The Madras High Court has temporarily stayed the tax demand of Rs. 9,403.09 crore associated with the Cognizant Technology’s Rs. 19,000 crore buyback dividend distribution tax dispute.
Justices R. Mahadevan and Mohammed Shaffiq, presiding over the case, directed Cognizant Technology to remit Rs. 1,500 crores in cash or via a bank letter and provide property security for the remaining tax liability with interest and penalty to the respondent within four weeks. Upon payment and submission of property title deeds, the department will release the lien on the remaining fixed deposits in banks.
Read More: Payment towards Buyback of Shares not Genuine: ITAT upholds Order against Cognizant Technology
The appellant, challenging the Income Tax Appellate Tribunal’s dismissal of the appeal for the assessment year 2017–18, asserts that Cognizant Technology should only be taxed for the purchase of its own shares as capital gains under Section 46A.
The case has been taken up for scrutiny assessment and during the course of assessment proceedings, several hearings were held by the AO and the assessee furnished necessary information relating to buy back of shares from its shareholders. However, with respect to the buyback of shares, the AO had accepted the explanation of the assessee and no adjustment was made to the total income.
The Tribunal, however, had treated the consideration for share purchase as a dividend under Section 2(22), leading to the appellant’s liability under Section 115-O. The court upheld this decision, confirming orders by the CIT (A) and the Assessing Officer.
The department argued that in 2013–14, the appellant, to avoid taxes, distributed accumulated profits through share buybacks. The department further contended that Section 46A does not cover all buyback forms, and shareholders are liable for capital gains tax.
The Tribunal held that “the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue and thus, the CIT has rightly exercised his jurisdictional powers and set aside the assessment order passed by the AO u/s 143(3) dated 31/12/2016. Hence, we are inclined to uphold the order of the CIT and dismiss the appeal filed by the assessee.”
With financial difficulty cited by the appellant, the court granted an interim stay on the tax demand, conditioned on a Rs. 1,500 crore payment within four weeks. Failure to comply automatically vacated the stay, allowing the department to pursue legal means for tax recovery.
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