Earlier Finance Act, 2013 introduced tax on the distributed income by the company on the buyback of the Unlisted Shares vide section 115QA under chapter XVII-DA.
The Bare Act language of the section 115QA mentioned below for the reference.
115QA. Tax on distributed income to shareholders.
“(1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
Explanation. —For the purposes of this section, —
(i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”
On the plain reading of the above section, it can be said that the Company whose shares are not listed on the any recognized stock exchange is required to pay tax in addition to normal income tax on the distributed income on the buy back.
Now question may come to mind that, if there is an company whose shares are listed on the recognized stock exchange and such company distribute its income by way of buy back of its own shares then who is required to pay tax on the same.
Now for the same, we have a separate provision under the Income tax act,1961 covering by section 46A.
The Bare Act language of the Section 46A is mentioned below for reference:
Section 46A: Capital gains on purchase by company of its own shares or other specified securities.
“Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
Explanation. —For the purposes of this section, “specified securities” shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956).”
As per the provision of the above section, if a company buy back its own shares, then the difference between consideration received by a shareholder and cost of the acquisition of such shares is treated as a capital gain in the hands of Shareholder and accordingly such shareholder is liable to pay tax on such gain.
Now there are mainly two section, 115QA and other one is section 46A. Both are independent charging section. One covers the cases where a share of unlisted company is bought back and other cover the case of charging tax on the income in the hands of shareholders where shares are bought back by the company. Here in section 46A, there is no bifurcation between shares of listed company vis-à-vis shares of unlisted company.
However, the section 115QA starts with the non-estoppel clause that means “Notwithstanding anything contain in any other provision of this act”. Hence it can be said that Where shares of the unlisted company are bought back, section 115QA will be applicable and accordingly company will pay the income tax on the distributed income and there will be no further tax liability in the hands of shareholders since the section 115QA starts with the non-estoppel clause and the said section will prevail over section 46A.
Whereas on other side, if the shares of the listed company are bought back, then section 115QA will not have an applicability since it applies to shares of unlisted company only. Therefore, here section 46A will have applicability and accordingly tax liability on the distributed income of the listed company on the buy back will be discharged by the shareholders.
Thereafter, Finance act 2019 (No.2) removed the line i.e. “(not being shares listed on a recognized stock exchange)” from the section 115QA of the Income tax act,1961. Therefore, it can be said that if a listed company bought back its shares, then it will also hit by provision of the section 115QA and accordingly the company will require to pay tax on the distributed income. The Bare Act language of the revised section 115QA looks like as follows:
115QA. Tax on distributed income to shareholders.
“(1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made on or before the 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
Explanation. —For the purposes of this section, —
(i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies;
(ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”
Hence it can be said that now in the both the cases the tax will be discharged by the company itself whose shares are bought back and as per the wording of the said section, the tax so discharged by the company will be treated as final payment of the tax and not further tax liability arises in respect of the said income. Moreover the said income is exempt in the hands of shareholder vide section 10(34A) of the Income tax act,1961.
Now one thought of argument can be, whether the provision of the section 46A requires any changes or not, since in the both cases tax is discharged by the company as per the provision of section 115QA and the same will be treated as a final payment of the tax and hence there will be no further tax liability in respect of the distributed income by the company (Whether listed or unlisted) on the buyback. Moreover, section 115QA does not distinguish between equity shares and preference shares. Therefore, it applies to both the category of shares.
Now considering the above explanation,
“Whether the word ‘Shares’ or ‘Shareholder’ needs to be removed from the section 46A in order to avoid any confusion whatsoever. Some sort of clarification is required on this issue.”
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