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TMI Blog2023 (9) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... y back its shares u/s. 391-393 alone. Therefore, in our considered view, the AO the Ld.CIT(A) have rightly held that the transactions of purchase of its own shares is nothing but distribution of accumulated profits and reduction of capital which falls under the definition of dividend u/s. 2(22)(d). Further, the term buyback is used in the Companies Act, 1956, only in Sec. 77A and not in any other place. Similarly, the term buyback was defined u/s. 115-QA of the Income Tax Act, 1961, to mean buyback u/s. 77A only. The arguments of the Ld. Counsel for the assessee that purchase of own shares by a Scheme of Arrangement Compromise u/s. 391-393 of the Companies Act, 1956, is taxable u/s. 115QA of the Act, only after amendment to the term buyback by the Finance Act, 2016 w.e.f. 01.06.2016 is in correct. Because, there is no dispute on the law in so far as buyback of shares u/s. 77A of the Act, and therefore, the amendment to Sec. 115QA by the Finance Act, 2016, is nothing to do with the present tax treatment, when the companies Act has amended by insertion of Sec. 77A of the Act, in the year 2016. Simultaneously, a new provision has been inserted under the Income Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56. In any event, assuming without conceding that Sec. 46A applies to all forms of buyback, but Sec. 115-O contains a non-obstante clause which would override the provisions of Sec. 46A of the Act. Therefore, the contention of the assessee that consideration paid for purchase of its own shares, is only taxable in the hands of the shareholders as per provisions of Sec. 46A of the Act, is devoid of merits. Sec. 115QA was amended in 2016 and the present transaction would only be taxable as per the amended provision - Firstly, there is a distinction between purchase of own shares upon reduction of share capital and buyback. Buyback is a term used only in respect of transactions covered u/s. 77A. In fact, assessee itself stated in the scheme that it is not a buyback of shares in terms of provisions of Sec. 77A of the Act. Therefore, the object behind amendment of Sec. 115QA has to be read. In our considered view, the amendment to Sec. 115QA was brought in to clarify that the provisions would apply to buyback of shares u/s. 77A as well as to buyback of shares u/s. 391-393 of the Companies Act, 1956. Secondly, assuming without conceding that Sec. 115-QA would govern the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below are without prejudice to each other. 2. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), treating the Scheme of Arrangement and Compromise ('the Scheme') approved by the Hon'ble Madras High Court in C.P. 102 of 2016 under section 391 to section 393 of the Companies Act, 1956 in the Appellant's case for purchase of own shares, as a Scheme for 'capital reduction' is violative of the Scheme itself as also the order of the Hon'ble High Court. 3. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), erroneously treats the consideration paid by the Appellant for purchase of its own shares from its shareholders in accordance with the Scheme as dividend as per section 2(22) of the Act. 4. The learned CIT(A) has erred in holding that what is excluded from the definition of dividend us 2(22) and brought into the purview of Sec. 46A is the 77A buy-back of shares and not any other 'purchase of own shares' . 5. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), fails to appreciate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that the credit for INR 495 crores deposited under protest during the pendency of the proceedings shall be given effect to only from April 2020 whereas the amount was moved to the regular account (Head of Account No. 106) of the Income-tax department in March 2019 itself. 3. The brief facts of the case are that the assessee, M/s. Cognizanat Technology Solutions India Pvt. Ltd., (in short M/s.CTS India Pvt. Ltd. ) is a Private Ltd. Co., and is engaged in the business of software development and related services/solutions. The assessee is operating in India since 1994 and has grown to be one of the largest Software Development Company in India. The assessee clients predominantly are in the USA. The assessee was originally a wholly owned subsidiary of CTS, USA. Thereafter, in FY 2011-12, there was a restructuring of various businesses directly or indirectly under the control of CTS, USA. Through a Court approved scheme, the Appellant Company was amalgamated with M/s. Cognizant India Pvt. Ltd. (M/s.CIPL) and M/s. MarketRx India Pvt. Ltd. (M/s. MIPL). M/s. CIPL was a wholly owned subsidiary M/s. Cognizant (Mauritius) Ltd., whereas M/s. MIPL was a wholly owned subsidiary of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders and tax deducted at source is as follows: Share holder No. of shares bought-back Gross Consideration (INR) Capital gains (INR) Tax deducted at source (INR) Cognizant Technology Solutions Corporation, USA 37,00,747 7,511,40,61,859 7,496,38,22,485 810,73,37,402 marketRx, Inc, USA 2,38,521 484,12,60,737 483,88,75,527 52,33,24,388 Cognizant (Mauritius) Limited, Mauritius 53,01,788 10,761,03,91,036 10,748,63,57,379 Nil (Not chargeable to tax under the India-Mauritius DTAA) CSS Investments LLC, Delaware, USA 1,59,478 323,69,24,966 323,16,36,873 34,95,01,528 Total 94,00,534 1,90,80,26,38,598 1,90,52,06,92,264 8,98,01,63,318 5. The assessee deducted TDS on consideration paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x demanded) and has furnished security in the form of fixed deposits for a sum of INR 2,806 Crs. on which lien has been marked in favour of the CIT-LTU, Chennai. The Writ Petition filed by the assessee was dismissed by the single judge as non-maintainable and the assessee was directed to file an appeal before the Ld.CIT(A) vide order of the Hon ble High Court of Madras dated 25.06.2019. The Hon ble High Court of Madras while dismissing the Writ Petition has observed that the consideration paid by the assessee towards purchase of its own shares constituted dividend and that the provisions of Chapter XII-D of the Act, do not envisage any prior proceedings for a taxpayer to be treated as an assessee in default . The assessee challenged the order of single judge of the Hon ble High Court of Madras before the Division Bench of the Hon ble High Court of Madras in Writ Appeal No.2063 of 2019. The Division Bench of the Hon ble High Court of Madras vide its judgment and order dated 06.09.2019 allowed the Writ Appeal in part by setting aside the remarks of the Ld.Single Judge on merits. The Division Bench upheld the directions of the Ld.Single Judge with respect to filing an appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions of the assessee and also on analysis of various provisions of the Income Tax Act, 1961, with regard to capital gains on buyback of shares and also taken note of relevant provisions of the Companies Act, 1956, deals with buyback of shares, capital reduction and arrangement compromise referred to u/s. 391 to 393 of the Companies Act, 1956, held that consideration paid by the assessee to its shareholders for purchase of its own shares was liable to tax as deemed dividend u/s. 2(22)(d) of the Act, and alternatively, u/s. 2(22)(a) of the Act, and consequently, the assessee company was liable for payment of Dividend Distribution Tax (in short DDT ) u/s. 115-O of the Act. The AO has discussed the issue at length in light of certain judicial precedents and held that consideration paid by the assessee to its shareholders for purchase of its own shares under the Scheme of Arrangement Compromise u/s. 391 to 393 of the Companies Act, 1956, is nothing but dividend within the meaning of Sections 2(22)(a) / 2(22)(d) of the Act. The AO further held that if you go through the scheme documents submitted by the assessee, it is clear that the assessee has specifically excluded the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee reiterated its arguments made before the AO along with certain judicial precedents and argued that the powers of the Hon ble High Court of Madras u/s. 391 to 393 of the Companies Act, 1956, has been held to be complete code in itself and such power is independent and de horse Sec. 77A of the Companies Act, 1956. In other words, the assessee submits that Scheme of Arrangement Compromise sanctioned by the Hon ble High Court of Madras in terms of Sections 391 to 393 of the Companies Act, 1956, cannot be considered as buyback of shares in terms of provisions of Sec. 77A of the Companies Act, 1956, and also reduction of capital in terms of provisions of Sec. 100-104/402 of the Companies Act, 1956. The Ld.CIT(A) after considering relevant submissions of the assessee and also by taking note of various facts brought on record by the AO, discussed the issue at length and held that consideration paid by the assessee to its shareholders for purchase of its own shares through the Scheme of Arrangement Compromise sanctioned by the Hon ble High Court of Madras involves capital reduction and is deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittedly, assessee's transaction is not a 'buy-back' u/s 77A of Companies Act 1956; it exceeds the limit of 25% of total paidup equity capital fixed in section 77A also. Section 391 cannot be read standalone for the purpose of purchase of own shares and it has to necessarily read with section 77 and section 100 of the Companies 1956. Purchase by virtue of Section 77 of Companies Act 1956 or 57 Companies Act 2013is for mandatorily effecting capital reduction. Such purchase cannot be made simpliciter divorced off a reduction capital. Reduction in capital is sine qua non for any purchase of own shares other than sec 77A including that under sec391. Even if the assessee argues that purchase of its own shares was done u/s. 391 simpliciter, even then, what happened in reality in the transaction is capital reduction [to the extent of 54.7% of total paid-up share capital], which the assessee has been unable to controvert. Almost all the court decisions available on the subject invariably hold that 'purchase of own shares' (other than 77A buybacks) done u/s. 391 should always be read with section 100. None of these decisions hold that such transaction does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned scheme also confirms to this fact. More precisely. it is transaction of 'reduction of capital' through 'purchase of own shares'. Further, for the purposes of section 2(22)(d), what is to be seen is whether there is capital reduction; if the answer is yes, then, section 2(22)(d) comes into play. Whether it is 'transaction of capital reduction through purchase of own shares' or 'transaction of purchase of own shares involving capital reduction' or 'capital reduction being the end result of the transaction of purchase of own shares' etc do not in fact really matter. It is to be noted that section 2(22)(d) simply refers to 'reduction of capital' and it does not even refer to any section of the Companies Act. Only clause (iv) of Sec. 2(22) stipulates that it should not be buy-back u/s. 77A. What is to be seen is whether there is capital reduction or not. 'Capital reduction' happened in the transaction is an undeniable fact; it is not buy-back u/s. 77A is also an undeniable fact. Then, section 2(22)(d) comes into play automatically. Even if for argument sake, it is taken that 'capital reduction' is not the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital reduction accompanied by distribution of accumulated profits and is squarely . covered u/s. 2(22)(d)/(a) r.w.s 115-O. Assessee tried to argue that the RD has given his clean-chit for the scheme and based on that, the Court has given approval for the Scheme. It has to be noted that while approving, the Court has clearly stated that the approval does not give any exemption from following any mandatory compliances as per law and does not give any exemption from any due tax as per law. RD nowhere stated that the impugned transaction does not involve capital reduction. RD of Corporate Affairs is not an authority under the Income tax Act. Income tax liability has to be seen independently by the concerned Income tax authorities under the Income tax Act. Hence, this argument of the assessee is not acceptable. The assessee again argued that as per RBI intimation made by the assessee, the transaction is transfer of shares and not dividend. RBI intimation made by the assessee is for _FEMA purposes and not for Income tax Act purposes. Therefore, RBI intimation made by the assessee cannot govern or determine the tax liability under the Income tax Act. Hence, reliance canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here in section 2(22), there is such stipulation. Assessee cannot go by any general meaning for the dividends u/s 2(22). Legal meaning as provided in the provisions of section 2(22) can only be looked into. In the impugned transaction of the assessee, there is capital reduction, which is indisputable; and that accompanied payment from accumulated profits to the shareholders; and the impugned transaction is not buy-back u/s. 77A. Then, as per the legal meaning of those relevant provisions, it is dividend u/s. 2(22)(d)/(a). As the impugned transaction is not a buy-back u/s. 77A of the Companies Act 1956, section 46A of the Income tax Act is not applicable read with Explanation to section 46A section_ 46A, Finance Act comment for section 46A and Circular Memorandum for No.3/2016 [F.No.225/19/2016/I7A.II] dated 26.2.2016. Section 46A does not have any role on the impugned transaction of the assessee. This has been amply demonstrated in detail in paragraphs 9.3.9, 9.12 and 9.13 above. lt may also be noted that non-obstante section 115-O takes primacy over section 46A. Therefore, the argument of the assessee that the shareholders paid (barring the major Mauritius shareholder under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with all other relevant existing provisions, like section 77. The same distinction is maintained in all the relevant provisions of Companies Act 2013 also. Buyback of shares attracts buyback tax u/s. 115QA, whereas purchase of own shares involving the mandatory capital reduction attracts DDT u/s. 115-O. In other words, more particularly, buy-back'' of shares [u/s 77A or u/s. 391 r.w.s 77A of Companies Act 1956 or u/s. 68 or u/s. 230 r.w.s 68 of Companies Act 2013] attracts buyback tax u/s. 115QA, whereas purchase of own shares involving the mandatory capital reduction [u/s 77 r.w.s 100 or 391 r.w.s 77 100 of Companies Act 1956 or u/s. 67 r.w.s 66 or u/s. 230 r.w.s 67 66 of Companies Act 2013] continues to attract DDT u/s. 115-O.There is absolutely no ambiguity in it. This has been amply demonstrated in detail in paragraphs 9.3.10, 9.14, 9.15 and 9.16 above. The assessee again tried to take shelter under the Court's approval for its Scheme, for not paying the due tax u/s. 115-O. This is not possible and not acceptable, as the Hon'ble Court in its approval clearly stated this Court having also observed that this order will not be construed as an orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is taxable in India; there is no foreign income accrued or arisen to the assessee in the impugned transaction. Hence, DTAAs are not applicable to the assessee company. When DTAAs are not applicable to the assessee on the impugned transaction at all, there is no question of DTAAs overriding the provisions of the Income tax Act. Hence, the argument of the assessee is patently wrong. The assessee again argued that the respective DTAAs will be applicable for the respective NR shareholders. Once the company is taxed u/s. 115-O, the shareholders are exempt u/s. 10(34).The taxability of the NR shareholders on the income accrued or arisen or deemed to have accrued or arisen to them in India and the applicability of DTAA benefits on such income are separate issues relevant for consideration in the assessment of the respective NR shareholders. The issue on hand is only the DDT liability u/s 115-O on the assessee company. Therefore, the plea that the AO of the assessee has contravened the provisions of the DTAAs has no merit. Thus, in view of the above facts, the assessee's transaction of purchase of own shares through the 'scheme of arrangement and compromise' is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluer. The Ld.Sr.Counsel for the assessee, referring to scheme document explained the purpose and intent of scheme and also modality of purchase of shares from its shareholders and argued that such scheme is voluntary. The Ld. Counsel for the assessee further took us to various clauses of the scheme and argued that it is expressly provided in the scheme that the provisions of Sec. 2(22) or Sec. 115-O or Sec. 115QA of the Act, are not applicable to the purchase of equity shares by the company from its shareholders. Further, said scheme shall not be treated or considered as a capital reduction under the provisions of Sec. 100 of the Companies Act, 1956, or buyback under the provisions of Sec. 68 of the Companies Act, 2013. The purchase of equity shares and the payment of consideration shall not be treated as distribution of assets or distribution of accumulated profits of the company to its shareholders. The company complied with all statutory provisions, including Foreign Exchange Management Act, 1999, and the regulations and notifications thereunder and also deducted TDS as per the provisions of the Act, wherever applicable. The ld. Counsel for the assessee further referring to var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , from the aforesaid, it follows that prior to 15.12.2016, there was no restriction on the powers of the Hon ble High Court to sanction a scheme of arrangement for purchase of its own shares u/s. 391 of the Companies Act, 1956, independent and de horse Sec. 77 of the Companies Act, 1956. 12. The Ld.Sr.Counsel for the assessee submitted that purchase of shares and extinguish thereof does not amount to reduction of capital as envisaged u/s. 100-104/402 of the Companies Act, 1956. As per sec.77(1) of the Companies Act, 1956, there is a necessity to extinguish shares after buyback of shares by any company u/s. 391 or u/s. 77A of the Companies Act, 1956. Therefore, the company has to perforce cancel/extinguish shares purchased from the shareholders due to bar in law. Therefore, the scheme of arrangement for purchase of shares cannot be said to be a scheme for reduction of capital u/s. 100-104/402 of the Companies Act, 1956. Since, purchase of shares and extinguishment thereof does not amount to reduction of capital, payment of consideration to the shareholders for purchase of own shares cannot, therefore, be said to be occasioned on account of reduction of capital, and consequent red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr.Counsel for the assessee further submitted that provisions of Sec. 2(22)(d) of the Act, does not applicable in the present case, because, the deeming fiction provided therein is triggered when payment is made to the shareholders upon reduction of share capital. In the instant case, the company had under the scheme made an offer to purchase its own shares from its shareholders and acceptance of such offer by the shareholders a contract comes into existence. Therefore, the shareholders tendered whole or part of the shares held at the discretion of the shareholders to the company and the company accordingly, made payment to the shareholders in discharging of the consideration agreed for purchase of shares. Once the company acquired its shares from the shareholders under a completed contract for purchase/sale of shares, the company thereafter, had to necessarily extinguish the shares in view of the bar in law. The payment to the shares was made in pursuance of the contract and not on account of extinguish of shares. Therefore, the interpretation of the AO that upon reduction of capital, the assessee has made payment to the shareholders, and thus, same is in the nature of deemed divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1981] 131 ITR 597 submitted that speech of the finance bill can be taken into consideration for discerning the legislative intent while interpreting the provisions of the statute. He had also referred to CBDT Circular No.779/1999 regarding clarification on tax issues arising out of the provision to allow buyback of shares by the company and submitted that the provisions of Sec. 2(22) of the Act, has been amended 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 provisions contained in Sec. 77A of the Companies Act, 1956. It is also inserted a new provision namely Sec. 46A of the 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 shall be subject to provision contained in Sec. 48 of the Act. Therefore, from the above it is clear that even assuming that the legislature had been introduced Sec. 46A of the Act, all elements required for charge of tax as capital gains upon purchase of shares, are satisfied. Therefore, any consideration paid by a company for purchase of shares to its share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e buyback referred to u/s. 77A of the Act, in the hands of the shareholders u/s. 46A of the Act, up to 31.05.2013 and from 01.06.2013, the company is liable to pay additional income tax u/s. 115QA of the Act, and the shareholders does not need to pay any tax by virtue of exemption provided u/s. 10(34) of the Act. In case purchase of shares is pursuant to a scheme u/s. 391 to 393 of the Companies Act, 1956, up to 31.05.2013 it is taxable as capital gains in the hands of shareholders under provisions of Sec. 46A of the Act and from 01.06.2013 to 31.05.2016, once again, it is taxable as capital gains in the hands of the shareholders u/s. 46A of the Act. Further, additional income tax u/s. 115QA of the Act, is not applicable as the extent provisions of Sec. 115QA of the Act, were applicable only for purchase of own shares u/s. 77A of the Act. From 01.06.2016, company is liable to pay additional income tax under provisions of Sec115QA of the Act. Therefore, the AO and the Ld.CIT(A) are completely erred in invoking provisions of Sec. 2(22)(a) / 2(22)(d) of the Act, and levied tax u/s. 115-O of the Act, towards consideration paid for purchase of own shares in a Scheme of Arrangement Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as distribution of assets or distribution of accumulated profits by the company to its shareholders would operate as an estoppel and the Revenue cannot contend otherwise. 18. The Ld.Sr.Counsel for the assessee submitted that the AO has adopted inconsistent stand when it comes to levying tax u/s. 115-O of the Act, in the hands of the company and accepting capital gains declared by the shareholders in terms of Sec. 46A of the Act, which is evident from the fact that the assessee had withheld and deposited taxes in the case of US resident shareholders to the tune of Rs. 898.01 Crs. and the Revenue has been appropriated said taxes against tax liability of shareholders. At the same time, the AO has treated consideration paid by the assessee to its shareholders for purchase of its own shares as deemed dividend u/ss.2(22)(a) / 2(22)(d) of the Act, and levied tax u/s. 115-O of the Act, by taking a different stand for the shareholders on one hand and the company on the other hand. He further referring to certain judicial precedents, including the decision of the Hon ble Supreme Court in the case of Berger Paints India Ltd. v. CIT reported in [2004] 266 ITR 99 (SC) submitted that, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax under the head capital gains . Further, said case was decided when the provisions of Sec. 46A of the Act, was not in existence. Therefore, same cannot be applied to the facts of the assessee s case. The Ld.Sr.Counsel for the assessee had also distinguished the case law relied upon by the AO in the case of Mysore Electro Chemical Works Ltd. v. ITO reported in [1982] 133 ITR 330 (Karnataka HC) and the decision of the Hon ble Supreme Court in the case of Ramesh B. Desai and Ors. v. Bipin Vadilal Mehta and Ors. reported in [2006] 69 SCL 211 (SC) and argued that the above judgments are not applicable to the facts of the assessee s case, because, the assessee had purchased shares from the shareholders as per scheme sanctioned by the Hon ble High Court of Madras under the provisions of Sec. 391 to 393 of the Companies Act, 1956. Therefore, he submitted that the AO and the Ld.CIT(A) were completely erred in recharacterization of transaction of purchase of own shares as reduction of capital in terms of provisions of Sec. 100-104/402 of the Companies Act, 1956 and invoking provisions of Sections 2(22)(a)/ 2(22)(d) of the Act r.w.s.115-O of the Act. 20. Shri. R. Shankaranar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s best known chosen not to declare dividend and (ii) the only manner in which, the assessee choose to distribute its accumulated profits is by way of resorting to buy back in AY 2013-14 in order to avoid paying taxes. The ld. ASG further submitted that in this back drop, the existing scheme is analyzed, there is no dispute with regard to the fact that the assessee has bought back 9400534 equity shares of face value of Rs. 10/- each from its shareholders at a price of Rs. 20,297/- per equity share by paying total amount of Rs. 19,080.26 Crs. to its non-resident shareholders. If you see the dates and events, it is clear that the entire scheme was moved in a hurried manner which is evident from the fact that on 29.02.2016, amendment to Sec. 115QA of the Act, was announced and was in the public domain. The assessee was convened a board meeting on 10.03.2016 and on 05.04.2016, the details of the scheme were sent to the Registrar of Companies. The Registrar of Companies on 07.04.2016 has sent their objections to the Regional Direction. The scheme of arrangement compromise petition filed by the assessee was came up for final hearing before the Hon ble High Court of Madras on 11.04.2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f equity shares shall not be treated as buyback u/s. 68 of the Companies Act, 2013. The funds out of which the payments for purchase of shares would be effected is given under Clasue-7.2 and as per said clause, to the extent of face value paid up shares capital shall be adjusted and the difference between the face value and the total consideration shall be paid out of the accumulated credit in the P L A/c. The assessee has made necessary accounting entries in the books of accounts, including transfer of fund from P L A/c to the capital reduction reserve account. The real object and purport of the Scheme is also clear by a reading of the clauses in the Scheme where the assessee specifically states that the Scheme will not attract s.2(22), s.115-O or S.115QA of the Act. Further, Clause-6.7 of Scheme states that purchases of own shares would not amount to reduction of share capital u/s. 100 and also would not amount to buyback of shares u/s. 68 of the Companies Act, 2013. The effect of the scheme is that 54.70% of the total share capital got reduced. Therefore, there are three inescapable conclusions that arise from the present transaction are (i) the entire scheme is a colorable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT v. G. Narasimhan reported in 236 ITR 327, as it did not consider the scope of s.2(22)(d) of the Act. Therefore, in order to come within the ambit of s.2(22)(d) of the Act, there must be a distribution to the shareholders on the reduction of its capital and further, it must be to the extent of that company possess accumulated profits. In the present case, both conditions are satisfied. On perusal of the audited financial statement to show that the share capital has been reduced by around Rs. 9.4 Crs. which amounts to 54.70 % of the total paid up share capital which got reduced. Further, as per Clause-7 of the scheme, the distribution of money will be out of the general reserve and accumulated credit balance in the P L A/c. Therefore, both conditions are satisfied and thus, the transactions would come within the ambit of s.2(22)(d) of the Act. The ld. ASG had also negated the arguments of the counsel for the assessee that provisions of Sec. 2(22) are not attracted, because, both Sec. 2(22)(a) / 2(22)(d) of the Act, requires distribution which would only imply distribution without any quid pro quo. Since, the scheme is an offer and acceptance, this involves an element ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promise u/s. 391-393 of the Companies Act, 1956, is operates as judgment in rem and is binding on the Revenue, because, the order sanctioning the scheme itself clearly provides that the sanction shall not grant any immunity to the assessee from payment of taxes under any law for the time being in force. Further, the role of the Hon ble High Court in approving the scheme is very limited. The Company Court will look at the scheme and act as an umpire to just verify whether (i) the requisite meetings u/s. 391(1)(a) of the Companies Act,1956, have been complied with, and further, (ii) has the requisite majority (iii) is just and fair to all members including dissenting members and (iv) just fair and reasonable from the point of view of a prudent man. Therefore, merely the Hon'ble High Court, approving the scheme does not mean that other consequences, including tax implications will not apply to the assessee at all. In this regard, he referred to the decision of the Hon ble Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd (1997) 1 SCC 579. 26. The ld. ASG further submitted that the Revenue is not re-characterizing the scheme as alleged by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant time, the term buyback was defined u/s. 115-QA of the Income Tax Act, 1961, to mean buyback u/s. 77A only. He further submitted that assuming without conceding that the purchase of own shares amounts to buyback but not buyback u/s. 77A, it would still be taxable u/s. 115-O, because, as per proviso to Sec. 2(22), only buyback u/s. 77A, is excluded from the definition of dividend. This coupled with the fact that there was reduction of share capital and distribution of accumulated profits would mean that the purchase of own shares would come within the ambit of dividend. 27. The Ld. Counsel for the assessee had also contended that provisions of Sec. 46A of the Income Tax Act, 1961 is applicable to all forms of buyback, and thus, the shareholders are liable to pay capital gains tax on purchase of own shares in accordance with law. The arguments of the assessee is incorrect. Sec. 46A is only applicable to buyback u/s. 77A and not to any other forms of purchase of shares. The words used in Sec. 46A are identical to language in Sec. 77A of the Companies Act, 1956, and a reading of memorandum explaining the provisions of the Finance Act makes it dear that it was done to clari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough rather than Look At the transaction. Therefore, this is further established by the fact that there is no commercial nexus between the company's activities and Mauritius. The Ld. Counsel for the assessee had raised further contention alleging discrimination and inconsistent treatment by the Revenue on taxing the shareholders on one side and tax in the company hand on the other side. The arguments of the assessee is fallacious, because, the assessee after erroneously treating the same as capital gains, has deposited the amount as TDS with the respondent and is now trying to take advantage of its own wrong. Secondly, the ASG had also distinguished various case laws, including the decision of SEBI v. Sterlite Industries Ltd. (supra), and other judgments and argued that facts of those cases are entirely different and are not applicable to the facts of the assessee s case. 30. Per contra, the counsel for the assessee has filed a rebuttal to the submissions filed by the Revenue and argued that certain facts brought on record by the AO in the assessment order are not forming part of show cause notice dated 22.03.2018, and therefore, the same cannot be considered as necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 originally, the legal effect of the same has been decided once and for all by Hon'ble Supreme Court of India in the Appellant's case in Civil Appeal 1992 of 2020 arising from SLP (C) No. 23705 of 2019, by holding that it is a SCN, and by holding that the enquiry to be conducted by the Revenue should be centered around this SCN. 1.3. The Revenue has erred by traversing upon a number of findings in the order which never found mention in the SCN and thereby not affording the Appellant an opportunity to put forth its rebuttals there-to, which vitiates the order for violation of principles of natural justice as upheld by the Hon'ble Supreme Court in numerous judgments. Therefore, all such comments and adverse remarks ought to be considered as not proper and, therefore should be expunged and deleted. 1.4. The Appellant submits that the transactions mentioned by the Revenue (i.e., merger of group entities in FY 2011-12, tax exemptions claimed by the Appellant, buyback of shares under section 77A of the 1956 Act in AY 2014-15) do not in any manner impact the taxability of the purchase of shares under section 391-393 of the 1956 Act undertaken in the AY 2017-18 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the amalgamated company from A Y 2012-13 and (iii) no assessments have been framed in the name of the amalgamating companies thereafter; (d) the amalgamating companies have wound up and ceased to exist as legal entity in the eyes of law; (e) the change in the shareholding of the amalgamated company was duly intimated to the Reserve Bank of India. 1.10. The Hon'ble Bombay High Court in the case of Unique Delta Force Security Private Ltd. Vs Sumeet Facilities Pvt. Ltd.175 Comp Cas 318 (Pages 105 to 113 of Paper book Volume II) held that once the scheme of arrangement was sanctioned by the Court under section 391 of the 1956 Act, the Court was not authorized to recall or rescind/cancel the scheme. The Court observed as under (Page No. 111 of Paper book Volume II): 13. It is therefore well settled by the above decisions of the Hon'ble Supreme Court, that once a scheme is sanctioned and effected, the changes allowed therein should be minor ones and not wholesale changes which would tamper with the essence of the scheme and that if a Company desires to modify a scheme though not necessary to do so for the proper working thereof it is required to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of arrangement under section 391 of the 1956 Act to cancel I rescind the same, the Revenue, much less, does not have the power to sit in judgment thereon and dub the sanctioned scheme as a colorable device to avoid tax. 1.14. Given the above, it is not possible for the Revenue to challenge the scheme sanctioned in FY 2011-12 in the present proceedings, (despite having accepted the position for the last several years). It is categorically asserted that the Revenue is estopped from making allegations about the fundamental nature and the genuineness of the amalgamation undertaken by the Appellant in FY 2011-12 which was duly sanctioned by the Hon'ble Madras High Court and seek to have adverse inference therefrom. ii) Appellant's entitlement to income-tax exemptions 1.15. The Appellant submits that it has been operating in India since 1994 and has grown to be one of the largest investors and employers in India. The Appellant has invested billions of dollars in India and directly employs around 2 lakh professionals across 12 cities in India. The Appellant has paid direct taxes of around Rs. 10,000/- crores over the last one decade and had paid Rs. 2,054 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 540(E) dated 12th August, 2013. 1.17. Like all other leading industry players in the sector, the Appellant has also set-up multiple units in Special Economic Zones (SEZ) and Software Technology Park of India (STPI) over the years. These SEZ units and STPI units have not only generated significant employment opportunities but have also resulted in substantial forex inflow for the country on account of exports which continues to remain one of the primary priorities for the Government. 1.18. It is also worth mentioning that all the tax exemptions claimed by the Appellant are subject to satisfaction of prescribed conditions laid down in the relevant provisions of the Act and such tax exemption has been granted after detailed scrutiny by the Revenue. In light of the above, the Revenue's efforts to taint the Appellant's Scheme on account of the tax exemptions enjoyed by the Appellant is completely unjustifiable and without any basis in law. iii) The Scheme for purchase of own shares is not a colorable device for avoidance of tax 1.19. The Appellant submits that the rationale for purchase of own shares was to streamline the shareholding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant despite the fact that the procedure as prescribed in the 1956 Act, including the service of notice to the Central Government under section 394A of the 1956 Act was duly followed 1.23. Section 394A of the 1956 Act reads as under 394A. Notice to be given to Central Government for applications under sections 391 and 394. The Court shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. 1.24. Accordingly, notice was sent on the Appellant's Scheme seeking approval of the Central Government. The Registrar of Companies initially took an objection, raising all the points now raised by the Revenue. Thereafter, after due deliberation, the Central Government, represented by the Regional Director, accepted the Scheme (the Report of the Central Government, represented by the Regional Director, is at Page Nos 15 to 18 of the Paper book Volume IJ. 1.25. The said Report of the Central Government, represented by the Regional Director, will satisfy this Hon'ble Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue cannot sit on judgment on the commercial wisdom of the Appellant to declare dividend or not. 1.29. Without prejudice to the fact that the purchase of own shares by the Appellant pursuant to the Scheme was driven by commercial reasons and rationale, the Appellant submits that if two courses are open for distribution of excess cash to the shareholders, viz, buy-back of shares or declaration of dividend, the Revenue cannot compel the Appellant to adopt the course that results in higher tax outgo. To put it differently, where the law enables a taxpayer to choose one out of the various available options, it is the prerogative of the taxpayer to choose the option that leaves the taxpayer with a lighter tax burden. 1.30. A choice exercised by a taxpayer from multiple legally permitted options cannot be treated as tax avoidance. This principle has been upheld by the Hon'ble Supreme Court in Vodafone International Holdings B.V. v Union of India (341 ITR 1) and Union of India v AzadiBachaoAndolan (132 Taxman 373). 1.31. The Hon'ble Bombay High Court while sanctioning scheme of arrangement for purchase of own shares under section 391 of the 1956 Act in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in loss while having profit in other transactions (iii) Amalgamations and demergers (as defined in the Act) as approved by the High Court. Interpretation: Whether to pay dividend to its shareholder, or buy back its shares or issue bonus shares out of the accumulated reserves is a business choice of a company. Further, at what point of time a company makes such a choice is its strategic policy decision. Such decisions cannot be questioned under GAAR. Interpretation: Payment of dividend to its shareholder or buy back of its shares or issuing bonus shares out of the accumulated reserves is a business choice of a company, which a company is entitled to exercise at any point of time. It should be interpreted as incidental that the shareholder is entitled to a treaty benefit which exempts capital gains, but it is subject to SAAR (i.e. Limitation of Benefit clause). The decision of X Ltd. cannot be questioned under GAAR. 1.34. The Revenue's contention that the Scheme was moved in a hurried manner is without any basis since the entire procedure as provided fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower tax outflow as this would have meant purchase of no or lower number of shares from the US shareholders. However, this would not have achieved the commercial objective of the Scheme which was to streamline the minority shareholding of the Appellant. 1.41. In light of the above, the allegation of the Revenue that the Scheme is a colorable device to avoid tax is contrary to the facts of the case and settled legal position. Part B of the Revenue's contentions: Payment made by the Appellant to its shareholders under the Scheme is distribution of accumulated profits and therefore falls under the inclusive definition of dividend under the provisions of the Act - Paras 15-33 of submission filed by the Revenue 2. 1. The Revenue at Paras 15 to 33 of submission has contended that the Scheme involves capital reduction and distribution of accumulated profits of the Appellant and is to be treated as dividend as per section 2(22) of the Act. 2.2. The Appellant draws the attention of the Hon'ble Tribunal to Para 4 to Para 7 its written submission which clearly bring out the legal position that the purchase of own shares by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pre-determined consideration. In other words, all essential elements of a valid contract are present, viz. invitation made by a company, offer of shares to be bought back from the shareholder, acceptance or non-acceptance of such offer by the company, payment of consideration. 2.8. The use of the term 'distribution' in section 2(22)(a) to section 2(22)(d) of the Act and 'payment' in section 2(22)(e) of the Act itself demonstrates that the legislature has clearly treated 'distribution' and 'payment' as different concepts. Thus, the argument of the Revenue that every payment to shareholder involves distribution is without any basis in law. 2.9. The payment of consideration for purchase of own shares by the Appellant does not fall within the ambit of the term distribution so as to attract the provisions of either section 2(22)(a) or section 2(22)(d) of the Act, and consequently attract liability under section 1150 of the Act. Distribution on reduction of capital 2.10. The Revenue in Para 31 of their submission contends that provisions of section 2(22)(d) of the Act applies as long as there is reduction of share capital; the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by Ld CIT(A). As observed by him, two different activities have been combined with the scheme of arrangement. The first one was to buy back shares belonging to non-resident shareholders and the second one was to cancel the shares so purchased. We agree with the view taken by Ld CIT(A) that they are two different actions and both should not be clubbed together, even though Mis Century Enka Ltd has combined the same, for the sake of its convenience, in the scheme of arrangement. (emphasis supplied) 2.16. The Revenue's contention at Para 23 of their submission that the judgement of the Hon'ble Supreme Court in the case of Anarkali Sarabhai v. CIT [1997] 224 ITR 422 (SC) was impliedly held per incuriam by the Hon'ble Supreme Court in the case of CIT v. G. Narasimhan (236 ITR 327) (SC) is without any basis as the Hon'ble Supreme Court, in the said judgements, has laid down the position of law on a different transaction: (i) The Hon'ble Supreme Court in the case Anarkali Sarabhai (supra) had held that redemption of preference shares would tantamount to a sale/ extinguishment of a capital asset and is chargeable to tax under the head 'capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 393 of the 1956 Act are independent and de hors section 77 and section 100 of the 1956 Act. In other words, notwithstanding the bar under section 77, a company can purchase its own shares under a Court approved scheme under section 391 of the 1956 Act. 3.3. Notwithstanding the above, the Appellant submits that the discussion in Para 2.11 to Para 2. 15 above clearly demonstrates that the extinguishment/ cancellation of shares and the consequent reduction of capital is necessitated on account of the inability of a company to hold its own shares. The mere fact that shares purchased by the Appellant are subsequently extinguished does not change the character of the Scheme from that of purchase of own shares to a scheme of capital reduction 3.4. It is important to draw the attention of the Hon'ble Tribunal to the fact that the Regional Director South Zone, Ministry of Corporate Affairs filed a 'no objection' report with the Hon'ble High Court, overruling the objections raised by the Registrar of Companies (which are similar to the contentions of the Revenue) to the proposed scheme under section 391 of the 1956 Act. Having received no objection from the Regional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of own shares under section 77 A of the Act 4.2. The Appellant has clearly explained in Para No. 8 of its written submission filed before the Hon'ble Tribunal that the provisions of section 46A of the Act are applicable to all kinds of buy-back I purchase of shares by the company from its shareholders. The same is not restricted to section 77 A of the 1956 Act alone. 4.3. While section 46A applies to both purchase of shares and specified securities, the term 'specified securities' is not defined in the Act. The Explanation to section 46A refers to section 77 A of the 1956 Act for the limited purposes of defining the term 'specified securities'. The definition of 'specified securities' in Explanation to section 77 A of the 1956 Act is legislatively incorporated into section 46A of the Act. Therefore, the contention of the Revenue that the provisions of section 46A of the Act are applicable only for purchase of shares as per section 77 A of the 1956 Act is erroneous and without any basis. 4.4. It is trite law of interpretation of statutes that an Explanation cannot enlarge or limit the principal provision to which it is attached. Its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of own shares. 4.9. The Revenue at Para 46 of their submission contends that the amendment to section 115QA of the Act applies only to buy-back done under section 391 to section 393 read with section 77 A. 4.10. The above contention of the Revenue is without any basis as is clearly evident from the Explanation to section 115QA of the Act which defines the term 'buy-back': Explanation to section 115QA- Prior to 01.06.2016 Explanation - For the purposes of this section: (i) buy-back means purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); Explanation to section 115QA- With effect from 01.06.2016 Explanation - For the purposes of this section, (i) 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; 4.11. The above amendment clearly establishes that buy-back includes purchase of own shares in any form i.e., buy-back includes both purchase of own shares under section 77A and also purchase of own shares under section 391 to section 393 of the 1956 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 393 of the 1956 Act. 5. Other contentions of the Revenue 5.1. The Appellant has explained in Para No. 12 and Para No. 13 of its written submission filed before the Hon'ble Tribunal that the Revenue has adopted inconsistent stands in the case of the Appellant vis-a-vis the shareholders and also in the case of Genpact Ltd which has been denied by the Revenue at Para 49 and Para 50 of their submission. 5.2. The Appellant submits that the tax withheld and deposited in the case of US resident shareholders to the tune of Rs. 898.01 crores have been appropriated by the Revenue. The returns filed by the US shareholders and Mauritian shareholder reflecting capital gains on purchase of shares by the Appellant under section 46A have been processed under section 143(1) of the Act and have become final. The time limit for scrutiny assessment under section 143(3) of the Act for the subject AY has also expired. 5.3. In the case of Genpact vs DCIT [2019] 419 ITR 370 (Delhi) and [2019] 419 ITR 440 (SC) [@ Pages 25 to 46 of the Paper book Volume Ill], the Revenue has sought to levy tax under section 115QA of the Act on buyback/ purchase of shares under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully considered relevant provisions of The Companies Act, 1956,the Companies Act, 2013, and the Income Tax Act, 1961. The case laws relied upon by both parties are perused. The factual matrix of the impugned dispute is that the assessee company had purchased its own shares from non-resident shareholders in a Scheme of Arrangement Compromise sanctioned by the Hon ble High Court of Madras in terms of provisions of Sec. 391-393 of the Companies Act, 1956, vide order dated 18.04.2016. The scheme was sanctioned by the Hon ble High Court of Madras on 18.04.2016, permitting the assessee to purchase up to a maximum of 94,00,534 equity shares at a price of Rs. 20,297/- per share. In accordance with the scheme as sanctioned by the Hon ble High Court of Madras, the assessee has purchased 94,00,534 equity shares (representing 54.70% of the paid up share capital as on the date of implementation of the scheme) from its shareholder at price of Rs. 20,297/- per share and paid total consideration of Rs. 19,080.26 Crs. As per scheme document submitted and approved by the Hon ble High Court of Madras, in clause-5, the assessee has specified the manner in which shares can be purchased from e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of only Rs. 84.45. If the shares were to be distributed as per net worth/book value, then, CTS USA ought to have held 98.3% of the amalgamated entity. Therefore, from the above restructuring of shareholding pattern of the assessee company, it is clear that there has been an artificial shifting shareholding base from USA to Mauritius solely with a aim of claiming DTAA benefits, because, as per India Mauritius DTAA capital gains on transfer of equity shares is not taxable in India, as per the Indian Tax Laws. One more important fact brought on record by the AO also needs to be discussed before we continue to discuss the present Scheme of Arrangement Compromise in light of arguments of the assessee. As per the facts brought on record, the assessee has hitherto enjoyed up to and around Rs. 30,441Crs. tax exemption over the years and has close to Rs. 33,801Crs. of accumulated profits. However, there has been no dividend distribution to shareholders in any year except for declaration of interim dividend in the AY 2006-07 for Rs. 237 Crs. on which DDT of around Rs. 33 Crs. has been paid. The only other time profits were distributed to the shareholders was in AY 2013-14 by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of relevant provisions of the Companies Act, 1956 and the Income Tax Act, 1961, to analyze the tax implications. 33. The Ld. Counsel for the assessee and the ld. ASG explained the scheme with relevant clauses. The scheme primarily states that it is a Scheme of Arrangement Compromise and rational for the scheme is to rationalize its shareholding and capital structure. The fourfold reasons given in the scheme are to increase EPS, to streamline corporate ownership, to optimize the overall capital structure and to reduce the risk in terms of foreign currency fluctuation in respect of rupee funds. If you see the rational explained in the scheme in light of change in capital structure took place after implementation of the scheme, it looks like the entire scheme is nothing but a facade to avoid stating that the dominant and only commercial purpose is to shift the profit base to Mauritius so as to get the tax advantage. The term buyback is not used anywhere in the scheme. The transaction is always described only as purchase of equity shares. In fact, Clause 6.7 of the scheme clearly states that the purchase of equity shares shall not be treated as buyback u/s. 68 of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -O of the Act. The term dividend has been defined u/s. 2(22)(a) of the Act, and as per said definition, any distribution by a company to its shareholders to the extent of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. The definition is an inclusive definition and it goes beyond the conventional or traditional meaning associated with dividend. The definition is broad and covers a wide variety of payments made by a company. In fact, Sec. 2(22)(e) even includes a loan given by a company to its shareholder, subject to certain conditions, within the ambit of dividend. Therefore, the object of such an expansive definition seems to be ensure that the taxpayer do not camouflage payments out of accumulates profits to its shareholders through different channels in order to avoid payment of tax. Sec. 2(22)(a) covers any distribution by a company of accumulated profits which entails the release by the company to its shareholders of all or any of the assets of the company. Sec. 2(22)(d) covers distribution made to the shareholders by a company on the reduction of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. Therefore, from the ratio of above two case laws, it is clear that any distribution by a company of accumulated profits, if such distribution entails the release by the company to its shareholders all of or any part of the asset of the company shall come within the definition of dividend u/s. 2(22) of the Income Tax Act, 1961. It is also pertinent to note that the assessee has sought to distinguish Shashibala Navnitlal v. CIT (supra) on the ground that it is contrary to the decision in Anarkali Sarabhai v. CIT (supra). According to the Ld. Counsel for the assessee, said judgment was rendered at the time when the provisions of Sec. 46A of the Act, specific to a transaction of purchase of shares was not in existence in the statute and further, it was a case of redemption of preference was held to fall under the definition of dividend under the provisions of the Income Tax Act, 1922. We find that the judgement in Anarkali Sarabh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Punjab Distilling Industries Ltd. v. CIT reported in [1965] 57 ITR 1 (SC). The Hon'ble Supreme Court held that the meaning of the word distribution means division/payment between/to several people. The only condition specified was that it must be actual and not notional. Therefore, the definition of the word distribution does not contain any aspect of quid pro quo or lack thereof. In our considered view, the assessee trying to add to the ordinary meaning of the word distribution as interpreted by the Supreme Court by adding conditions which do not otherwise exist. The pre-requisites for distribution is that there must be payment and the disbursal of the same must be made to more than one person. Further, capital reduction as per Sec. 100 of the Companies Act, 1956, itself permits that it can be made in any manner. The second contention of the assessee is that there is no distribution on reduction of share capital. At the outset, it must be clarified that the definition of dividend in Sec. 2(22) is an inclusive definition. The intent, as borne out from the case laws, is to cover all scenarios whereby a company distributes its accumulated profits without strictly coming w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self clearly provides that the sanction shall not grant immunity to the assessee from payment of taxes under any law for the time being in force. Further, the role of the High Court in approving the scheme is very limited. The Company Court will look at the scheme and act as an umpire to just verify whether the requisite meetings u/s. 391(1)(a) of the Companies Act ,1956, have been complied with, and further, it has requisite majority. The Hon ble court will also look into the scheme is fair to all members and reasonable to a prudent man. Therefore, the Hon'ble High Court, while sanctioning the scheme will merely look at the commercial wisdom of the creditors and approve the same if it is just and fair and there are no illegalities. The tax consequences and otherwise would be for the AO to look into the scheme in light of relevant provision of the Income Tax Act, 1961. If you go by the arguments of the Ld. Counsel for the assessee that once, the scheme is approved by the Hon ble High Court, is operates in rem and binding on the Revenue, then the AO would be rendered functus officio and the assessment itself would be finalized under the scheme, and in this regard, it is releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be. Therefore, such self-serving clauses would not be binding on the AO and the AO is free to examine the effect of the scheme on the touchstone of the Income Tax Act, 1961. 37. The provisions of Sec. 77 of the Companies Act, 1956 prohibits a company from purchase of its own shares except by way of actual reduction in capital in accordance with Sec. 100-104 or Sec. 402 of the Companies Act, 1956. The only exception to this is the newly introduced non-obstinate clause under Sec. 77A of the Companies Act, 1956, for buy back of its own shares. The provisions of Sec. 391-393 are only a single window scheme through which various actions are undertaken. Therefore, the purchase of own shares will have to still relate back to either Sec. 77 r.w.s.100 or Sec. 77A. There cannot be any purchase of own shares just u/s. 391-393 without relate back to Sec. 77 r.w.s.100-104 or Sec. 77A of the Companies Act, 1956. In this regard, reference is made to the decision of the Hon ble Bombay High Court in the case of PMP Automation reported in [1991] 4 Bom CR 387 and Hognas India Ltd. 148 Comp CAS 70. Therefore, the transaction of the assessee would either to fall under u/s. 391-393 r.w.s.77 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e buyback is not u/s. 77A of the Companies Act, 1956, then, it will fall back u/s. 391-393 r.w.s.100-104 of the Companies Act, 1956, because, without any reference to Sec. 100-104 of the Companies Act, 1956, no company can buy back its shares u/s. 391-393 alone. Therefore, in our considered view, the AO the Ld.CIT(A) have rightly held that the transactions of purchase of its own shares is nothing but distribution of accumulated profits and reduction of capital which falls under the definition of dividend u/s. 2(22)(d) of the Act. 39. Further, the term buyback is used in the Companies Act, 1956, only in Sec. 77A and not in any other place. Similarly, the term buyback was defined u/s. 115-QA of the Income Tax Act, 1961, to mean buyback u/s. 77A only. The arguments of the Ld. Counsel for the assessee that purchase of own shares by a Scheme of Arrangement Compromise u/s. 391-393 of the Companies Act, 1956, is taxable u/s. 115QA of the Act, only after amendment to the term buyback by the Finance Act, 2016 w.e.f. 01.06.2016 is in correct. Because, there is no dispute on the law in so far as buyback of shares u/s. 77A of the Act, and therefore, the amendment to Sec. 115QA b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46A was contemporaneous to the insertion of Sec. 77A and in the proviso to Sec. 2(22) excluding the same within ambit of dividends. Lastly, the explanation to Sec. 46A also states that even the words specified securities would have the same meaning attached to it u/s. 77A. Therefore, normally words in parimateria, would have to be construed in the same sense, and therefore, Sec. 46A can only apply to buy-back u/s. 77Aof the Companies Act, 1956. In any event, assuming without conceding that Sec. 46A applies to all forms of buyback, but Sec. 115-O contains a non-obstante clause which would override the provisions of Sec. 46A of the Act. Therefore, the contention of the assessee that consideration paid for purchase of its own shares, is only taxable in the hands of the shareholders as per provisions of Sec. 46A of the Act, is devoid of merits. 41. The Ld. Counsel for the assessee has raised a contention stating that the non-obstante clause applies only in respect of Sec. 8 and not to Sec. 46A of the I.T. Act, 1961. This argument cannot be accepted for two reasons. First and foremost, there are broadly two types of non-obstante clauses. The first types of non-obstante clauses, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structure. The four reasons given are that (i) to increase earnings per share (ii) to streamline corporate ownerships (iii) to optimize the overall capital structure and (iv) to reduce the risk in terms of foreign currency fluctuations in respect of rupee funds. But, if you look at the scheme with its real intent, it is only carried out to shift the capital base of the assessee company to Mauritius based shareholders and also (ii) distribution of accumulated profits of the company to non-resident shareholders without coming within the ambit of any of the provisions, which deals with taxation of consideration paid for purchase of its own shares. The tax laws have been enacted to cover various transactions and the reasons for enacting each sections have been explained in the memorandum. When the Act itself has been provided for specific provisions to deal with specific transactions, then, no person can take an alternative route via general provisions or single window system to defeat the other provisions of the Act. For example, under the Companies Act, a specific provision has been provided by way of Sec. 77to debar the companies to purchase of its own shares up to certain date. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is capital gains in the hands of the shareholders, but had taken a different view in the hands of the assessee. We do not find any substances in the arguments of the counsel for the assessee for simple reason that, the AO has not taken any discriminatory treatment, one in the hands of the assessee and the other in the hands of certain shareholders. In fact, the assessee on its own treating the transaction as capital gains in the hands of shareholders has deposited the amount of TDS in the hands of two non-resident shareholders and is now trying to take advantage of its own wrong, which is not permissible under the law. Secondly, it is contended that in case of Genpactv. DCIT reported in 419 ITR 440 (SC), where, an identical transaction is taxed under Section 115QA. We do not find any merits in the arguments of the assessee for simple reason that the facts will be different in all schemes. Therefore, it cannot be said that all schemes of purchase of its own shares in terms of Sec. 391-393 are similar to facts of Genpact (supra). Moreover, there is no estoppel against law. Even if the AO takes a different view in one case upon incorrect appraisal of facts, it cannot disentitle the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Anarkali Sarabhai v. CIT (supra).The Hon ble Supreme Court ruling was in the context of redemption of preference shares. The issue before the Hon ble Supreme Court was whether there were any capital gains arose on redemption of preference shares or not. In the said case, it was contested that redemption does not qualify to be a transfer as defined under the Income Tax Act, 1961, and hence, not subject to capital gains tax. The Hon ble Supreme Court concluded that the redemption does not result in transfer of capital asset and consequently, result in capital gains. The said decision was with reference to taxation in the hands of shareholders and not on the company. Further, said decision was rendered when Sec. 115-O was not in statute. The facts of the present case and law involved are entirely different. The Hon ble Supreme Court was not dealt with the issue of applicability of Sec. 2(22) r.w.s.115-O of the Act. Therefore, the reliance placed on the said decision is misplaced. 47. In so far as the case law relied upon by Ld. Counsel for the assessee in the case of Ponny Sugars (Erode) Ltd v. CIT (supra), we find that in the said case, the scheme specifically e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that scheme was not entered into only for evading tax. This is in contradiction to the present case. Therefore, the said judgment aids the case of the Revenue that in case, where the scheme is only for the purpose of evading tax, then it can be discarded as a colourable device. In this case, on analysis of the scheme in light of relevant provisions of the Companies Act, 1956, and the Income Tax Act, 1961, with dates and events, it is clearly established that the scheme was implemented with a view to evade legitimate tax and thus, the judgment relied upon by the assessee cannot be applied to the facts of the present case. 50. The assessee had also took support from the decision of ITAT Mumbai Benches in the case of Goldman Sachs (India) Securities (P) Ltd. v. ITO reported in [2016] 70 taxmann.com 46. We find that said judgment is also in favour of the Department, because, in the said judgment, it was a case of buyback of shares u/s. 77A which unlike the present case, where the scheme makes it clear that it is not a buyback. In the said decision, the Tribunal categorically held that Sec. 46A applies to the buyback of shares u/s. 77A of the Companies Act, 1956 only. The Ld. Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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