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TMI Blog2016 (4) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... ut rendering any opinion on the correctness of Appellant's claim of not spending any amount for earning exempt income the learned AO could not have made a disallowance by applying the provisions of section 14A r. w. r. 8D. 1. 3 The Hon. Commissioner of Income Tax (Appeals) grossly erred in overlooking the fact that the principle of apportionment embedded in section 14A had no application where no direct expenditure was incurred to earn exempt income and entire expenditure was incurred for business purposes only. 2 The Hon Commissioner of Income Tax (Appeals) grossly erred in confirming the disallowance of ESOP expenses amounting to Rs. 52 08 592/-. 2. 1 The Hon. Commissioner of Income Tax (Appeals) grossly erred in ignoring the fact that the amount of Rs. 52 08 592/- represents the cost of stocks granted to the employees of the Appellants under an ESOP scheme to compensate them for services rendered by them and is therefore similar to salary cost which is allowable business expenditure. 2 The appellants crave leave to add alter amend or delete any of the above grounds of appeal. Grounds of appeal filed by the AO read as under: 1. "Whether on the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile deciding the appeal for 2008-09 the identical issue -except for the amount involved-was dealt by the Tribunal as under : "2. The first Ground of appeal is about disallowance of Rs. 2. 74 laks made u/s. 14A of the Act. During the assessment proceedings the AO found that the assessee had claimed dividend income of Rs. 18. 33 lakhs that it had offered no disallowance u/s. 14A on account of expenses relating to dividend income. The AO applied Rule 8D of the Income tax Rules 1962(Rules) and made a disallowance of Rs. 2 74 489/-(0. 5% of average value of investment). 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 the assessee had made investment in Mutual Funds only that investment was made out of assessee's own funds that no other expenditure was incurred regarding dividend income. After considering the submission of the assessee and the assessment order the FAA held that no disallowance had been made under the head interest expenditure that making of investment out of own funds had no relevance that only other administrative expenses had been disallowed as per Rule 8D of the Rules. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of the tax audit report the AO found that the assessee had paid Fringe Benefit Tax(FBT)only on amount of Rs. 50. 65 lakhs. The AO directed the assessee to explain as to why FBT had not been paid to whole amount. The assessee vide its letter dt. 29. 12. 12 stated that the value of FBT taken for ESOP(Rs. 50. 65lakhs) as against cost of stock awarded to KF Employees(Rs. 1. 07crores) that the amount of Rs. 50. 65 represented the value of ESOP that had been vested with the employees during FY 2007-08 and consequently considered for FBT that the amount of Rs. 1. 07crores represented the amount charged by Korn Ferry International USA to Korn Ferry International Pvt. Ltd. India towards stock awarded to the employees of the assessee . After considering the same the AO held that during the year under consideration only a part (Rs. 50. 65 lakhs)out of the total amount (Rs. 1. 07crores) was debited to P&L A/c. was vested in employees that the balance amount would be vested in employees over a period of time that the assessee had not paid FBT on Rs. 56. 40 lakhs that liability could eventually increase or decrease in future that it had not produced any evidence as to the fact that amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the above order we allow the appeal of the assessee with regard to second ground. ITA No. 6269/M/2013 4. The effective Ground of appeal filed by the AO is about buyback of shares. During the assessment proceedings the AO had held that assessee had indulged in activity of buy back of shares that the same was a colourable device for the purpose of avoiding dividend distribution tax that the assessee had not declared dividend inspite of making regular profit. In the appellate proceedings the FAA had upheld the disallowance of Rs. 52. 08 lakhs. But he did not agree with the AO that buyback of shares was an instrument to avoid dividend distribution tax. 5. During the course of hearing before us the DR and the AR stated that identical issue had arisen in the matter of Goldman Sachs(India) Securities Pvt. Ltd (ITA/3726/Mum/2015 AY. 2011- 12 dtd. 12. 02. 2016) that the Tribunal had decided the issue in favour of the assessee . We find that the Tribunal had deliberated upon the issue and had decided as under : "The assessee is a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC(GS-M). It was set up to undertake merchant banking and security business in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering 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 Rs. 81 01 34 000/- for the year ending 31. 03. 2008 to Rs. 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 of a share in the profits to a shareholder would be for purposes of reinvestment in the business for the purposes of enhancing future profits that the assessee had not shown any such requirement or compulsion as a justification for the non-grant of dividend in the regular course inspite of the continuous accumulation of profits in its books that the AO had specifically required the assessee to explain the commercial reason if any for the non issue of dividend although the profits were being accumulated year after year that it chose to remain silent on this show cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2010 vide its order dated 22. 03. 2012 and held that it had persuasive value. He further held that section 100 to 105 of the Companies Act dealt with reduction of capital that the annual accounts of the assessee showed that its share-capital actually got reduced and was so reflected in the books after the buy-back of the shares that buy-back of shares was one of the ways of capital reduction that reliance by the AO on the provisions of section 2(22)(d) of the Act dealing with capital reduction as including a transaction of buy-back of shares was justified that the provisions of section 10(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 securities under subsection (1) unless- (a) the buy-back is authorised by its articles ; (b)a special resolution has been passed in general meeting of the company authorising the buy-back Provided that nothing contained in this clause shall apply in any case where-(A) the buyback is or less than ten per cent. of the total paid-up equity capital and free reserves of the company ; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting : Provided further that Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Director has the requisite locus standi to raise all objections in respect of a scheme including objections pertaining to taxation laws. He can do so even if the Income Tax Authorities do not raise any objection. It has been held that this is the duty and obligation of the Regional Director. In view of the aforesaid decision of this Court the objection of the Petitioner with regard to the locus of the Regional Director is untenable and deserves to be rejected. 6. The Petitioner has submitted that it is open to the Petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with Sections 100 to 104 to effectuate the buyback of shares and there is no com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons (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 this Act . . . . " Only means that notwithstanding the provisions of section 77 and sections with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 77A to indicate that the jurisdiction of the court under section 391 or 394 has taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are therefore inclined to hold that section 77 A is merely an enabling provision and the courts powers under sections 100 to 104 and section 391 are not in any way affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 other specified securities as the case may be shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities as the case may be in the year in which such shares or other specified securities were purchased by the company. Explanation. -For the purposes of this section "specified securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act 1956 (1 of 1956). " The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts that buyback of shares of a corporate entity cannot to be characterised as deemed dividend that profit arising out of the buyback schemes had to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 years. " It is worth mentioning that provisions of section 115Q have been amended w. e. f. 01. 04. 2013 and profit arising out of buyback of shares is to taxed at a particular tax rate. But the AY. before us is prior to the April 1st 2013. Therefore we have to decide the issue as per the prevailing law applicable on the date of the transaction in question. There is no ambiguity about the provisions that would govern the buyback of shares. Section 2(22)(d)(iv)r. w. s. 46A of the Act would be applicable to the buyback scheme. Accordingly the transaction cannot be treated deemed dividend. 5. 2. Now we would deal with the issue of treating the assessee as A-I-D for not deducting tax at source. Once it has been decided that the profit arising out of buyback would be taxed as capital gains the next step is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2010 which provides that shares of an unlisted Indian company can be transferred by a non-resident to a resident under the general permission of the RBI if the transfer price does not exceed the fair market value as determined by a Chartered Accountant or a SEBl registered Merchant Banker as per the DCF method. In the present case the transfer price has been arrived at in accordance with the aforesaid circular of the RBI. The Regional Director has not disputed the fair market value of the shares so determined. In these circumstances it is clear that the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being so there is no question of there being any draining away of foreign exchange. 8. in view of the above and particularly the fact that in law the Petitioner is entitled to buy back its own shares by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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