Section 115QA of the Act provides for the levy of additional Income-tax at the rate of twenty per cent. of the distributed income on account of buy-back of unlisted shares by the company. As additional income-tax has been levied at the level of company, the consequential income arising in the hands of shareholders has been exempted from tax under clause (34A) of section 10 of the Act.

This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.

In order to curb such tax avoidance practice adopted by the listed companies, the existing anti abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognised stock exchange, is proposed to be extended to all companies including companies listed on recognised stock exchange. Thus, any buy back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act. Accordingly, it is also proposed to extend exemption under clause (34A) of section 10 of the Act to shareholders of the listed company on account of buy-back of shares on which additional income -tax has been paid by the company.

These amendments will take effect from 5th July, 2019.

[Clauses 61 & 36]

Extract of Clause 61 & 36 of Finance Bill 2019

61. Amendment of section 270A.

In section 270A of the Income-tax Act,––

(A) for the words “no return of income has been furnished” at both the places where they occur, the words and figures “no return of income has been furnished or where return has been furnished 40 for the first time under section 148” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017;

(B) in sub-section (2), in clause (e), for the words “no return of income has been filed”, the words and figures “no return of income has been furnished or where return has been furnished for the first time under section 148” shall be substituted and shall be deemed to have been substituted with 45 effect from the 1st day of April, 2017;

(C) in sub-section (3), in clause (i), in sub-clause (b), for the words “no return has been furnished”, the words and figures “no return of income has been furnished or where return has been furnished for the first time under section 148” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017.

36. Amendment of section 115QA.

In section 115QA of the Income-tax Act, in sub-section (1), the brackets and words “(not being shares listed on a recognised stock exchange)” shall be omitted with effect from the 5th day of July, 2019.

Note on Clause 61 & 36 of Finance Bill 2019

Clause 61 of the Bill seeks to amend section 270A of the Income-tax Act relating to penalty for under-reporting and misreporting of income.

Sub-section (2) of the said section specifies the condition under which a person shall be considered to have under-reported his income.

Sub-section (3) of the said section provides for the manner in which under-reported income shall be determined.

It is proposed to amend clause (b) and clause (e) of the said sub-section (2) so as to provide that where return is furnished for the first time under section 148, a person shall be considered to have under-reported his income, if the income or deemed income assessed is greater than the maximum amount not chargeable to tax .

It is further proposed to amend sub-clause (b) of clause (i) of the said sub-section (3) so as to provide that where return is furnished for the first time under section 148 in the case of a company, firm or local authority, the amount of income assessed, and in any other case, the difference between the amount of income assessed and the maximum amount not chargeable to tax shall be the under-reported income.

It is also proposed to amend clause (a) of sub-section (10) of section 270A so as to provide that in a case where return is furnished for the first time under section 148, the tax payable in respect of under-reported income shall be the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.

Clause 36 of the Bill seeks to amend section 115QA of the Income-tax Act relating to tax on distributed income to shareholders.

Sub-section (1) of the said section provides that a domestic company shall be liable to pay additional income-tax at the rate of twenty per cent. on the distributed income on buy-back of shares not being shares listed on a recognised stock exchange from a shareholder.

It is proposed to amend the said sub-section so as to provide that the provisions contained therein shall also apply to the buy-back of shares listed on a recognised stock exchange.

This amendment will take effect from 5th July, 2019.

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