Revenue Itself Treated It as Deemed Dividend – Then Exemption u/s 10(34) Must Follow- Mumbai ITAT Deletes Tax on Share Buyback

Navroze Shiamak Marshall Vs ITO (ITAT Mumbai)

Revenue Itself Treated It as Deemed Dividend – Then Exemption u/s 10(34) Must Follow- Mumbai ITAT Deletes Tax on Share Buyback

n an interesting and significant ruling, the Mumbai ITAT held that where the Revenue itself treats consideration received on buyback/reduction of share capital as deemed dividend u/s 2(22)(d), the consequential exemption u/s 10(34) cannot be denied to the shareholder.

The assessee had purchased shares of Spirax Marshall Pvt. Ltd. in March 2006 and sold them back to the company under a scheme of arrangement approved by the High Court. The assessee originally offered the gains as Long-Term Capital Gains (LTCG) after claiming indexation and deduction u/s 54F.

During reassessment, the AO rejected the assessee’s claim for exemption u/s 54F and also denied LTCG treatment and indexation benefits.

Before the ITAT, the assessee pointed out that in identical transactions involving her own children and other shareholders of the same company, the department itself had consistently taken a stand that the consideration received on buyback was not capital gains but deemed dividend u/s 2(22)(d). Those decisions had already been upheld by the Bombay High Court.

The Tribunal noted that in earlier group cases such as Kamal Imran Panju and Kayan Jamshid Pandole, the Revenue had successfully argued that the transaction amounted to reduction of capital resulting in deemed dividend under section 2(22)(d). However, both the ITAT and Bombay High Court simultaneously held that such deemed dividend was exempt in the hands of shareholders u/s 10(34) read with section 115-O.

The Bombay High Court had categorically ruled that once a payment falls within section 2(22)(d), the exemption u/s 10(34) automatically follows and cannot be denied merely because the company may not have paid dividend distribution tax. The Court observed that recovery consequences, if any, lie against the company and not the shareholder.

Applying the same reasoning, the ITAT held that the assessee’s case stood on identical footing. Accordingly, while treating the receipt as deemed dividend u/s 2(22)(d), the Tribunal held that the income was exempt u/s 10(34) and directed deletion of the entire addition.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee assailing the order dated 23.06.2025 passed by National Faceless Appeal Centre, (NFAC), Delhi for the Assessment Year (AY) 2008-09.

2. We have heard Shri JD Mistry, learned Senior Counsel appearing for the
assessee and Shri Swapnil Choudhary, learned Departmental Representative (DR). This appeal has thrown up an interesting issue, as to whether, the income derived by the assessee from sale of shares of a company, namely, M/s. Spirax Marshall Pvt. Ltd. can at all be taxed under “Capital Gains”?

3. Briefly stated, the assessee, since deceased, was holding 25,466 shares of an Indian Company, namely, M/s. Spirax Marshall Pvt. Ltd. As per the materials available on record, the shares were purchased on 31.03.2006 for a consideration of Rs.1,04,67,163/- and were sold on 05.04.2007 for a consideration of Rs. 4,96,58,700/-. In the return of income filed for the assessment year under dispute, the assessee declared net ‘Long-Term Capital Gain’ (LTCG) of Rs.3,91,91,537/- after claiming deduction towards indexed cost of acquisition. Against said capital gain, the assessee claimed deduction u/s. 54F of the Act towards purchase of a flat at Marble Diva for a consideration of Rs.3,99,67,910/-.

4. The assessment in case of the assessee was reopened u/s. 147 of the Act. In course of reassessment proceedings, the Assessing Officer (AO) called upon the assessee to justify the nature of gain as LTCG and also to justify the claim of deduction u/s. 54F of the Act. Though, the assessee furnished detailed submissions in support of her claim, however, the AO remained unconvinced. Ultimately, the AO completed the assessment rejecting assessee’s claim of deduction u/s. 54F of the Act on the reasoning of non-fulfilment of condition regarding construction of the house within a period of three years from the date of transfer. Thus, he added back the capital gain of Rs.3,91,91,537/- to the income of the assessee. Further, he disallowed assessee’s claim of LTCG and indexation benefit. Though, the assessee contested the aforesaid decision of the Assessing Officer by filing an appeal before the First Appellate Authority, however, the addition was confirmed.

5. Before us, learned Senior Counsel appearing for the assessee, referring to Ground Nos. 5 and 6, submitted that though the assessee had claimed the income derived from sale of shares as capital gain, however, in case of her children, who entered into similar transactions of sale of shares of M/s. Spirax Marshall Pvt. Ltd., the Tribunal and Hon’ble High Court has held that the income arising from sale of shares is in the nature of dividend under section 2(22)(d) of the Act, hence, exempt from taxation in terms with section 10(34) of the Act. In this context, he placed on record the following decisions:

1. Addl. CIT vs. Kamal Imran Panju, ITA No. 7620/Mum/2011, dated 31.12.2013.

2. ACIT vs. Smt. Kayan Jamshid Pandole, ITA No. 8027/Mum/2011, dated 14.01.2015.

3. PCIT vs. Smt. Kayan Jamshid Pandole, [2018] 100 com284 (Bombay).

6. Learned Departmental Representative (DR) relied upon the observations of the Departmental Authorities.

7. We have considered rival submissions and perused the materials on record. There is no doubt that assessee suo-motu declared the income derived from sale of shares under the head “Capital Gain”. However, materials placed on record reveal that the assessee, along with her children, were holding shares of M/s. Spirax Marshall Pvt. Ltd. and all of them sold the shares by way of buyback by the said company through a scheme of arrangement approved by High Court. The consideration received from the company towards sale of shares were offered as capital gain in the respective returns of income filed by the concerned persons, including the assessee. In case of other two assessee, namely, Kamal Imran Panju and Smt. Kayan Jamshed Kundale, the Department, while completing the assessments treated the income derived from sale of shares as dividend under section 2(22)(d) of the Act, as against the claim of capital gain by the respective assessee. The said assessees challenged such decision by filing appeals before the First Appellate Authority and, thereafter, the dispute reached the ITAT. While deciding the appeals, the Tribunal upheld the decision of the Department that the income from buyback of shares by the company has to be treated as dividend under Section 2(22)(d) of the Act. However, it was also held that such dividend would not be taxable at hands of the respective assessees, as they are exempt under section 10(34) read with section 115-O of the Act. In case of Smt. Kayan Jamshid Pandole, the Department went in further appeal before Hon’ble Bombay High Court with the following substantial questions of law:

“ (a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 2,78,46,000/-received by the assessee from Spirax Marshall (P) Ltd on sale of its shares to the said company under the Scheme of Arrangement, which is treated as deemed dividend under section 2(22)(d) of the Act, is exempt under Section 10(34) of the Act?

(b) Whether on the facts and in the circumstances of the case and in law, in this peculiar case, the assessee can claim exemption under section 10(34) of the Act when the company M/s. Spirax Marshall (P) Ltd has not paid additional income-tax under section 115-O of the Act?”

8. While answering the aforesaid questions, the Hon’ble Bombay High Court has observed as under:

“3. Brief facts are as under:

Respondent-assessee is an individual. The issue pertains to the Assessment Year 2008-09. The assessee was holding shares of one M/s Spirax Marshall Limited pursuant to a scheme of arrangement formulated by the company and approved by the Bombay High Court, the Company purchased shares held by the assessee and several other shareholders of the same group. The income received by the assessee under such arrangement was offered by the assessee by way of capital gain in the return filed for the said assessment year. The Revenue was of the opinion that the income was in the nature of a deemed dividend in terms of Section 2 (22)(d) of the Income Tax Act, 1961 (“the Act” for short).

4. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment accepted the Revenue’s contention and held that the income was not in the nature of capital gain, but a deemed dividend. However, the Tribunal thereafter examined the question whether the dividend would be exempt from tax under Section  10(34)of the Act. The Tribunal referred to the said provision as also Section 115-Oand held that the dividend would be tax-free in the hands of the receiver. It is this views or the Tribunal the Revenue has challenged the present appeal.

5. Learned counsel for the Revenue submitted that the Tribunal committed an error in holding that the income was exempt under Section 10(34)of the Act. He further submitted that the company had not paid any tax on distribution of such dividend as required under Section 115-O. The assessee, therefore, cannot claim exemption under Section 10(34) of the Act. Learned counsel agreed that against the judgment of the Tribunal in case of Kamal Imran  Panju, Mumbai Vs. Department of Income Tax1 who is an assessee similarly situated as the present one, the Revenue has not preferred any appeal before the High Court. He, however, submitted that non-filing of the appeal by the Revenue was on account of misinterpretation of the relevant provisions. When court interpretation was adopted, the revenue Priya Soparkar 4 7 itxa 387-16-o formed a belief that the question requires further consideration. In this context, learned counsel relied on the judgment of Supreme Court in the case of Commissioner of Income-Tax Vs.  Modipon Limited1 to argue that merely because in case some other assessee, Revenue has not preferred appeal, would not preclude the revenue from filing appeal in later cases.

6. On the other hand, learned counsel Mr.Porus Kaka appearing for the assessee submitted that the income generated by way of buy back of shares by the company was in the nature of capital gain. Assessee had offered the same to tax accordingly. If the Revenue contends that the income is in the nature of deemed dividend, the effect of Section  10(34)of the Act would automatically follow. He further submitted that all other assessees who were shareholders of the same company and who formed a common group had made declaration in the income tax returns declaring the gain as a capital gain. The Revenue has not opposed these claims in their cases. The Revenue has isolated the cases of only two assessees for a differential treatment. He further pointed out that case of Kamal Imran Panju also arose out of the same arrangement. In said case, the revenue chose not to pursue the issue beyond the level of the Tribunal. On the question of consistency, therefore, he argued that the revenue would be precluded from pursuing the present appeal.

7. At the outset, we may notice that according to the assessee the sale of shares did not result into any dividend and it was a capital gain. It was Revenue who had argued that income is not in the nature of capital gain but a deemed dividend. It would be open for the assessee to persue the line that the Tribunal had committed error in rejecting the assessee’s contention in this regard. Surely, however, the Revenue cannot change the stand that income was in the nature of deemed dividend. We have, therefore, examined the entire issue in this backdrop.

8. Section 2(22)of the Act as is well known includes range of situations under which payment by company to its shareholders would amount to distribution of dividend. Clause (d) of Section  2(22)  provides that any distribution to its shareholders by the company on reduction of capital to the extent to which the company possesses the accumulated profit which arose after end of previous year, under certain circumstances would be included in the term “dividend”.

9. Section 10(34)in turn exempts from payment of tax, any income by way of dividend referred to Section 115-O. As per Sub-section (1) of Section 115-O notwithstanding anything contained in the provisions of Act and subject to the provisions of the said section in addition to the income tax chargeable in respect of the total income of the domestic company, any amount declared, distributed or paid by such company by way of dividend on or after 1st April, 2003 would be chargeable to additional income tax referred to as tax on distributed profits.

10. The question would be whether the deemed dividend under Section 2(22)(d)would fall within the purview of Sub- Section  1 of Section 115-O of the Act. However, the legislature has advisedly cleared this position by providing an explanation to Section 115-Q of the Act. Before we refer to the explanation, we may note that Section  115-Q provides that if any Principal Officer of domestic company and a company does not pay tax on distributed profits in accordance with the provisions of Section 115-O then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Act for collection and recovery of the income tax shall apply. This provision thus makes a specific reference to unpaid distribution tax by a company. An explanation to Section 115-Q which existed at the relevant time but which was omitted by the Finance Act, 2018 and provided that for the purposes of the said Chapter (Chapter XIID) which contains Section 115-O and 115-Q, the expression “dividend” shall have the same meaning as it given to dividend under Sub-Section (22) of Section 2, but shall not include sub-clause (e) thereof.

11. The plain effect of the explanation, therefore, would be that even the deemed dividend under Section 2(22)(d)of the Act would be covered from the purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-O of the Act. Inescapable conclusion, therefore, would be that such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act.

12. The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34)should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of receiptant by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company. In the result, the tax appeal is dismissed.”

9. As could be seen from the above, as against the claim of the assessee that income derived from sale of shares in the “Capital Gains”, the Department has treated it as dividend under section 2(22)(d) of the Act. Such reclassification of head of the income by the Department has been upheld by the Tribunal and Hon’ble Bombay High Court. However, while doing so, it has been held that such income would be exempt under Section 10(34) of the Act. Since, the dispute arising in assessee’s appeal stands on the same footing, the view taken by the Coordinate Bench and Hon’ble Bombay High Court in case of two other assessees is squarely applicable. Thus, we hold that the income derived from sale of shares, though, in the nature of dividend under section 2(22)(d) of the Act, however, it is exempt under section 10(34) of the Act. The Assessing Officer is, therefore, directed to delete the addition.

10. In the result, appeal is allowed.

(Order pronounced in the open court on /05/2026.)