Circular No. 3/2016 : Clarification regarding nature of share Buy-back transactions under Income-tax Act, 1961

Circular No. rorg Government of India Ministry of Finance : Department of Revenue Central Board of Direct Taxes North Block, New Delhi, the? of February, 2016 Subject: Clarification regarding nature of share Buy-back transactions under Income-tax Act, 1961 - regd.- As per provisions of Section 46A of the Income-tax Act, 1961 (‘Act’), applicable with effect from 01.04.2000, any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares/other specified securities shall be, subject to provisions contained in section 48, deemed to be Capital gains, Further, sub- clause (iv) of clause (22) of section 2 of the Act excludes any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act from the ambit of ‘dividend’. Finance Act, 2013 subsequently introduced section 1150A (w.e.f, 01.06.2013) to Provide that any amount of distributed income bya company on buyback of unlisted shares shall be charged to tax and the company so distributing its income shall be liable to pay additional income-tax at the rate of twenty percent of the distributed income. 2, It has been brought to the notice of the Board that the Provisions of law regarding buy- back of shares since introduction of dividend distribution tax (‘DDT’) under section 1150 of the Act w.e.f. 01.04.2003 till 31.05.2013 are being interpreted in a conflicting manner by the tax authorities and taxpayers, thereby giving rise to disputes on this issue. It has been contended that subsequent to introduction of section 115QA in the Act and placing reliance on a decision of the Authority for Advance Ruling (AAR No. P of 2010), income-tax authorities, in some cases have sought to re-characterize the purchase consideration received on account of buy-back of shares, undertaken prior to 01.06.2013, as dividend and accordingly, subjecting the amounts so distributed by the companies to DDT. 3. The matter has been examined. Between the period 01.04.2000 till 31.05.2013 as mentioned in para 1 above, provisions of section 46A read with section 2(22)(iv) of the Act clearly provide that the income arising to a shareholder on buy-back of shares was to be treated as income from Capital gains and not dividend income. Further clarity on this issue emerges on perusal of Circular No. 779 dated 14.09.1999 of CBDT, which in Para 28 has A mentioned following reasons for introducing section 46A in the statute: “28 Clarification oftax issues arising out ofthe provision to allow buy-back ofshares by the companies — tein teeta ees 28.1 The Companies (Amendment) Ordinance, 1998 [subsequently enactedas the Companies (Amendment) Act, 1999], inserted section 77A in the Companies Act, 1956, which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished andPhysically destroyed and the company is precludedfrom making anyfurther issue ofsecurities within a period of24 monthsfrom such buy-back, 28.2 The above newly introduced Provisions ofbuy-back Ofshares threw Up certain issues in relation to the existing provisions of \ \ the Income-tax Act. The two Principal issues are whether it wolild give rise to deemed dividend under section 2(22) of the Income-taxActand whetherany Capital gains wouldarise in thehands ofthe shareholder. The legal position on both the issues Were far from clear and Settled and there Was apprehension that there will be unnecessary litigation unless the issues are Clarified with finality, 28.3 The Act, therefore, has amended clause (22) ofsection 2 ofthe Income-tax Act 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 the provisions contained in section 77A of the Companies Act, 1956. It has also inserted q new section, namely, section 46A in the /ncome-tax Act, to provide that any consideration received bya shareholder, or q holder ofother specified securitiesfrom any company on purchase ofits own shares or otherSpecified securities shall be, subject to Provisions contained in section 48, deemed to be the Capital gains,” (Emphasis supplied) 4. Accordingly, the CBDT hereby Clarifies that consideration received on buyback of shares between the Period 01.04.2000 till 31.05.2013 would be taxed as Capital gains in the hands of the recipient in accordance with section 46A of the Act and no such amount shall be treated as dividend in view of Provisions of section 2(22)(iv). 5. With a view to bring about further clarity on this issue asa step towards non-adversarial tax regime, the CBDT hereby directs that as a Matter of general Principle, no fresh notice for assessment/reassessment/non-deduction of TDS at source Shall be issued where buyback of shares has taken place prior to 01.06.2013 and the case is covered under section 46A read with section 2(22)(iv) of the Act. In cases where notices have already been issued and assessment Proceedings are pending, tax authorities shall complete the assessment keeping in view the above legal Position. 6. The above may be brought to the notice of all for necessary compliance. : 7. Hindi version to follow. i (Rohit Garg) Deputy Secretary to the Government of India (F.No. 225/19/2016/ITA. 11) Copy to: 1) Chairman, CBDT and all Members, CBDT 2) All Pr. CCsIT/Pr. DsGit 3) All JS/CsIT, CBDT 4) ADG(PR,PP & OL) with request for placing on official handle of the department 5) Addl. CIT, Data base Cell for uploading on Departmental Website 6) Web Manager for uploading on incometaxindia.gov.in & placing in public domain “ee Central Board of Direct Taxes (3 copies) 8) Guard file eee