9911796707
TMI Blog2023 (9) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest of the Appellant on the grounds, inter alia, set out below. The grounds of appeal listed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC). 12. Without prejudice, the learned CIT(A) has erred in stating 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 (Mauriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SA 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 to non-resident shareholders, M/s. Cognizant Technology Solutions Corporation, USA, M/s. MarketRx Inc. USA, and M/s. CSS Investments LLC, Delaware, USA, because, treaty benefit is not available to non-resident shareholders of USA. The assessee did not withheld tax on consideration paid to M/s. Cognizant (Mauritius) Ltd., Mauritius, because, capital gain is not chargeable to tax in the hands of Mauritius shareholders in India under India Mauritius DTAA. The assessee has remitted consideration paid to shareholders for purchase of its own shares and also complied with relevant provisions of FEMA & RBI and also filed Form No.15CA after obtaining a Certificate from Chartered Accountant in Form No.15CB furnishing the details of remittances made to non-resident shareholders. 6. The assessee had filed its return of income for AY 2017-18 on 28.11.2017 declaring total income of Rs. 5399,54,16,100/- and the ROI filed by the assessee has been processed u/s. 143(1) of the Act, on 30.03.2019. The assessee had receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal 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 the Ld.CIT(A). The Division Bench had also held that all issues to be raised before the Ld.CIT(A). The assessee preferred an SLP against the order of the Division Bench before the Hon'ble Supreme Court on the ground that order dated 22.03.2018 was passed in violation of principles of natural justice without granting the assessee an opportunity of being heard and such order cannot be considered as appealable order. After hearing the assessee and the Department, the Hon'ble Supreme Court has disposed SLP filed by the assessee on 04.03.2020 in Civil Appeal No.1992 of 2020 arising from SLP (C) No.23705 of 2019 with certain directions. As per the judgments of the Hon'ble Supreme Court, the recovery letter dated 22.03.2018 shall be regarded as a 'show cause notice', to call upon the assessee to submit its response to averments therein within a period of 10 days from the date of the Hon'ble Supreme Court's order. The Hon'ble Supreme Court further directed that the AO shall grant an opportunity of personal hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of Sec. 77A of the Companies Act, 1956, and claimed which is not a buyback of shares as contemplated u/s. 77A of the Companies Act, 1956. Therefore, purchase of own shares through any scheme/method available u/s. 391 to 393 of the Companies Act, 1956, should invariably fulfill the statutory requirements stipulated u/s. 100-104 and 402 of the Companies Act, 1956. To put it in simple words, when purchase of own shares is contemplated under the provisions of Sections 391 to 393 of the Companies Act, 1956, it should be invariably to be r.w.s.100-104/402 of the Companies Act, 1956, or u/s. 77A of the Companies Act, 1956, and thus, without invoking provisions of Sections 100-104/402 of the Companies Act, 1956, the provisions of Sections 391 to 393 of the Companies Act, 1956, is inoperative as far as the buyback of shares are concerned. Therefore, opined that consideration paid by the assessee to its shareholders for purchase of own shares through a 'Scheme of Arrangement & Compromise' sanctioned by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders 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 deemed dividend within the purview of Sections 2(22)(a) / 2(22)(d) of the Act, and thus, there is no error in the reasons given by the AO to determine DDT u/s. 115-O of the Act. The relevant findings of the Ld.CIT(A) in nutshell to sum up as under: 9.27 In nutshell to sum up: * Assessee's impugned transaction of "purchase of its own shares" from its NR shareholders involved mandatory 'capital reduction' to the extent of reducing 54.7% of the total paid-up share capital. Capital reduction to this extent in the transaction is an indisputable fact. * In the transaction, the assessee distributed over Rs. 19,099/- crores of its accumulated profits to its NR shareholders. Such payment from accumulated profits to its NR shareholders in the transaction is also an Indisputable facts. * The capital reduction accompanied by distribution of accumulated profits is evident from para 7.2 and 7.3 of the Court approved Scheme as well as from the conduct of the assessee and also as established by the data from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' (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 involve capital reduction. This has been elaborated under para 9.9.2 above. * Assessee tried to argue that its 'purchase of own shares' is not possible u/s. 77 r.w.s 100, as purchase of own shares from its related shareholders was not made in proportionate basis and option has to be given to the shareholders, which are not possible u/s. 100 and hence, it had to resort to section 391. The argument of the assessee is patently wrong in view of the explicit provisions of law. 'Capital reduction' can by effected in any way/ in any manner as per section 100 of the Companies Act 1956 {as explained already in paras 9.3.3, 9.3.4 and 9.3.5)for the purposes of 'purchase of own shares', as resolution can provide for any flexibility, subject to adoption of fair value of shares in the transaction. There is no bar in the law in providing for disproportionate purchase (involving capital reduction accordingly) and option for shareholders in the resolution. Resorting to single window section 391 helps avoid approval again* u/s. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(22)(d) comes into play automatically. * Even if for argument sake, it is taken that 'capital reduction' is not the transaction, even then, the payments to the shareholders gets covered u/s. 2(22la), as the accumulated profits were distributed to the shareholders entailing part of the assets of the company and the transaction not being u/s. 77A and thus the assessee is liable to pay DDT u/s. 115-O. * In fact, assessee's May 2013 transaction was 'buy-back' of shares u/s. 77 and hence, it was exempt from section 2(22)(a) in view of clause (iv) of section 2(22) and the assessee rightly applied section 46A as it was buyback u/s. 77A. The present impugned May 2016 transaction of 'purchase of own shares' is admittedly not a buy-back' u/s. 77A; so, even if the assessee claims that it is not a transaction of capital reduction, the transaction stands covered/s 2(22j(a), as accumulated profits were distributed to shareholders entailing part of the assets of the assessee company. * For escaping from section 2(22)(d), the assessee says the transaction is not capital reduction; for escaping from section 2(22)(a), the assessee says the transaction involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion made by the assessee cannot govern or determine the tax liability under the Income tax Act. Hence, reliance cannot be placed on RBI intimation for income tax liability. The impugned transaction of 'purchase of own shares' involved capital reduction accompanied by payment of accumulated profits to the shareholders and so, it is dividend u/s 2(22)(d) of the Income tax Act. * Assessee admits that payments from accumulated profits have been made to the shareholders in the impugned transaction of purchase of own shares involving capital reduction, but it tries to argue that it is only 'payment' and not 'distribution' and so, it does not qualify as dividend u/s. 2(22)(d). The fact that this argument is not tenable has been discussed elaborately under para 9.20 above and it has been established that distribution' includes 'payment' also. Further, as per non-obstante section 115-O(1) itself, any amount declared, distributed of paid by way of dividends" is liable for DDT. For the purpose of DDT, dividend includes the ones u/s 2(22)(a) to 2(22)(d) also, as per Explanation to section 115-O. * The assessee tried to argue that the payment was made as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the argument of the assessee that the shareholders paid (barring the major Mauritius shareholder under DTAA) capital gains tax u/s. 46A and assessee is not liable u/s. 115-O, 15 not at all correct and not tenable in the eyes of law. * Even for argument sake, if the assessee had thought that provisions of section 46A along with deduction in terms of section 195 would need to be considered as payments were made to NR shareholders, then the inescapable course for it is to go under the process stipulated in the second proviso to Section 195(1) which clearly states that "provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Thus, the assessee ought to have first ruled out the applicability of section 115-O in its case, which it had failed to do so as per law. This is more so, as the non-obstante section 115-O gets primacy over section 46A. This prime requirement as per law has not been complied with by the assessee. As all the conditions of capita] reduction, distribution from accumulated profits and transaction not being u/s 77 A are satisfied, there is no room for the assessee to rule out the applicability of section 115- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly stated "this Court having also observed that "this order will not be construed as an order granting exemption from payment of stamp duty or, taxes or, any other charges, if any, payable, as per the relevant provisions 2I law or, from any applicable permissions that may have to be obtained or. even compliances that ma have to be made as per the mandate of law. "This shows that the court approval has not exempted the assessee from any mandatory compliances as per Companies Act itself and has not given any exemption to the due taxes payable by the assessee as per Income tax Act also. Therefore, approval of the Court for the Scheme has no impact on determination of the tax liabilities under the Income tax Act. * Assessee has taken a plea that the AO has taxed the transaction as dividend distributed u/s. 115-O in the hands of the assessee and simultaneously taxed the same transaction as capital gains in the hands of the NR shareholders. The plea of the assessee is blatantly wrong. The assessee is aware that the AO of the assessee company and the AOs of the NR shareholders are different. The AO of the assessee, based on facts and law, has clearly come to the decision that the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "purchase of own shares" through the 'scheme of arrangement and compromise' is not a 'buy-back' of shares u/s. 77A or u/s. 391 r.w.s 77A of the Companies Act 1956, and hence, the provisions of section 46A of the Income tax Act have no application. On the other hand, the assessee's transaction of 'purchase of own shares' through the 'scheme of arrangement and compromise' u/s 391 is to be invariably read with section 100 of the Companies Act 1956 and involves capital reduction. Even otherwise also, assessee's purchase of own shares' has actually involved 'capital reduction' since the 'paid-up share capital' was utilized for payment for shares and 54.7% of the total 'paid-up share capital' got reduced in the impugned transaction. Therefore, the transaction qualifies for 'distribution by way of reduction of capital' for the purpose of section 2(22)(d) of the Income tax Act, and accordingly falls within the ambit of definition of 'dividends' and consequently liable for DDT u/s. 115-O of the Act. * In view of the above, I am of the considered opinion that the AO has rightly concluded that the assessee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, wherever applicable. The ld. Counsel for the assessee further referring to various documents submitted that tax has been withheld out of the payment of consideration to the US resident shareholders aggregating to Rs. 898.01 Crs. In so far as payment made to M/s. Cognizant (Mauritius) Ltd., tax has not been withheld, because, the same is exempt from the tax in the hands of the non-resident shareholders under Article-13 of the India Mauritius DTAA. The return filed by the US shareholders and the Mauritius shareholders reflecting capital gains on purchase of own shares by the assessee company was processed u/s. 143(1) of the Act, and further, no proceedings have been initiated, thereafter in the hands of either of the US shareholders or Mauritius shareholders. 11. The Ld.Sr.Counsel for the assessee, explaining the power of the Hon'ble High Court, to sanction scheme for purchase of own shares u/s. 391 of the Companies Act, 1956, submitted that the power of the Hon'ble High Court u/s. 391 to 393 of the Companies Act, 1956, has been held to be complete 'code in itself' and the Court can sanction, inter alia, scheme of arrangement for purchase by the company of its own shares from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be occasioned on account of reduction of capital, and consequent reduction of capital cannot be said to be a 'causa causans' or proximate/direct cause of the payment to the shareholder but 'causa sine qua non' since the extinguishment/cancellation of shares is a consequence of the purchase of shares. Therefore, the counsel submitted that payment of consideration to shareholders for purchase of own shares by the company are ultimately extinguished/cancelled cannot be said to be reduction of capital and in this regard, he specifically referred to Para No.24 of the decision of the Hon'ble Bombay High Court in the case of SEBI v. Sterlite Industries Ltd., (supra).The Ld.Sr.Counsel for the assessee, further referring to the decision of the Hon'ble Delhi High Court in the case of Reckitt Benckiser (India) Ltd., submitted that buy back of shares and reduction of capital are different concepts and are operating entirely in different fields. The purchase of own shares by company and consequent extinguish does not amount to reduction of capital. 13. The Ld.Sr.Counsel for the assessee submitted that the Act itself recognize that reduction of capital and purchase of its own shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment to the shareholders, and thus, same is in the nature of deemed dividend, is incorrect. The Ld.Sr.Counsel for the assessee, submits that even Sec. 2(22)(a) of the Act, is not applicable, because, said section deals with distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails release by the company to its shareholders of all or any part of the assets of the company to be taxable as dividend. In the facts of the present case, the payment made by the assessee to its shareholders is towards discharge of consideration payable under contract of purchase of shares and thus, same cannot be regarded as distribution, which implies payment being made as/without any 'quid pro quo' or proportionately to all shareholders/ class of shareholders. In case of buyback of shares, the payment is not without any quid pro quo, but towards satisfaction of the liability due by the company equivalent to the amount of purchase consideration proportionate to the number of shares purchased from each shareholder. Furthermore, Sections 2(22)(a) / 2(22)(d) of the Act, are in the nature of deeming provision seeking to enlarge the definition of the term 'div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , any consideration paid by a company for purchase of shares to its shareholders is taxable in terms of provisions of Sec. 46A of the Act, alone. In this regard, he relied upon the decision of the Hon'ble Supreme Court in the case of Anarkali Sarabhai v. CIT reported in [1997] 224 ITR 422 (SC). 16. The Ld.Sr.Counsel for the assessee further referring to section 115QA of the Act, submitted that Sec. 115QA of the Act, originally enacted by the Finance Act, 2013 w.e.f. 01.06.2013 along with explanation. The scope of the said section was enlarged while amendment made by the Finance Act, 2016 w.e.f. 01.06.2016 by amending of definition of buyback in clause and explanation to subsection (i). From the aforesaid amendment, it would be apparent that w.e.f. 01.06.2016, purchase/buyback of shares by a company from its shareholders under any applicable provisions of Companies Act, including Sec. 391 of the Companies Act, 1956 would be subject to levy of tax in the hands of the company, u/s. 115QA of the Act. In the present case, since the Hon'ble High Court had approved the 'Scheme of Arrangement & Compromise' u/s. 391 of the Companies Act, 1956, vide order dated 18.04.2016, the amended provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration paid for purchase of own shares in a 'Scheme of Arrangement & Compromise'. 17. The Ld.Sr.Counsel for the assessee submitted that the scheme of arrangement once approved by the Hon'ble High Court operates as judgment in 'rem' because, in terms of provisions of Sec. 394A of the Companies Act, 1956, notice of the scheme of arrangement was required to be given to the central government, which was empowered to rise objection and representation to the Court. It is important to note that the Regional Director, Ministry of Corporate Affairs filed a 'No Objection Report' before the Hon'ble High Court overruling the objections raised by the Registrar of Companies to the proposed scheme u/s. 391 of the Companies Act, 1956. Therefore, once having furnished 'no objection' from the Regional Director, the Central Government including the AO cannot change the nature of scheme approved by the Court. The contention of the Revenue that the Hon'ble High Court does not give any immunity for payment of taxes, and thus, the AO can very well examine the transactions under Income Tax Act, 1961, is fully misconceived. The assessee reiterated that it has deducted applicable taxes, where the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT reported in [2004] 266 ITR 99 (SC) submitted that, it was not open to the Revenue to adopt conflicting/contrary view in the hands of the different tax payers. 19. The Ld.Sr.Counsel for the assessee had also distinguished various case laws relied upon by the AO in support of their claim. The Ld.Sr.Counsel for the assessee referring to the decision of AAR No.P of 2012 reported in 206 Taxman 631 submitted that in the said ruling a selective buyback of shares was undertaking wherein only Mauritius shareholders participated in the buyback and other shareholders for whom capital gains would lead to tax incidence in India did not participate. Under those peculiar circumstances, a portion of the buyback consideration was re-characterized as divided. In the assessee's case, all the shareholders had participated in purchase of shares and it was not a case of selective buyback. Therefore, said case law cannot be applied to the facts of the assessee's case. The Ld.Sr.Counsel for the assessee had also tried to distinguish the decision of the Hon'ble Supreme Court in the case of CIT v. G. Narasimhan236 ITR 327 and argued that in the said case, reduction of capital was undertaken whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) of the Act r.w.s.115-O of the Act. 20. Shri. R. Shankaranarayanan, the Additional Solicitor General of India (in short "the ASG"), for Shri A.P.Srinivas, Sr.Standing Counsel for the Department submitted that the assessee was originally a fully owned subsidiary of CTS, USA.In the FY 2011-12, there was a restructuring of various business directly or indirectly through a Court approved scheme of amalgamation where the assessee amalgamated with M/s. Cognizanat India Pvt. Ltd., (M/s.CIPL) and M/s. Market Rx India Pvt. Ltd., (M/c.MIPL) in a scheme of amalgamation. Interestingly, the shares were allotted on 1:1 swap based on number of shares held by the shareholders of all entities and the swap was not in proportionate to the market value of the shares in the individual companies. This resulted in CTS, USA holding only 22.92% shares in the amalgamated entity, whereas CTS, Mauritius is holding 76.68% of the share capital of amalgamated entity. This is despite the fact that shares held by CTS, USA had a book value/net worth of Rs. 22,581/- per share prior to amalgamation while CTS, Mauritius had a book value/net worth per share only Rs. 84.45 per share. If these shares were distributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l hearing before the Hon'ble High Court of Madras on 11.04.2016 and the Hon'ble High Court of Madras has approved the scheme on 18.04.2016. The assessee has implemented the scheme on 18.05.2016 and on 01.06.2016, amendment to Sec. 115QA of the Act, had come into force. Therefore, from the sequence of events, it is abundantly clear that the assessee has designed a scheme in a hurried manner so as to distribute accumulated profits to its shareholders without coming into taxation net as per provisions of the Income Tax Act, 1961. 21. The ld. ASG further referring to the scheme document submitted before the Hon'ble High Court of Madras in terms of Sec. 391 to 393 of the Companies Act, 1956, submitted that as per Clause-5 of the scheme, the assessee adopted a peculiar manner by which shares would be bought back. Firstly, as per Clause-5.2(a) all shares held by shareholder owning less than 1% would be purchased by the company other than 10,000 equity shares of Rs. 10/- each. Secondly, as per Clause-5.2(b) all equity shares held by shareholders holding more than 1%, but less than 25% would be purchased by the company. Lastly, as per Clause-5.2(c), the balance equity shares were proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present transaction are (i) the entire scheme is a colorable devise to try to avoid payment of tax dues (ii) there is capital reduction & (iii) there is distribution out of accumulated profits. 23. The ld. ASG further submitted that from the above the question that arise for consideration of this bench is whether the amount distributed under the scheme for purchase of own shares would be taxable in the hands of the assessee company as deemed dividend u/s. 2(22)(a) / 2(22)(d) of the Act, and therefore, the assessee is liable to pay DDT u/s. 115-O of the Act, or not. The crux of the case of the Department is that the purchase of shares by the assessee through a 'Scheme of Arrangement & Compromise' as sanctioned by the Hon'ble High Court of Madras in terms of provisions of Sec. 391-393 of the Companies Act, 1956, is amounts to distribution of dividend and therefore, is to be taxed u/s. 115-O of the Act. The ld. ASG referring to provisions of Sec. 2(22) explained the definition of dividend and argued that the definition is an inclusive definition and the definition goes beyond the conventional or traditional meaning associated with dividend. The object of such expansive definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme is an offer and acceptance, this involves an element of quid pro quo and therefore, there is no distribution. The ld. ASG submitted that the contention of the Ld. Counsel for the assessee that s.2(22)(d) of the Act, requires distribution on reduction of capital is also not satisfied, is incorrect. The word 'distribution' in s.2(6A) of the Income Tax Act, 1922, which is analogous to Sec. 2(22) of the current Income Tax Act, 1961, was considered in the case of Punjab Distilling Industries Ltd. v. CIT reported in [1965] 57 ITR 1 (SC)and the Hon'ble Supreme Court held that the meaning of the word 'distribution' means division/payments 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. The assessee is 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. The second contention made by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot re-characterizing the scheme as alleged by the assessee, because, the AO is fully empowered to analyze the effects of the scheme and to determine whether they attract the provisions of the Income Tax Act, 1961 or not. The assessee cannot take shelter under the self-serving clauses of the scheme and state that certain provisions of the Income Tax Act,1961 have been excluded. The object and purport of the scheme is to operate as a single window system and 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. The provisions of Sections 391-393 of the Companies Act, 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 Section 77A of the Companies Act, 1956. There cannot be any purchase of own shares effected just u/s. 391-393 of the Companies Act, 1956. To support his arguments, he relied upon the decision of PMP Automation reported in (1991) 4 Bom CR 387&Hognas India Ltd., 148 Comp Cas 70. The ld. ASG further submitted that the transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act makes it dear that it was done to clarify that buyback u/s. 77A necessitated a clarification. The insertion of Sec. 46A was contemporaneous to the insertion of Sec. 77A in the proviso to Sec. 2(22) excluding to same within ambit of dividends. Further, explanation to Sec. 46A also states that even the words specified securities would have the same meaning attached to it u/s. 77A. Therefore, the arguments of the assessee that even for purchase of own shares under 'Scheme of Arrangement & Compromise' the provisions of Sec. 46A alone is applicable, is incorrect. 28. The ld. ASG on the point of non-obstante clauses in any statues submitted that there are broadly two types of non-obstante clauses. The first class of non-obstante clauses which refers to specified provisions of the Act which will be overridden by the concerned clauses. The second class are those clauses which will override all other provisions of the Act. He has explained the provisions with reference to specific provisions of the Income Tax Act, 1961. Therefore, he submitted that s.115-O of the Act, is in the second category where the legislature has deliberately taken a decision to give an overriding ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the same cannot be considered as necessary without affording an opportunity to the assessee. In any event, the arguments of the Revenue that the scheme of purchase of own shares through arrangement & compromise, is a colourable device for avoidance of tax is devoid of merits, because, the reference to restructuring of shareholding pattern from one shareholder to other shareholder is carried out in accordance with relevant provisions of the Act, and the Revenue has not disputed the same. The contention of the Revenue that the assessee has availed tax exemptions to crores of rupees and has not distributed any dividend, is also not relevant to decide the issue. The assessee has availed tax exemptions as per the provisions of the Act after satisfying the conditions prescribed therein. The scheme for purchase of own shares is not colourable device for avoidance of tax, because, like assessee, several leading industrial payers had undertaken buyback/purchase of own shares to reward their shareholders. The counsel for the assessee has filed elaborate written submission in rebuttal to submissions made by the Revenue and relevant written submissions filed by the appellant, are as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken in the AY 2017-18 which is the subject matter of the appeal before this Hon'ble Bench. The only limited issue to be decided in this appeal is whether the purchase of shares by the Appellant under the Scheme is taxable as capital gains or dividend. 1.5. Without prejudice to the above, the Appellant has provided its submission in response to the contentions of the Revenue. i) Scheme of Amalgamation of group entities with the Appellant in FY 2011-12 1.6. The Revenue's contention that the entire profit base of the Appellant has shifted from USA to Mauritius through carefully orchestrated transactions is completely incorrect and contrary to the facts of the case and the legal position. 1. 7. The Appellant submits that Cognizant India Private Limited ('CIPL') and MarketRX India Private Limited ('MIPL'), group entities of the Appellant, were merged with the Appellant during the Financial Year ('FY') 2011-12 with the approval of the Hon'ble Madras High Court under section 391 to section 394 of the 1956 Act. The merger had taken place in FY 2011-12 after complying with the relevant provisions of the 1956 Act and the Foreign Exchange Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed under Section 391 of the Act. In view thereof, allowing the prayers sought by the Applicants to recall/rescind/cancel the scheme in the garb of exercising inherent powers would not only amount to exercising powers not vested in this Court but would also amount to overreaching the law laid down by the Hon'ble Supreme Court. In view thereof I hold that this Court is not only not vested with power to abrogate/rescind/cancel the scheme or to even modify the scheme if it is not necessary for the proper working thereof but this Court cannot exercise inherent powers to abrogate/rescind/cancel the scheme once sanctioned and effective. " 1.11. The Hon'ble Kolkata ITA T in the case of Electrocast Sales India Ltd. vs. DCIT [2018] 170 ITD 507 held as follows: "4.6. The Id AR further argued that the scheme of amalgamation, as sanctioned by the Hon'ble Calcutta High Court, was effective from 1.4.2010 and the parties had acted according to the said scheme and cannot be subjected to reversal after a period of 7 years by virtue of the principle of 'res judicata', 'constructive res judicata' and 'acquiescence'. ......... We find that in the inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.16. While the tax exemptions enjoyed by the Appellant over the years have no bearing to the issue on hand (i.e., taxability of the purchase of own shares by the Appellant under the Scheme), the Appellant submits that the tax exemptions claimed by the Appellant are on account of the incentives provided by the Government (i.e., tax holiday under section 10A, section 10AA, section 80-IAB etc of the Act) as part of its fiscal initiatives to boost the level of exports and employment generation which is evident from the following: Press Information Bureau Government of India Ministry of Commerce & Industry 11-July-2014 16:42 IST Incentives/Facilities to Special Economic Zones In addition to Seven Central Government Special Economic Zones (SEZs) and 11 State/Private Sector SEZs set-up prior to the enactment of the SEZ Act, 2005, formal approval has been accorded to 565 proposals out of which 388 SEZs have been notified. Presently, a total of 185 SEZs are exporting. A list showing State-wise distribution of formally approved, notified and operational SEZs is at Annexure. The fiscal concessions and duty benefits allowed to Special Economic Zones (SEZs) are inbuilt into the SEZs Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been duly considered by the respective authorities i.e., the Central Government, represented by the Regional Director and the Hon'ble Madras High Court. 1.20. The Appellant submits that the purchase of own shares by the Appellant has to be seen in light of the prevailing economic situation. The IT services industry, which the Appellant is a part of, had witnessed a rapid growth in the last decade which necessitated the industry to re-invest its surplus funds back into the business eyeing further growth potential. During the later years, the level of growth has been gradually declining indicating a dearth of attractive investment or expansion opportunities. In light of this economic reality (i.e., slowing growth), the Appellant undertook the purchase of own shares to streamline its shareholding, improve earnings per share and long-term shareholder value. 1.21. The Appellant submits that several leading industry players had undertaken buyback/ purchase of own shares to reward their shareholders, improve earnings per share and long-term shareholder value. A list of buy-back/ purchase of own shares by leading listed IT players (details from annual report) is provided below: Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per General Circular No. 1/ 2014 dated 15 January 2014 issued by the Ministry of Corporate Affairs, the Income-tax department is required to provide its objections to the Regional Director in relation to a scheme of arrangement under section 391 to section 394. The Circular further provides that if no response is filed by the department, it is presumed that the income-tax department has no objection to the scheme. The relevant extract of the Circular is as follows: 3. An instance has recently come to light wherein a Regional Director did not project the objections of The Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no objection to the action proposed under Section 391 or 394 as the case may be. 1.27. In light of the above circular and considering the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay. 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." 1.32. Without prejudice to the fact that the provisions of the General Anti Avoidance Rules ('GAAR') are not applicable for the subject A Y under appeal, it is relevant to note that even CBDT Circular No. 7/ 2017 dated 27 January 2017 on "Clarifications on implementation of GAAR provisions under the Income-tax Act, 1961" provides that GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction: Question no. 3: Will GAAR interplay with the right of the taxpayer to select or choose method of implementing a transaction? Answer: GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. 1.33. The Expert Committee set-up by the Government to provide report on GAAR has unambiguously held that selection of one or more options by the taxpayer and the timing of a transaction should not be subject to the GAAR provisions. The relevant extracts of the Report are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genuineness of the transaction.." 1.36. In summary, based on the settled legal position and principles laid down by the Hon'ble Supreme Court and High Courts, the Appellant submits that the Scheme sanctioned by the Hon'ble Madras High Court for purchase of own shares by the Appellant from its shareholders, cannot, by any stretch of imagination be considered as a colorable device to avoid tax. iv) Appropriate taxes have been paid on the purchase of own shares 1.37. The Appellant submits that one of the main objectives of the Scheme was to streamline the shareholding of the Appellant by purchasing shares from the minority shareholders. To achieve this objective, the Appellant purchased all the shares held by the US shareholders (other than 10,000 shares). 1.38. The US shareholders have paid capital gains tax under section 46A of the Act amounting to Rs 898 Crores and hence the contention of the Revenue that no taxes have been paid on the purchase of own shares is without any basis and contrary to the facts of the case. 1.39. The fact that there was no intention to avoid taxes is evident from the fact that the Appellant has purchased all shares (other than 10,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries vs CIT [1965] 57 ITR 1 (SC) wherein the Hon'ble Supreme Court had an opportunity to examine the meaning of the term 'distribution' as it appeared in section 2(6A)(d) of the erstwhile Income-tax Act, 1922 (corresponding to section 2(22)(d) of the Act): "The word "distribution" has several dictionary meanings. In the context of section 2(6A)(d), it means allotment or apportionment of the surplus amongst the shareholders; this allotment takes place and each shareholder gets a vested right to his portion of the surplus as soon as the capital stands reduced .... " 2.5. The Hon'ble Supreme Court has clearly held that in the case of 'distribution' each shareholder gets a vested right to his entitlement. This clearly means that the shareholder does not provide anything to the company in return for the amount so received pursuant to the distribution. In other words, there is no quid-pro-quo. 2.6. The term 'distribution' is different from 'payment' which refers to fulfilment of a promise; the performance of an agreement. A delivery of money or its equivalent in either specific property or services by a debtor to a creditor. Thus, paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the quondam shareholder pursuant to his tender of shares, will not be a "distribution on reduction of capital", but would rather be a standalone payment, with a reduction of capital being a consequence of the repurchase transaction. Section 2(22)(d) will not be attracted unless the distribution is a direct consequence of the reduction of capital. In this case, Section 2(22)(d) is not attracted at all. Possibly realizing this, the Revenue desperately contends in Para 31 of their submission that Section 2(22) is inclusive in nature. 2.14. The consequent reduction of capital cannot be said to be a causa causansor proximate/ direct cause of the payment to the shareholder but causa sine qua non since the extinguishment / cancellation of shares is a consequence of the purchase of own shares. 2. 15. In the case of Accord is Beheer BV vs. DCIT 176 TT J 406 (@ pages 138 to 144 of the Paper book Volume II) the Hon'ble Mumbai bench of the Tribunal observed that reduction of shares in a scheme for purchase of shares by the company is consequential in nature. "15.... Further the Ld CIT(A) has observed that the subsequent cancellation or writing off the shares is nothing to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders as 'capital gains' under section 46A of the Act. Part C of the Revenue's contentions: Purchase of shares under section 391 to section 393 of the 1956 Act de-hors the provisions of section 100 of the 1956 Act is not possible - Paras 34-40 of submission filed by the Revenue 3.1. The Revenue has contended that provisions of section 391 to section 393 of the 1956 Act are only a single window scheme and will necessarily have to still relate to either section 77 read with section 100 or section 77 A of the 1956 Act. The contention of the Revenue that, "there cannot be sui generis buy-back that is possible under Section 391393 de hors reference to any other provision of the Companies Act." is contrary to the settled law. [Reference is drawn to decision in SEBI vs. Sterlite Industries Limited: 113 Comp. Cas. 273 (@ pages 1 to 14 of the Paper book Volume II; Hon'ble Andhra Pradesh High Court in Re: T.C.I. Industries Ltd. (2004) 188 Comp Case 373 (AP), the Hon'ble Delhi High Court in Re: Reckitt Benckiser {India) Ltd. Company Pet. 228. 2010 and In Re: Maneckchowk and Ahmedabad (1970) 40 Comp Cas 819). 3.2. The Appellant has clearly explained in Para No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 90(2) thereof. 3.6. The Appellant submits that while the income-tax consequences of the Scheme can be decided by the Revenue, the Revenue cannot seek to re-characterize the nature of the transaction as approved by the Hon'ble High Court as part of the sanctioned Scheme. The taxability of the consideration paid to the shareholders can be determined by the Revenue only on the basis of the nature of the transaction as sanctioned by the Hon'ble High Court. The transaction being that of a purchase of own shares is confirmed by the Hon'ble High Court and that applicable taxes have been paid thereon. Given the same, the Revenue cannot seek to re-characterize the transaction of purchase of shares as one of reduction of capital. Part D of the Revenue's contentions: Section 46A of the Act is applicable only for purchase of shares undertaken under the provisions of section 77 A of the 1956 Act and that the amendment to section 115QA of the Act with effect from 01.06.2016 has no relevance - Paras 41-46 of submission filed by the Revenue 4.1. The Revenue has contended that the provisions of section 46A are applicable only to purchase of shares under section 77 A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares from its shareholders is not specifically covered under the deeming fiction contained in section 2(22) of the Act, it leads to the inescapable conclusion that the exemption under sub-clause (iv) of the said section has been provided only out of abundant precaution or for clarification purposes. This does not mean that in the absence of exemption qua purchase of own shares under a Court sanctioned scheme, the same would be deemed to be 'dividend' under section 2(22) of the Act. To put it differently, merely because section 2(22)(iv) was inserted in the context of buy back of shares under section 77 A of the 1956 Act cannot ipso facto lead to the conclusion that any other mode of purchase of own shares would be covered within the scope of section 2(22) of the Act, especially without answering the requirement of 'distribution' as envisaged in the section. Amendment to section 115QA with effect from 01.06.2016 4.8. The Appellant has explained in Para No. 9 of its written submission filed before the Hon'ble Tribunal that the amendment to section 115QA with effect from 01.06.2016 makes it clear that the provisions of section 2(22) and consequently the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of taxation from section 115-O to section 115QA is without any basis as post amendment to section 115QA, there is no corresponding amendment in section 2(22) of the Act or section 115-O of the Act to carve out purchase of own shares under a court approved scheme from being treated as 'dividend'. 4.16. If after the amendment in section 115QA, the position advocated by the Revenue is to be taken as correct, the same transaction of purchase of own shares would be taxable under both section 115QA of the Act and under section 115-O of the Act in the hands of the same company. This interpretation would be totally absurd. 4.17. It is submitted that a combined reading of the provisions of section 46A, section 115QA and section 10(34A) of the Act clearly indicates that the purchase of own shares under section 391 to section 393 of the 1956 Act was taxable in the hands of the shareholders under section 46A of the Act prior to 01.06.2016 and is subject to additional income-tax under section 115QA in the hands of the company with effect from 01.06.2016. The provisions of section 2(22) and consequently section 115-O were never applicable to purchase of own shares under section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement and the Appellant's Scheme are identical and not different as contended by the Revenue. And in this similar fact pattern, the Revenue, in the case of Genpact, has adopted the stand that such purchase of shares under section 391 is liable to tax under section 115QA of the Act. 5.6. The Appellant seeks to draw attention of the Hon'ble Bench to the decision of the Hon'ble Supreme Court in the case of Berger Paints India Ltd. vs. CIT (266 ITR 99) (@ Pages 47 to 51 of the Paper book Volume Ill) wherein the Apex Court held that it was not open to the Revenue to adopt conflicting I contrary view in the hands of the different taxpayers. 6. Prayer In light of the foregoing submissions and the arguments of the Appellant in its written submission filed with the Hon'ble Bench, it is humbly prayed that the Hon'ble Tribunal be pleased to allow the appeal filed by the Appellant by holding that the provisions of section 115-O of the Act are not applicable to the Appellant. 31. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered relevant provisions of The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shareholding with CSS Investment LLC, Delvare, USA. Before implementation of the scheme, in the FY 2011-12, there was a restructuring of various business directly or indirectly under the control of CTS, USA. Through a Court approved scheme of amalgamation, the assessee was amalgamated with M/s. Cognizant India Pvt. Ltd., (in short "M/s.CIPL")& M/s. Market RX India Pvt. Ltd.(in short "M/s.MIPL"). M/s. CIPL was a wholly owned subsidiary of Cognizant (Mauritius) Ltd., whereas, M/s. MIPL was a wholly owned subsidiary of M/s. Market RX Inc., USA, both of whom are wholly owned subsidiaries of CTS, USA. Interestingly, the shares were allotted on 1:1 swap based on number of shares held by the shareholders of all entities and the swap was not in proportion to the market value of the shares in the individual companies. This resulted in CTS, USA holding only 21.92% shares in the amalgamated entity, whereas, CTS, Mauritius, held 76.68% of the amalgamated entity. This is despite the fact that shares held by CTS,USA had a book value/net worth of Rs. 22,581.91 per share prior to amalgamation while CTS, Mauritius, had a book value/net worth per share of only Rs. 84.45. If the shares were to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d manner, which is evident from the dates and events brought on record by the AO. There was a proposal to amend Sec. 115QA and the same was announced in public domain on 29.02.2016. The assessee immediately convened a Board Meeting on 10.03.2016 to consider the scheme of purchase of its own shares. The details of the scheme were sent to the Registrar of Companies on 05.04.2016. The Registrar of Companies sent their objections to the Regional Director on 07.04.2016. The scheme came up for final hearing before the Hon'ble High Court on 11.04.2016 and the Hon'ble High Court has approved the scheme on 18.04.2016. The assessee has implemented the scheme on 18.05.2016 and the amendment to Sec. 115QA had come into force w.e.f. 01.06.2016. From the above dates and events, it is clear that the assessee had moved a proposed scheme for buyback of its own shares in terms of Sec. 391-393 of the Companies Act, 1956, when it came to know that provisions of Sec. 115QA, which levy additional tax on distributed profit by Indian Companies on purchase of its own shares from shareholders. Therefore, it is necessary to 'look through' the scheme in light of relevant provisions of the Companies Act, 1956 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the scheme is that 54.70% of the total paid up share capital of the assessee got reduced. In terms of consideration, the assessee has paid a sum of Rs. 9.4 Crs. from paid up share capital and further, a sum of Rs. 59.286 Crs. from General Reserves and the balance of sum of Rs. 19,011.57 Crs. from retained earnings. Therefore, from the above facts, it is clear that there is a capital reduction and distribution out of accumulated profit of the Company to its shareholders. 34. In light of above facts, if you examine the present 'Scheme of Arrangement & Compromise', the question that arise for consideration is whether consideration paid by the assessee to its non-resident shareholders in pursuant to 'Scheme of Arrangement & Compromise' approved by the Hon'ble High Court of Madras in terms of Sec. 391-393 of the Companies Act, 1956, is taxable in the hands of the assessee or not. The AO and the Ld.CIT(A) have held that consideration paid by the assessee for purchase of its own shares from non-resident shareholders, comes within the ambit of Sec. 2(22)(a) / 2(22)(d) of the Act, and the assessee is liable to pay DDT u/s. 115-O of the Act. The term 'dividend' has been defined u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (d) of section 2(6A) of the Act, had taken place, it would not be a dividend. If it was not so distributed, section 16(2) of the Act, would not be attracted. To put it in other words, if accumulated profits were distributed, it would satisfy not only the definition of "dividend" in clause (d) but also would fix the year, in which, it would be deemed to be income. What then is the meaning of the expression "distribution"? The dictionary meaning of the expression "distribution" is to give each a share, to give several persons. The expression distribution connotes something actual and not notional. It can be physical; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him. The Apex Court had to construed the scope of the word "paid" in section 16(2) of the Act in J.Dalmia v. Commissioner of Income-tax [1964] 53 ITR 83, 90 (SC), Shah J. speaking for the court, observed: "The expression 'paid in Section 16(2), it is true does not contemplate actual receipt of the dividend by the member. In general, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of Sec. 2(22)(d) of the Act. 35. The counsel for the assessee strongly put forth two arguments and contend that the provisions of Sec. 2(22) are not attracted in the present case. According to the Ld. Counsel for the assessee, Sec. 2(22) (a) / 2(22) (d) requires distribution which would only imply distribution without any quid pro quo. Since, the scheme of purchase of own shares is made through offer and acceptance and therefore, this involves an element of quid pro quo, and therefore, there is no 'distribution'. He further argued that Sec. 2(22)(d) requires distribution on the reduction of capital. Therefore, the reduction of share capital is to be coterminous with the distribution. In the present case, the reduction was only a consequence of the scheme owing to the stipulation in Sec. 77 that a company cannot purchase its own shares. There has been no distribution on the reduction of share capital. We do not find any merit in the contention of the assessee, because, the word 'distribution' in Sec. 2(6A) of the Income Tax Act, 1922, which is analogous to Sec. 2(22) of the current Income Tax Act, 1961, was considered in Punjab Distilling Industries Ltd. v. CIT reported in [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a mere ministerial function. In any event, assuming without conceding, that it cannot be treated as distribution on reduction of share capital, then it will automatically fall within the ambit of Sec. 2(22)(a) of the Income Tax Act, 1961, as there is distribution of accumulated profits entailing release of assets to the shareholders. 36. The Ld. Counsel for the assessee has made another argument in light of certain judicial precedents that the purchase of own shares was by way of a scheme sanctioned by the Hon'ble Madras High Court is operates in 'rem' and is binding on the Revenue. Once, the Central Government through Regional Director of Companies filed a 'no objection' for the scheme proposed by the assessee before the Hon'ble High Court, it cannot re-characterize the scheme, by taking into account immunity Clause provided by the Hon'ble High Court without understanding the context, in which, said provision has been given by the Hon'ble High Court. In our considered view, there is no merit in the arguments of the Ld. Counsel for the assessee for the simple reason that firstly, the order sanctioning the scheme itself clearly provides that the sanction shall not grant imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to look into the scheme in accordance with relevant laws. Therefore, the arguments of the Ld. Counsel for the assessee that once, the scheme approved by the Hon'ble High Court is operates as in 'rem' and is binding on the Revenue does not holds good. No doubt, the Court approved scheme is binding on all stakeholders, wherever it comes to the commercial wisdom of the persons who proposed the scheme. However, it does not mean that other consequences like tax implications are fully absorbed by the Court when the scheme was sanctioned. If you accept the arguments of the Ld. Counsel for the assessee, then, it is as good as rendering other authorities powerless even if the law permits them to look into the transactions in accordance with relevant provisions. Further, in our considered view, the assessee cannot take shelter on the basis of self-serving provisions of the scheme and state that certain provisions of the Income Tax Act, 1961 have been excluded. The object and purport of the scheme is to operate as single window system. The scheme spends more time laying out what it is not rather than to explain what it actually should be. Therefore, such self-serving clauses would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of share capital can only be done u/s. 391-393 r.w.s.77 and s.100 of the Companies Act, and this fact has been clearly explained by the Hon'ble Bombay High Court in the case of Cap Gemini India Private Limited, Company Scheme Petition No. 434 of 2014, where, it has been clearly held that company may either follow procedure u/s. 391 r.w.s.100-104 of the Companies Act, 1956, or the procedure u/s. 77A (now Sec. 68) of the Companies Act 1956. In the present case, the assessee itself has stated that it is not a buyback u/s. 77A of the Companies Act. In any event u/s. 77A/68of the Companies Act, 1956, a company can buyback only 25% of the total paid up share capital and free reserves. In the present case, if you go by the scheme, the conditions prescribed u/s. 77A of the Companies Act, 1956, are not satisfied, because, the purchase of its own shares by the assessee is more than 25% of the total paid up share capital and free reserve which is evident from the facts brought on record by the authorities, where, it has been observed that 54.70% of capital has been reduced after the scheme was given effect. Therefore, once the buyback is not u/s. 77A of the Companies Act, 1956, then, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 391-393 would fall back under the definition of Sec. 2(22), because, which entails release of all or part assets of a company to its shareholders. This is further fortified with the fact that there was reduction of share capital and distribution of accumulated profits, and thus, purchase of own shares would come within the ambit of dividend u/s. 2(22) of the Act. 40. The assessee had also taken another stand that the consideration paid for purchase of its own shares is to be taxed only in the hands of the shareholders u/s. 46A of the Income Tax Act, 1961, as capital gains. We find no merits in the arguments of the Ld. Counsel for the assessee for the simple reason that Sec. 46A is only applicable to buyback u/s. 77A and not to other forms of purchase of own shares. The words used in Sec. 46A are identical to the language in Sec. 77A and a reading of the Memorandum explaining the provisions of the Finance Act, inserting Sec. 46A, makes it clear that it was done to clarify that buybacks u/s. 77A necessitated a clarification as to whether the same ought to be taxed as capital gains or dividends. The insertion of Sec. 46A was contemporaneous to the insertion of Sec. 77A and in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions from the date of amendment, it would not preclude the transaction from being subject to tax u/s. 115-O of the Act, because, amendment can also be brought in to shift tax incidence from one provision to another. If all conditions of Sec. 115-O r.w.s.2(22) are satisfied, the same cannot be impliedly excluded on the basis of the amendment to Sec. 115QA of the Act. 43. At this stage, it is relevant to look into the scheme in light of purpose and intent specified in the scheme document. The assessee claims to have implemented the scheme to rationalize its shareholding and capital structure. The four reasons given are that (i) to increase earnings per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, it is relevant to refer to the decision of XYZ India, In Re [2012] 20 taxmann.com 89 and also the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings BV v. Union of India & Anr. (2012) 6 SCC 614 (SC). Although, the Ld. Counsel for the assessee refers to the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings BV v. Union of India & Anr.(supra), in our considered view, the Ld. Counsel for the assessee has selectively referred to the observation of the Court for their advantage, and thus, it cannot be said that the Hon'ble Supreme Court in the above case, had given a blanket sanction to all transactions, including transactions which are carried out to evade legitimate tax dues to the exchequer. 44. The assessee had raised two further contentions alleging discrimination and inconsistent treatment by the Revenue. The Ld. Counsel for the assessee contended that TDS remitted by the assessee for capital gains in the hands of US resident shareholders is still in the possession of the AO, and therefore, the AO accepted the position that it is capital gains in the hands of the shareholders, but had taken a diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is actually in favour of the revenue that any purchase of its own shares u/s. 391-393 of the Companies Act, 1956, has to be read along with Sec. 77 & Sec. 100-104 of the Companies Act, 1956. Further, the Hon'ble Court held that buyback of shares u/s. 391-393 of the Companies Act, 1956, is always refers to Sec. 100-104 of the Companies Act, 1956. Therefore, Sec. 391-394 cannot read separately in isolation with Sec. 100-104 for the purpose of purchase of own shares involving capital reduction. Since, in the instant case, it is not buyback u/s. 77A of the Act, then same relates back to Sec. 391-393 r.w.s. 100-104 of the Act. Further, the Hon'ble High Court in Para No.70 very categorically held that purchase under an order of Court in a 'Scheme of Arrangement & Compromise' u/s. 391-394, is subject to compliance with Sec. 100-104. Therefore, if you go by the present scheme, the judgment of the Hon'ble Bombay High Court is supports the stand of the AO, and thus, selective reference by the Ld. Counsel for the assessee, is incorrect. 46. The assessee had also relied upon the decision of the Hon'ble Supreme Court in the case of Anarkali Sarabhai v. CIT (supra).The Hon'ble Supreme Court r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and decide the taxability of the transaction. Moreover, the Hon'ble Madras High Court order itself clearly states that the sanctioning of the scheme was not construed as immunity granted to the assessee for payment of taxes under any law for the time being in force. Therefore, the said judgment does not come to the aid of the assessee. 49. The Ld. Counsel for the assessee had also relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Purbanchal Power Co. Ltd., reported in [2022] 145 taxmann.com 215 (Calcutta). We find that this case does not laydown general proposition, that a Court sanctioned scheme can never be a colourable device and it cannot be so. In any event, the Court did not find there to be any substantial question of law and dismissed in limine. Therefore, said judgment cannot be applied to the facts of the assessee's case. Similarly, the assessee has relied upon by the decision of the Hon'ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. v. Department of Income Tax reported in [2013] 353 ITR 222 (Guj.), where, there was a clear finding that scheme was not entered into only for evading tax. This is in contradiction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered view that consideration paid by the assessee for purchase of its own shares in accordance with scheme sanctioned by the Hon'ble High Court of Madras in terms of provisions of Sec. 391-393 of the Companies Act, 1956, amounts to distribution of accumulated profits which entails release of all or part of assets of a company on reduction of capital which attracts provisions of Sec. 2(22) of the Income Tax Act, 1961. The Ld.CIT(A) has discussed the issue at length in light of plethora of judicial precedents and held the transaction of purchase of own shares by the appellant company is distribution of accumulated profits within the meaning of section 2(22) of the Income Tax Act, 1961. Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to treat the transactions of the assessee as dividend u/s. 2(22)(a)/2(22)(d) r.w.s. 115-O of the Income Tax Act, 1961, and thus, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss appeal filed by the assessee.
52. In the result, appeal filed by the assessee is dismissed.
Order pronounced on the 13th day of September, 2023, in Chennai. X X X X Extracts X X X X X X X X Extracts X X X X
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