applicable for dividend covered under section 2(22)(d) of the Act. Transaction in question would not fall under the category of colourable device. If an assessee enters into a deal which does not violate any provision of the Act of applicable to a particular AY. the deal cannot be termed a colourable device, if it result in non-payment or lesser payment of taxes in that year. The whole exercise should not lead to tax evasion. Non-payment of taxes by an assessee in given circumstances could be a moral or ethical issue. But, for that the assessee cannot be penalised. In light of the above discussion, we are reversing the decision of the FAA and deciding the effective ground of appeal in favour of the assessee. - ITA No. 3726/Mum/2015 - - - Dated:- 12-2-2016 - Sh. Rajendra, Accountant Member And Ram Lal Negi, Judicial Member For the Petitioner : Shri Percy Pardiwala/Smt. Aarti Sathe For the Respondent : Shri Jasbir Chauhan-DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end was determined by the AO as payable by the assessee in terms of para 2(a) of Article 10 of the India Mauritius Tax-Treaty. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that a transaction of buy back of shares referred to section2(22) (iv) of the Act was different from a transaction of capital reduction dealt by section 2(22)(d) of the Act, that the transaction in question was one of buy back of shares and not a case of capital reduction. After considering the submissions of the assessee and the order of the AO, the FAA held the AO had obtained the annual report of the assessee company for the five preceding years and from such annual reports he noticed that it had been earning profits after tax for each of those years, that the reserves and surplus increased from ₹ 81, 01, 34, 000/-for the year ending 31. 03. 2008 to ₹ 3, 46, 03, 20, 000/-for the year ending 31. 03. 2010, that inspite of regular profits being earned by it Directors of the assessee-company did not recommend any dividend payment on its equity shares, that money had a time value and postponement of grant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the receipt of its share of profits in the assessee company was given an artificial colour of capital gains, that capital gain on such transaction was exempt from tax in the hands of the recipient, that the non-distribution by way of dividend of the accumulated profits, the transaction of buy back of shares offered by it and the exercise of such option by its sole shareholder was carried out not for any commercial reasons, that whole transaction was arranged for the purposes of enabling an evasion of taxes due on such distribution of Profits, that the receipt by GS-M would come within the ambit of income from a share-holding or a participation in the profits of a subsidiary, that the assessee through the recourse to the arrangement of the buyback of shares sought to give the colour to this transaction as not being in the nature of a receipt of dividend but a capital gain of the concerned share holder, that the arrangement was made to use of the provisions of section 46A of the Act and to claim exemption from tax in India on the basis of Article 13(4) of the India Mauritius Tax Treaty. The FAA referred to the case of a Indian Company that was decided by the AAR in Case No. P of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colourable device, that the scheme had resulted in reduction in capital, that the FAA had rightly held that provisions of section 2(22)(d) of the Act were applicable. 5. We have heard the rival submissions and perused the material before us. We are of the opinion that for deciding the issue before us, it would be useful to consider the provisions of section 77A and100-105 of the Companies Act(CA) and section 2(22) and 46A of the Act. Section 77A of the CA deals with buying back of shares in following manner: (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back ) out of- (i) its free reserves ; or (ii) the securities premium account ; or (iii) the proceeds of any shares or other specified securities : Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 28. 04. 2015) as under: 4. The entire case of the Regional Director revolves around his contention that the buyback of shares must be effected only under Section 77 A of the Companies Act, 1956/Section 68 of the Companies Act, 2013. According to the Regional Director if a buyback of shares is effected under Section 77A/Section 68, then the distributed income of the company as defined in Section 115QA of the Income Tax Act, would be charged to tax and it is for this reason that the company is not following the procedure prescribed under Section 77A/Section 68 and has opted for the procedure under Section 391 which would not attract such a tax under Section 115QA of the Income tax Act. According to the Regional Director by this colourable device the company is evading its liability to pay tax. 5. One of the contentions raised by the petitioner is that a view of the Circular dated 15th January 2014, the Regional Director has no locus in respect of tax matters, particularly when the Income tax Authorities have not raised any objection. This aspect has been considered in detail by this Court in the case of Casby CFS Pvt. Ltd. and it has-been held that the Regional Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of subsections (2), (3) and (4). Prior to the introduction of section 77 A, the only manner in which a company could buy-back its shares was by following the procedure set out under sections 100 to 104 and section 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the court) the drawing up of a list of creditors of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind the introduction of section 77 A is to provide an alternative method by which a company may buy-back upto 25 per cent of its total paid- up equity capital in any financial year subject to compliance with sub-sections (2), (3) and (4). It does not supplant or take away any part of the pre-existing jurisdiction of the company court to sanction a scheme for such reduction under sections 100 to 104 and section 391. 23. The submission of the appellants that the non obstante clause in section 77A gives precedence to that section over provisions of sections 100 to 104, section 391 is misconceived. The non obstante clause in section 77 A namely notwithstanding anything contained in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The above observations of the Hon ble Court does not leave any doubt that buyback of shares cannot be equated with reduction of capital. 5. 1. We find that while amending the CA, by introduction of section 77A of the Act, Legislature had made amendments to the Income tax Act too. We would like to reproduce Section 2(22)(d) and section 46A of the Act and same read as under: (22) dividend includes- (a) . (b) . (c) . . (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; 46A. Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the Income-tax Act and whether any capital gains would arise in the hands of the shareholder. The legal position on both the issues were far from clear and settled and there was apprehension that there will be unnecessary litigation unless the issues are clarified with finality. 28. 3 The Act, therefore, has amended clause (22) of section 2 of the Income-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act, 1956. It has also inserted a new section, namely, section 46A in the Income-tax Act, to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains. 28. 4 This amendment will take effect from 1st day of April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected. The Regional Director has not furnished any particulars in support of the aforesaid contention. Be that as it may, if the law permits a company to buy back back its shares in more than one way; the company cannot be compelled to follow only the method that results in payment of income tax. It is well settled that an assessee can always manage his affairs in a manner so as to avoid payment of tax. In the present case since it is legally permissible for the company to buy back its shares by following the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act, the fact that the same may not attract income tax will not amount to it being a device to evade tax. 7. Even the argument of the Regional Director that foreign exchange amounting to ₹ 248 crores will be drained away if the Scheme is sanctioned, is of no avail once it is held that the procedure adopted by the company is permissible in law. Moreover, the Regional Director has not shown that the law prohibits the transfer of shares by a non-resident to resident. In fact, he does not dispute that the same is permissible. The Petitioner has placed on record RBI's Circular No. 49 dated 4th May ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
