Section 115QA- Practical Problems

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.