We repurchased shares through a court-approved scheme. Can the department still call it a dividend?
On these facts, yes. The Chennai Tribunal held the repurchase was a colourable device — in substance a reduction of capital releasing the company's assets to shareholders — taxable as deemed dividend under s.2(22)(d), alternatively s.2(22)(a), with dividend distribution tax under s.115-O payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
Decided by the ITAT (Income Tax Appellate Tribunal, Chennai Bench 'D' — Mahavir Singh, Vice President and Manjunatha G., Accountant Member (order delivered by Manjunatha G., AM); IT Appeal No. 269 (CHNY) of 2022; AY 2017-18) on 2023-09-13, reported as [2023] 154 taxmann.com 309 / 108 ITR(T) 492 (Chennai)(Trib.); (2023) 225 TTJ 873 (uncorroborated); IT Appeal No. 269/CHNY/2022. It bears on section 2(22)(d), section 2(22)(a), section 115-O, section 115QA, section 46A, section 10(34) of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This favours the revenue and is here because it is what the department cites against scheme-based repurchases. It closes two arguments: that a scheme under ss.391-393 creates a third route outside both the capital-reduction machinery and the s.77A buy-back conditions, and that a sanction order immunises the transaction from tax — the Tribunal held the tax consequences of a scheme are for the tax authorities to determine. Its weight is limited: the merits are under appeal and no appellate decision on them was found.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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In financial year 2016-17 the company purchased 94,00,534 of its own equity shares of Rs. 10 each at Rs. 20,297 per share, aggregating Rs. 19,080.26 crores and representing 54.70 per cent of its outstanding equity, from its shareholders in Mauritius and the United States. The purchase was carried out under a scheme of arrangement and compromise under ss.391-393 of the Companies Act 1956, sanctioned by the Madras High Court on 18 April 2016, and the scheme was not a buy-back under s.77A of that Act - nor could it have been, the purchase exceeding the limit that section allows. After the scheme the Mauritius shareholder's holding rose to 99.87 per cent. Tax of Rs. 8,98,01,63,318 was deducted on the payments to the United States shareholders, and nothing on the payment to the Mauritius shareholder, treaty relief being claimed for it under the India-Mauritius agreement on the footing that the payment was consideration for a transfer of shares giving rise to capital gains in the shareholders' hands. Clause 7 of the scheme showed the money came out of general reserves and the accumulated credit balance in profit and loss. The assessment year was 2017-18.
The Tribunal dismissed the company's appeal. The transaction was a colourable device: in substance it was a reduction of capital involving the release of the company's assets to shareholders, and the consideration was deemed dividend under s.2(22)(d), and alternatively under s.2(22)(a), on which dividend distribution tax under s.115-O was payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
The Tribunal held that s.2(22) is an inclusive definition going beyond the conventional meaning of dividend, its object being to stop payments out of accumulated profits being camouflaged through other channels, and that both pre-requisites of s.2(22)(d) were satisfied - a distribution to shareholders on a reduction of capital, the paid-up capital having fallen by 54.70 per cent, and accumulated profits to that extent, clause 7 of the scheme showing the source. It rejected the arguments that 'distribution' imports an absence of quid pro quo and that the reduction must be coterminous with the distribution: on the Supreme Court's construction, distribution means division or payment among several persons and need only be actual rather than notional, and the clause does not distinguish between a reduction that is intended and one that is a consequence of the scheme. If it were not a distribution on a reduction, it would fall within s.2(22)(a) as a distribution of accumulated profits entailing a release of assets. There cannot be a purchase of own shares under ss.391-393 divorced from the rest of the Companies Act: a company must follow either s.391 read with ss.100-104 or the s.77A route, and since s.77A was excluded, what remained was a reduction of capital. The word 'buy-back' appears in the 1956 Act only in s.77A, and the proviso to s.2(22) excludes only a s.77A buy-back from the definition of dividend, so any other form of purchase of own shares falls back into s.2(22). Two further limbs matter. Section 46A was held to apply only to a s.77A buy-back - its language is taken from that section, it was inserted contemporaneously with it and with the proviso to s.2(22), and its Explanation borrows the same defined term - and in any event s.115-O carries a non obstante clause of the wider kind, overriding all other provisions of the Act, so it would override s.46A; the submission that the non obstante clause reaches only s.8 was rejected. And the contrary characterisation drawn from the Supreme Court's decision in Anarkali Sarabhai was met by holding that decision to have been impliedly rendered per incuriam on the s.2(22)(d) point by the later decision in G. Narasimhan, because it had not considered the scope of that clause - which is the load-bearing move against the capital-gains characterisation. On a dates-and-events analysis of the scheme the Tribunal held the arrangement to be a colourable device with no commercial purpose, an artificial shifting of the shareholding base to reach a treaty, and held the authorities entitled to look through it. It rejected the argument that sanction of the scheme conferred immunity, distinguishing the decisions relied on because there the scheme itself had spelt out the tax implications, whereas the sanction order here states in terms that it is not to be treated as granting immunity from payment of taxes; a scheme binds as a judgment in rem, but nothing bars the Assessing Officer from examining it against the Income-tax Act.
Therefore, once the buyback is not u/s.77A of the Companies Act, 1956, then, it will fall back u/s.391-393 r.w.s.100-104 of the Companies Act, 1956, because, without any reference to sec.100-104 of the Companies Act, 1956, no company can buy back its shares u/s.391-393 alone.
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Handle my notice → Ask a CA on WhatsAppOn these facts, yes. The Chennai Tribunal held the repurchase was a colourable device — in substance a reduction of capital releasing the company's assets to shareholders — taxable as deemed dividend under s.2(22)(d), alternatively s.2(22)(a), with dividend distribution tax under s.115-O payable by the company. The High Court's sanction of the scheme conferred no tax immunity. This was decided by the ITAT (Income Tax Appellate Tribunal, Chennai Bench 'D' — Mahavir Singh, Vice President and Manjunatha G., Accountant Member (order delivered by Manjunatha G., AM); IT Appeal No. 269 (CHNY) of 2022; AY 2017-18) and bears on section 2(22)(d), section 2(22)(a), section 115-O, section 115QA, section 46A, section 10(34) of the Income Tax Act 1961. It is reported as [2023] 154 taxmann.com 309 / 108 ITR(T) 492 (Chennai)(Trib.); (2023) 225 TTJ 873 (uncorroborated); IT Appeal No. 269/CHNY/2022. This favours the revenue and is here because it is what the department cites against scheme-based repurchases. It closes two arguments: that a scheme under ss.391-393 creates a third route outside both the capital-reduction machinery and the s.77A buy-back conditions, and that a sanction order immunises the transaction from tax — the Tribunal held the tax consequences of a scheme are for the tax authorities to determine. Its weight is limited: the merits are under appeal and no appellate decision on them was found. If it applies to you, the first step is this: Establish the date of the repurchase before you use this at all — the company-level regime the Tribunal applied has gone for buy-backs on or after 1 October 2024, when s.115QA was sunset, s.2(22)(f) made the whole consideration dividend in the shareholder's hands with nil cost under s.46A, s.10(34A) was withdrawn and s.194 TDS applied.
In financial year 2016-17 the company purchased 94,00,534 of its own equity shares of Rs. 10 each at Rs. 20,297 per share, aggregating Rs. 19,080.26 crores and representing 54.70 per cent of its outstanding equity, from its shareholders in Mauritius and the United States. The purchase was carried out under a scheme of arrangement and compromise under ss.391-393 of the Companies Act 1956, sanctioned by the Madras High Court on 18 April 2016, and the scheme was not a buy-back under s.77A of that Act - nor could it have been, the purchase exceeding the limit that section allows. After the scheme the Mauritius shareholder's holding rose to 99.87 per cent. Tax of Rs. 8,98,01,63,318 was deducted on the payments to the United States shareholders, and nothing on the payment to the Mauritius shareholder, treaty relief being claimed for it under the India-Mauritius agreement on the footing that the payment was consideration for a transfer of shares giving rise to capital gains in the shareholders' hands. Clause 7 of the scheme showed the money came out of general reserves and the accumulated credit balance in profit and loss. The assessment year was 2017-18. The matter was decided on 2023-09-13 by the ITAT (Income Tax Appellate Tribunal, Chennai Bench 'D' — Mahavir Singh, Vice President and Manjunatha G., Accountant Member (order delivered by Manjunatha G., AM); IT Appeal No. 269 (CHNY) of 2022; AY 2017-18). On those facts the ITAT held as follows. The Tribunal dismissed the company's appeal. The transaction was a colourable device: in substance it was a reduction of capital involving the release of the company's assets to shareholders, and the consideration was deemed dividend under s.2(22)(d), and alternatively under s.2(22)(a), on which dividend distribution tax under s.115-O was payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
The Tribunal held that s.2(22) is an inclusive definition going beyond the conventional meaning of dividend, its object being to stop payments out of accumulated profits being camouflaged through other channels, and that both pre-requisites of s.2(22)(d) were satisfied - a distribution to shareholders on a reduction of capital, the paid-up capital having fallen by 54.70 per cent, and accumulated profits to that extent, clause 7 of the scheme showing the source. It rejected the arguments that 'distribution' imports an absence of quid pro quo and that the reduction must be coterminous with the distribution: on the Supreme Court's construction, distribution means division or payment among several persons and need only be actual rather than notional, and the clause does not distinguish between a reduction that is intended and one that is a consequence of the scheme. If it were not a distribution on a reduction, it would fall within s.2(22)(a) as a distribution of accumulated profits entailing a release of assets. There cannot be a purchase of own shares under ss.391-393 divorced from the rest of the Companies Act: a company must follow either s.391 read with ss.100-104 or the s.77A route, and since s.77A was excluded, what remained was a reduction of capital. The word 'buy-back' appears in the 1956 Act only in s.77A, and the proviso to s.2(22) excludes only a s.77A buy-back from the definition of dividend, so any other form of purchase of own shares falls back into s.2(22). Two further limbs matter. Section 46A was held to apply only to a s.77A buy-back - its language is taken from that section, it was inserted contemporaneously with it and with the proviso to s.2(22), and its Explanation borrows the same defined term - and in any event s.115-O carries a non obstante clause of the wider kind, overriding all other provisions of the Act, so it would override s.46A; the submission that the non obstante clause reaches only s.8 was rejected. And the contrary characterisation drawn from the Supreme Court's decision in Anarkali Sarabhai was met by holding that decision to have been impliedly rendered per incuriam on the s.2(22)(d) point by the later decision in G. Narasimhan, because it had not considered the scope of that clause - which is the load-bearing move against the capital-gains characterisation. On a dates-and-events analysis of the scheme the Tribunal held the arrangement to be a colourable device with no commercial purpose, an artificial shifting of the shareholding base to reach a treaty, and held the authorities entitled to look through it. It rejected the argument that sanction of the scheme conferred immunity, distinguishing the decisions relied on because there the scheme itself had spelt out the tax implications, whereas the sanction order here states in terms that it is not to be treated as granting immunity from payment of taxes; a scheme binds as a judgment in rem, but nothing bars the Assessing Officer from examining it against the Income-tax Act. In the words reproduced by the source cited on this page: "Therefore, once the buyback is not u/s.77A of the Companies Act, 1956, then, it will fall back u/s.391-393 r.w.s.100-104 of the Companies Act, 1956, because, without any reference to sec.100-104 of the Companies Act, 1956, no company can buy back its shares u/s.391-393 alone."
It was decided by the ITAT on 2023-09-13 and is reported as [2023] 154 taxmann.com 309 / 108 ITR(T) 492 (Chennai)(Trib.); (2023) 225 TTJ 873 (uncorroborated); IT Appeal No. 269/CHNY/2022. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 2(22)(d), section 2(22)(a), section 115-O, section 115QA, section 46A, section 10(34), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Tribunal dismissed the company's appeal. The transaction was a colourable device: in substance it was a reduction of capital involving the release of the company's assets to shareholders, and the consideration was deemed dividend under s.2(22)(d), and alternatively under s.2(22)(a), on which dividend distribution tax under s.115-O was payable by the company. The High Court's sanction of the scheme conferred no tax immunity. It arises in Assessment & Scrutiny matters, on section 2(22)(d), section 2(22)(a), section 115-O, section 115QA, section 46A, section 10(34) of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Chennai Bench 'D' — Mahavir Singh, Vice President and Manjunatha G., Accountant Member (order delivered by Manjunatha G., AM); IT Appeal No. 269 (CHNY) of 2022; AY 2017-18. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Identify in writing which statutory route the scheme actually uses; here s.77A was expressly excluded, which is what left a distribution on a reduction of capital as the only substance available. Do not rely on a sanction order as conferring tax protection unless the order itself says so — the Tribunal recorded that this one contained no such protection. Check the movement in paid-up capital and the accumulated profits position, since the 54.70 per cent fall in paid-up capital was treated as showing that a reduction had in fact occurred.
Under appeal, and the appeal has not been decided. Expressly not final. Nothing was found applying, following or affirming this order. The appeal history is now documented from the decisions themselves rather than inferred. The order was carried to the Madras High Court in T.C.(A) No. 487 of 2023, which admitted seven substantial questions of law and passed an interim order on 21 December 2023 - Cognizant Technology Solutions India (P.) Ltd. v. ACIT [2024] 158 taxmann.com 428 / 464 ITR 183 (Mad.) - recording a demand of about Rs. 3,301 crores of dividend distribution tax and a total liability with interest and penalty of Rs. 9,403,09,59,478, and requiring Rs. 1,500 crores in cash together with property security for the balance. That order was modified by the Supreme Court on 8 January 2024 in SLP (C) No. 206 of 2024 - [2024] 158 taxmann.com 429 / 297 Taxman 137 / 464 ITR 190 (SC) - which permitted the Union to encash Rs. 2,956 crores, being Rs. 1,500 crores in cash and Rs. 1,456 crores of fixed deposit receipts, recorded the law officer's undertaking to refund with interest within four weeks if the appeals succeed, dispensed with security for penalty, and requested the High Court to dispose of the appeal preferably within six weeks. No decision of the Madras High Court on the merits of that appeal could be found, so the substantive appeal remains undecided so far as the record shows. Neither interim order endorses any part of the Tribunal's reasoning. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order was read in full - 52 numbered paragraphs - and the facts, the reasoning and the quoted sentence now come from it; the Bench and the appeal number, recorded here as unknown, are established. On the Supreme Court's order of 8 January 2024, two refinements to what this entry said before: the Court requested rather than directed the High Court to dispose of the appeal, and it recorded an express undertaking that the sum encashed would be refunded with interest if the appeals succeed. It remains correct that the order approves nothing in the Tribunal's reasoning. The account given elsewhere in this entry of the buy-back regime introduced by the Finance (No. 2) Act 2024 - s.2(22)(f), the sunset of s.115QA, the withdrawal of s.10(34A) and deduction of tax under s.194 - was not verified in this pass either, and should still be checked against the Act before it is relied on. The TTJ reference carried in the reported field could not be corroborated. Whether the Madras High Court has decided the appeal on the merits could not be established: no decision on the merits of T.C.(A) No. 487 of 2023 was found, notwithstanding the Supreme Court's request of 8 January 2024 that it be disposed of within six weeks. The order does not decide how the same transaction would be treated under the regime introduced for buy-backs from 1 October 2024, and this entry's account of that regime is unverified. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tribunal dismissed the company's appeal. The transaction was a colourable device: in substance it was a reduction of capital involving the release of the company's assets to shareholders, and the consideration was deemed dividend under s.2(22)(d), and alternatively under s.2(22)(a), on which dividend distribution tax under s.115-O was payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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