Draft Buy-Back Rules under section 115QA
Critical Analysis
1. Under
Section 115QA ‘distributed Income” by company on buy- back of shares (not being
listed shares) from shareholders is subject to tax 20% in the hands of Company
2. “Distributed
income” means consideration paid by company on buy-back of shares as reduced by
the amount, which was received by the company for issue of shares, determined in the
manner as may be prescribed.
3. CBDT
has come with draft rules to determine the amount
received by company for issue of shares, in various scenarios, in the
context of section 115QA, as under;-
a) Subscription of Shares- Paid up amount actually received including
share premium shall be amount received by company for issue of shares.
b) Past Capital Reduction – Where
any sum has been returned by company in respect of shares on capital reduction,
which is presently subject to buy-back, the amount so returned shall be reduced
from amount received in respect of those shares and reduced amount shall be
considered as amount received by company for issue of shares.
c) Amalgamation – Upon shares being
issued on amalgamation in lieu of shares in amalgamating company, the amount
received by amalgamating company in respect of those shares, shall be amount
received in respect of shares issued by amalgamated company.
d) Demerger –
i)
Resulting Company - For shares being issued by Resulting
company, the amount received by resulting company on issue of shares shall be :
Amount Received by Demerged company on issue of shares x Net book value of
assets transferred to Resulting Company/Net worth of Demerged Company.
ii)
Demerged Company – The amount received by
demerged company in respect of original shares, shall be reduced by the amount
determined at (i) above
e) Bonus Shares – NIL Amount.
f) Convertible Debenture/Bonds –
The amount received in respect of Debenture/bonds so converted, shall be considered
as amount received by company for issue of shares
g) Residual Clause – In any other
case, the face value of shares shall be considered as amount received by company for issue of shares
Critical
Analysis
1.
Consolidate
Approach absent
a) The
draft rules prescribes piecemeal scenarios to determine the amount received in
respect of shares issued by company, but
determination of amount received in respect of shares issued, where existing
Share capital is comprise of Subscription shares, bonus shares and shares
issued on amalgamation, is lacking.
b) Consider
the following case
i.
Status of Share Capital of Company
|
S.No
|
Particulars
|
Nos
|
Rs
|
||
|
Shares
|
Face Value
|
Share Premium
|
Amount Received as per Draft rules
|
||
|
1
|
Shares Subscribed by Shareholders
|
15,000
|
150,000
|
150,000
|
300,000
|
|
2
|
Bonus Shares
|
15,000
|
150,000
|
-
|
-
|
|
3
|
Shares Issued on Amalgamation
|
5,000
|
50,000
|
-
|
10,000
|
|
|
TOTAL
|
35,000
|
350,000
|
150,000
|
310,000
|
ii.
Suppose the company decides to buy-back 10% of
its outstanding shares i.e 3500 shares.
iii.
The point for consideration is how to determine
the amount received in respect of 3500 shares issued. The draft rules are
silent on this aspect.
iv.
In this case, whether the residual clause will
be applicable, whereby face value of 3500 shares i.e Rs. 35,000 be taken as amount received
in respect of such shares?
v.
Clarity on this aspect is required.
2.
Rule
2 – Consistency missing
a) The
Rule 2 read as under:-
“Where the company had at any time, prior to
the buy-back of the share, returned any sum out of the amount received in
respect of such share, determined in accordance with this rule, the
amount as reduced by the sum so returned shall be the amount received by the
company for issue of the share.”
b) The
strike out sentence is missing in the rule, which need to be there, explained
as under:-
I.
The Rule provides for deduction of amount repaid
on capital reduction from amount received earlier in respect of shares. But the question is how to determine the
amount received in respect of those shares originally i.e. will it be in accordance
with normal parlance or will it be in accordance with methodology provided in
the rules.
II.
Consider the case, where company has earlier
issued shares on amalgamation and carried out capital reduction:-
|
Particulars
|
Shares (Nos)
|
Face Value
|
Share Premium
|
TOTAL
|
Amount Received as per rule
|
|
Shares Issued on Amalgamation
|
10,000
|
100,000
|
200,000
|
300,000
|
60,000
|
|
Capital Reduction
|
1,000
|
30,000
|
30,000
|
||
|
Balance
|
9,000
|
270,000
|
30,000
|
III.
The company has received assets worth Rs.
3,00,000 on amalgamation and issued shares of similar value. So company has
received Rs. 3,00,000 in respect of 10,000 shares but the amount received by
amalgamating company on shares, in lieu of which amalgamated company has issued
10,000 shares, was Rs. 60,000. (Assumed).
IV.
To maintain consistency with Rule 3 & Rule 4,
for the purpose of determining the amount received in respect of 9,000 shares,
the value should be taken at Rs. 30,000 instead of 2,70,000
c) The
Rule 3, which provides for determination of amount received on shares issued by
amalgamated company, explicitly states that amount received by amalgamating company
in respect of shares should be determined in accordance with this rule, which
is reproduced as under:-
“Where the share has been issued by a
company being an amalgamated company, under a scheme of amalgamation, in lieu
of the share or shares of an amalgamating company, then, the amount received by
the amalgamating company in respect of such share or shares determined in accordance with this rule,
shall be deemed to be the amount received by the amalgamated company in respect
of the share so issued by it.”
d) Thus
to maintain parity and uniformity, it is suggested that strike out words be
inserted in Rule 2
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