The Madras High Court has held that the shares purchased pursuant to the order of Company Court would not amount to capital gain and rather to be treated as a dividend.
The assessee, engaged in the business of development of computer software and related services & export, bought back its own shares. Thereafter, during the year 2016 under the Scheme of Arrangement and Compromise, the assessee planned to purchase its own shares u/s 391 to 393 to increase earnings per share and return on equity over a period of time and enhance long-term value creation; and to reduce foreign currency fluctuation risk in respect of rupee funds in India. The gain arising to the shareholders in the course of buy-back was offered to taxation as capital gain as per the treaty relief and a total of Rs.898.01 Crores was paid as capital gain to the Department by the assessee.
The Department held that the buy-back of share u/s 391 of the Indian Companies Act was nothing but the distribution of accumulated profit and it had to be treated as dividend u/s 2(22)(d) and Dividend Distribution Tax at 15% was required to be paid by the assessee u/s 115O. It was therefore stated that unlike the Regular Assessment Proceedings u/s 143(3), the provisions of Section 115-O did not prescribe any specific order to be passed as it was equivalent to self-declaration and the taxpayer was required to remit the taxes within a period of 14 days from the date of distribution of dividends and any failure in remitting the taxes within the time would automatically make the taxpayer, “assessee deemed to be in default”.
Justice K Kalyanasundaram noted that “in the Company Petition in C.P.No.102 of 2016, in Clauses 6.6 and 6.7, it is stated that the provisions of Section 2(22) or Section 115 O or Section 115QA of the Act are not applicable to the purchase of Equity Shares by the Company from its shareholders and the Scheme of Arrangement and Compromise shall not be treated or considered as a “capital reduction” under the provisions of Section 100 of the Companies Act, or a “buy-back” under the provisions of Section 68 of the Companies Act. However, while approving the Scheme, as observed above, the Company Court has categorically held 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 of law”.”
The Court said that Section 115 O is a charging section on its own. These Sections are self-contained codes in themselves and they do not demand to issue any show-cause notice and then passing any order.
“it is not disputed that the Department sought for furnishing information with regard to remittance made to the shareholders of the assessee-Company during the financial year 2015-16 and 2016-2017. It is an admitted fact that no provision of law has been quoted in the letter particularly Section 2(22) of the Act, but a cursory perusal of the letter would show that the Department had sought for payment details to ascertain the tax liability of the assessee. It is equally not disputed that the assessee approached the AAR only when the issue was pending before the AO. Section 245R makes it clear that if the enquiry is already pending before the AO, then AAR has no jurisdiction to entertain the application. It is now questioned that gain on buy-back of shares cannot be categorized as a dividend and it is a capital gain as per Section 46 A. It is a case of the Department that there was no dispute and necessity to file the petition u/s 391 to 393 of the Companies Act and it was filed only to avoid payment of Dividend Distribution Tax. Whenever a company distributes its profits to its shareholders, the profit so disbursed, will amount to dividend,” the Court said.
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