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TMI Blog2017 (2) TMI 1504X X X X Extracts X X X X X X X X Extracts X X X X ..... efore to the extent of the transaction of buy back of shares, the same cannot be classified as dividend as per the provisions of Section 2(22) when the exclusion clause (iv) of Section 2(22) has specifically excluded such a payment on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies Act from the definition of dividend. After the insertion of Section 115QA, the purchase of its own shares by the company in accordance with the provisions of section 77A of the Companies Act shall be charged to DDT. Since this transaction in the case of the assessee is prior to 1.6.2013 therefore the said provision of Section 115QA is not applicable in the case of the assessee as it is explained by the CBDT vide Circular No.3/16. CBDT has clarified that the consideration received on buy back of shares between the period 1.4.2000 to 31.5.2013 would be taxed as capital gain in the hands of the recipient in accordance with the provisions of Section 46A of the Act and no such amount shall be treated as dividend in view of the provisions of Section 2(22)(iv) - AO has accepted that the capital gain in the hand of the holding company is not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the assessee is set aside to the record of the Assessing Officer for adjudication as per law - Appeal of the assessee is partly allowed. - I.T. (T.P) A. No. 416/Bang/2016 - - - Dated:- 22-2-2017 - Shri Vijay Pal Rao, Judicial Member And Shri Inturi Rama Rao, Accountant Member For the Appellant : Shri T. Suryanarayana, Advocate. For the Respondent : Shri Muzzaffar Hussain, CIT, LTU (D.R). ORDER Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the assessment order dt.29.01.2016 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) dt.09.02.2015 for the Assessment Year 2011-12. 2. The assessee has raised the following grounds : 1. That on the facts and circumstances of the case and in law, the learned Assessing Officer ( AO ) erred in levying Dividend Distribution Tax ( DDT ) under section 115-O of the Income-tax Act, 1961 ( the Act ) on the amount remitted by the Appellant to its shareholders on account of buy-back of shares made in accordance with the provisions of section 77A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA ) between India and Mauritius which provides exemption to the recipient of Mauritius. The Assessing Officer was of the view that since FID Holding Mauritius is having 99.99% share holding, the amount lying under Reserves Surplus are not distributable to others. If the dividend is being declared by the assessee-company, the Dividend Distribution Tax would have been paid which will result into less profit for the share holding company. Therefore the assessee and its holding company adopted the other route to transfer reserves and surplus out of India without being any single penny of tax. The Assessing Officer held that in such manner, the offer is nothing but a colourable instrument to transfer the accumulated profit without having tax impact in India in the hand of recipient. Hence the Assessing Officer proposed to treat the payment by the assessee to its holding company on account of buy back of shares as dividend under Section 2(22)(d) of the Act and levied under DDT under Section 115(O) of the Act. The Assessing Officer has computed the dividend being the difference between the face value of the shares and the amount paid by the assessee being the buy back price to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a particular enactment so provides. 5. On the other hand, the learned Departmental Representative has relied upon the order of the Assessing Officer and submitted that the assessee has adopted a dubious method and modus to make the payment out of the reserves and surplus to its holding company in the garb of buy back of shares at a very exorbitant high price. The Assessing Officer has held that the buyback price is very exorbitant and therefore the assessee has adopted this colourable device to transfer the money from the reserves and surplus to this holding company. 6. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the holding company of the assessee based in Mauritius is holding more than 99.99% of the shares of the assessee. Therefore if any payment is made by the assessee to the holding company, the same would be treated and deemed as dividend in view of the provision of Section 2(22) of the Act however, in this case the payment in question has been made by the assessee to the holding company on account of buy back of shares. Therefore to the extent of the transaction of buy back of shares, the same cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon. Thus after the insertion of Section 115QA, the purchase of its own shares by the company in accordance with the provisions of section 77A of the Companies Act shall be charged to DDT. Since this transaction in the case of the assessee is prior to 1.6.2013 therefore the said provision of Section 115QA is not applicable in the case of the assessee as it is explained by the CBDT vide Circular No.3/16. We quote the relevant para Nos.1, 4 and 5 of the Circular : 1. As per provisions of Section 46A of the Income Tax Act, 1961, applicable with effect from 1.4.2000, any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares/other specified securities shall be, subject to provisions conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2,85,108 per share having face value of ₹ 10. So far as the payment on account of buy back made by the assessee to its holding company to the extent of the fair market price of the share of the assessee company is concerned, the same would be treated as capital gain in the hand of the holding company as per the provisions of Section 46A and in view of the provisions of Indo-Mauritius DTAA the capital gains on account of sale of share is not chargeable to tax in India. The payment in the name of buy back of shares made by the assessee over and above the fair market price of the share of the assessee would not be treated as part of the purchase price because the transaction is between the two closely related parties and therefore the payment which is in excess of fair market price of the share of the assessee company would certainly fall in the ambit of Section 2(22)(e) of the Act. There is no dispute regarding the other condition of the holding company having a voting power of not less than 10% as it holds the shares of the assessee to the extent of 99.99%. In case the buy back price is not based on the real valuation and it is artificially inflated by the parties then it is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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