Opinion Of Eminent Legal Luminaries On Controversial Issues

Tax on distributed income to share holders- Buy back of shares

QUERY: Are Provisions of section 50CA and section 56(2)(x) applicable to buyback of shares? i.e., is it possible to buy back the equity shares, at a price which is lower than the fair market value, without any incidence of tax?
ANSWER: No. For Buy back of shares section 115QA of the Income tax Act, 1961 is applicable. Section 115QA(1) reads as under:
“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 recognized 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 purpose 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 buyback 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 -----------------“.
Thus, this section starts with non-obstante clause. Therefore for buyback of shares, section 50CA or section 56(2)(x) will not apply. Section 115QA provides for levy of tax @ 20% on the difference between amount paid by the company for purchase of shares from its shareholders and the amount paid for subscription of the shares. The tax would be payable by the company on the distributed income. In the hands of shareholders the same shall be exempt under section 10(34A) of the Act, Rule 40BB of the Income tax Rules, 1962 provides for determination of fair market value of the shares of unlised company. So, the company will have to pay tax on the fair market value of shares as determined under the said rule.
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One comment on “Tax on distributed income to share holders- Buy back of shares
  1. Amol Dabake says:

    Can we set off carried forwarded business losses against the income under section 115QA?

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