Practical Problems – Section 115QA
Section 115QA as inserted by Finance Act, 2013 provides
as under;-
1.
Amount of distributed income
2.
By the domestic company
3.
On buy back of shares (not being shares listed
on recognised stock exchange) from shareholder
4.
Shall be charge to tax and company shall pay
additional income tax @ 20% of distributed income. (Surcharge @ 10% and
Education cess of 3% extra)
The distributed
income has been defined to mean 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 shares
Issues involved
1. Share issued at various point of time at
different prices- How to determine consideration received.
ABC Ltd issued equity shares as under:-
a)
On 1/4/2010, it issued 1,00,000 shares of Rs. 10
each at face value to X
b)
On 1/4/2011, it issued 1,00,000 share of Rs 10
each at premium of Rs. 10 to Y
c)
On 1/4/2012, it issued 1,00,000 shares of Rs. 10
each at premium of Rs. 20 to Z
Company agreed to buy-back
75,000 shares at Rs. 50/share
·
If all the shareholders participate in buy-back in equal proportion
·
If all the share participate in buy-back in
unequal proportion
·
If only one of the shareholder participate in
buy-back
·
If all the original share holder sold their
shares to other persons, and those other persons participate in buy-back in
unequal proportion.
Issue: How to determine the
consideration received for 75,000 shares. Should the company followed FIFO
method or average method to determine the consideration received or should
consideration be shareholder specific.
2. Issue of Shares for consideration other
than cash
Distributed income is defined
excess of consideration paid by company on buy-back of shares over amount which was received by company.
On issue of shares for consideration
other than cash, no amount is received by company, only assets are received.
Will in the absence of computation mechanism, charging provision prevail
of section 115QA prevail.
3. Implications, where distribution of
reserves in past was treated as deemed dividend
Considered following position
of Balance sheet at particular point of time:-
Share capital (1,00,000 shares
of Rs. 10 each) -
Rs.10,00,000
Securities Premium -
Rs. 5,00,000
Profit & Loss Account -
Rs. 5,00,000
In the past company has given
loans to its shareholders to the extent of Rs. 5,00,000 which was treated as
deemed dividend u/s 2(22)(e) in assessments.
Technically company has
exhausted its reserves in distribution of dividend.
Now Company buy-back 25,000
shares at Rs. 20. The issue price was Rs. 15/share.
Will in absence of balance in Profit & loss account, since same is
treated at deemed dividend, the question of distributed income will arise?
Other Consequences:-
1.
Section 10(34A) inserted by Finance Act, 2013,
provides for exemption of income as under:-
a)
Any income arising to assessee, being a
shareholder,
b)
On account of buy-back of shares by the company
as referred to in section 115QA
Section 10(34A) exempt any income.
However it is essential to
determine the nature of income to as to put then in one of Five categories of
Income.
The transaction involved is
extinguishment of shares by company on buy back, as such the transaction
squarely falls under the definition of transfer.
So income arising to
shareholder on buy-back will be either Capital Gain or Business Profit
depending whether shares are treated as Capital Assets or Stock in Trade by
Shareholder assessee.
As
result, necessary corollary follows from that loss, if any, arising to
Shareholder under the head Capital gain or Profit & Gains of business or
profession, upon buy-back, too will not be available for set-off.
