ACIT-1(2)(1, MUMBAI V. MERITON INFOTECH PVT LTD., MUMBAI

ITA 741/MUM/2023

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 4309 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 30-11-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 09-03-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Set aside
• Section: 68; 263; 143(3); 142(1); 143(2); 43; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH KARHAIL, JM ITA No.741/Mum/2023 (Assessment Year: 2017-18) ACIT -1(2 ) (1) Room No. 535, Aa ykar Bhavan, M.K. Road, Mum ba i-400 020 Vs. Meriton Infotech Pvt. Ltd. G-4, Khetan Bhavan, EK Omkar Premises Co- ops, 198, Jamshedji Tata Road, Churchgate, Mumbai-400 020 (Appellant) (Respondent) PAN No. AAECM4348N Assessee by : Shri Vijay Mehta, AR Revenue by : Shri Manoj Kumar Sinha, DR Date of hearing: 01.12.2023 Date of pronouncement : 12.01.2024 O R D E R PER PRASHANT MAHARISHI, AM: 01. ITA No.741/Mum/2023 is filed by the Assistant Commissioner of Income Tax (ld AO ) against the appellate order passed by the National Faceless Appeal Centre, Delhi [the learned CIT (A)] for A.Y. 2017-18 on 11 th January, 2023, wherein the appeal filed by the assessee against the assessment order dated 28 th December, 2019, passed under Section 143(3) of the Income-tax Act, 1961 (the Act) by the Deputy Commissioner of Income Tax, Circle 1(2)(2), Mumbai, was partly allowed. Page | 2 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 02. The learned Assessing Officer is aggrieved by that appellate order and is in appeal raising following grounds:- “1. "Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the levying tax of Rs. 19,92,58,167 under section 115QA of the Act, on the capital reduction transaction undertaken by the company during the year- made by the A.O. without appreciating the fact that the share capital reduction by payments to the shareholders is buy-back of shares and provisions of section 115QA of the Act is attracted." 2. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the alleged reduction was of 86,36,363 shares with Face Value of Rs. 10/-, which amounts to Rs. 8,63,63,630/- of the capital & the amount paid to reduce this capital was of Rs. 110/- per share amounting to Rs.94,99,99,930/- which clearly pin points that the reduction has been made to profit the shareholder." 3. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that if a scheme is allowed as per the directions of the Hon. High Court which was adjudicated on the basis of petition moved by the assessee, it does not imply that tax u/s. 115QA would not be payable." 4. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate a Page | 3 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 relevant point submitted by the assessee vide para no 4.19 of the appellate order that the shareholder of the Appellant is an overseas Fund entity and an Investor Advisors entity in India and the investor entity has been given an exit route by such reduction of capital." 5. "Whether on the facts and circumstances of the case the Ld.CIT(A) was justified in deleting tax and interest levied under section 115QB of the Act amounting to Rs.8,56,81,012/- when the A.O. has rightly invoked the provisions of section 115QA of the Act and determined the tax liability of Rs. 28,49,39,179/-."6. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that reduction in share capital is exigible to tax u/s. 115QA of the Act. 7. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restore 8. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.” 03. The brief fact shows that assessee is a private limited company engaged in the business of operation and maintenance of information Technology Park. For A.Y. 2017-18, it filed return of income on 31 st October, 2017 declaring income of ₹3,71,14,350/-. The return of income was picked up for scrutiny by issuing notice under Section 143(2) of the Income- Page | 4 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 tax Act, 1961 (the Act) on 11 th August, 2018 and subsequently, issued notices under Section 142(1) of the Act. The assessment order was passed under Section 143(3) of the Act on 28 th December, 2019, at a total income of ₹12,92,88,930/-. 04. In the assessment proceedings, the dispute was with respect to reduction of equity share capital of Rs 94,99,99,930/- and its taxability u/s 115 QA and also interest u/s 115QB of the Act amounting to Rs. 28,49,39,179/- 05. Brief facts pertaining to the transactions shows that i. as per the order of the Hon'ble Bombay High Court dated 16 th April, 2016, in company scheme petition no.160 of 2016 filed for capital reduction u/s 101-104 of The Companies Act, 1956 on 4/02/2016, assessee was permitted to reduce its share capital by cancelling up to a maximum of 91 lacs equity shares or 10% aggregating to amount not exceeding ₹100 crores. ii. Pursuant to the scheme the assessee reduced its 1,44,38,037 equity shares to 58,01,674 equity share by cancelling 86,36,363 equity shares and returned capital to the equity shareholders at ₹110/- per equity share aggregating to ₹94,99,99,930/-. Page | 5 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 iii. Pursuant to the scheme two shareholders of the company namely New Vernon Infratech , Mauritius { Foreign shareholder } and Kotak Investments Advisors Limited { Indian Shareholder} for reduction of their shares by 6917727 and 1718636 equity shares respectively. iv. The above sum of premium of Rs 100/- per share for 8636363 equity shares amounting to Rs. 86,36,44,409/- was adjusted against security premium account of Rs 369682071/- and revaluation reserve of Rs. 493962338/- . v. There was no surplus in the profit and loss account in the company. 06. The learned Assessing Officer on the above transaction issued a notice on 21 st December, 2019, holding that the payment of ₹94,99,99,930/- attracts the provision of Section 115QA of the Income-tax Act, 1961 (the Act) and asked to furnish certain other details. 07. The assessee responded stating that i. capital reduction is by way of order of the Hon'ble Bombay High Court. ii. Such capital reduction has been completed prior to 1 st June, 2016. Page | 6 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 iii. Up to 31 st May, 2016, the provision of Section 115QA of the Act would apply only where a buy back is undertaken in accordance with provision of Section 77A of the Companies Act, 1956. iv. The present capital reduction is in terms of scheme approved by Hon'ble High Court and in accordance with Section 100 to 104 of Companies Act, 1956 and v. Therefore, the provision of Section 115QA does not apply. 08. The learned Assessing Officer rejected the contention of the assessee that provision of Section 115QA would apply only in case where the buy back is in accordance with the Provisions of Section 77A of the Companies Act, 1956. He referred to Provisions of Section 77A of the Companies Act and Section 100 to 104 of the Companies Act, 1956. According to him, the amendment made with effect from 1 st June, 2016, by the Finance Act, 2016 to explanation 1 to Section 115QA by removing the reference to Section 77A of the Companies Act, 1956 is to cover all the relevant provisions of law of the Companies Act, 2013. He further held that Section 115QA is an anti tax avoidance provision as per explanatory memorandum to Finance Act, 2013. Based on this, he held that normally listed company resort to buy back of its own shares when the market price is low as compared to its intrinsic value with a view to Page | 7 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 increase the value of shares of remaining shareholders. However, in the present case, the assessee company has brought back the shares at a huge premium under the guise of share capital reduction with ostensible intention to make unjust enrichment of shareholder and also to avoid the payment to dividend distribution tax. Therefore, Provision of Section 115QA and Rule 40BB comes into play. He found that the assessee company received ₹10 for issue of ₹86,36,363/- equity shares and same were brought back at ₹110 per share. Therefore, ₹100 per share on 86,36,363 equity shares amounting to ₹86,36,36,300/- is distributed income under explanation (ii) to Section 115QA(1) of the Act which would attract tax at the rate of 20% plus applicable surcharge and cess amounting to ₹19,92,58,167/-. He further found that on such buy back tax, the assessee is also required to pay interest under Section 115QB at the rate of 1% per month after 14 days from the date of consideration paid. Such consideration is paid on 31 st May, 2016, and therefore, upto 31 st December, 2019, i.e. for 43 months the interest of ₹8,56,81,011/- is to be paid. Accordingly, he treated the assessee as assessee in default under Section 115QC of the Act for ₹28,49,39,170/-. The assessment order was passed on 28 th December, 2019. 09. The assessee aggrieved with the order preferred the appeal before the learned CIT (A), who decided the Page | 8 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 issue as per paragraph no.6.2 of his order following the decision of the co-ordinate Bench in ITA No.3726/Mum/2015 in case of Goldman Sachs (India) Securities Pvt. Ltd. Vs. ITO dated 12 th February, 2016, wherein it was held that the conditions provided in section 77A of the Act are applicable only to buy back of shares and further the conditions applicable to Section 100 to 104 and Section 391 of the Companies Act, cannot be imported and made applicable to buy back under Section 77A of the Act. Accordingly, he held that the learned Assessing Officer was not justified in invoking the Provisions of Section 115QA/ QB to the payment made to the shareholders as a result of capital reduction scheme and therefore, he cancelled the tax liability of ₹28,49,39,179/-. The learned Assessing Officer is aggrieved with the same and is in appeal. 010. The learned Departmental Representative stated that i. Section 115QA provides for the levy of additional income tax at the rate of 20% of the distributed income on account of buy back of unlisted shares be a company. ii. It was submitted that the amendment with effect from 1 st June, 2016, is only to provide clarity. It was stated that the fact of buy back being in the nature of distribution of income is relevant rather than particular provisions of the Page | 9 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 law relating to the companies under which distribution undertook. Therefore, buy back taxation is not necessarily restricted to Section 77A of the Companies Act, but it applies when the companies distributed its income in response to shares being brought back under any other provision also. iii. relied on the decision of the Hon'ble Supreme Court in case of Goldman Coins Health Food Pvt. Ltd. specifically referring to paragraph no.15 stating that the learned CIT (A) has incorrect in deleting the tax demand u/s 115QA by merely showing that the buy back is not under Section 77A of the Act, it is under Section 100 to 104 of the Companies Act. iv. Such distinction is not in accordance with the law, because the assessee has reduced its share capital by cancelling its shares and paying consideration to the shareholders by distributing its income. v. Once the primary intention is ascertained and the object and the purposes of the legislators is known it is the duty of the court to give the statute to a purposefully or functional interpretation. vi. The learned Departmental Representative relied on the decision of the Hon'ble Supreme Page | 10 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 Court in case of ITO Vs. Vikram Bhatia dated 6 th April, 2023 (2023) live law (SC) 274. vii. Thus, the learned Departmental Representative vehemently supported the order of the learned Assessing Officer. 011. The learned Authorized Representative i. referred to provisions of section 77A of the Companies Act, 1956, pertaining to power of company to purchase its own securities and stated that such provisions are applicable when the shares are purchased by the company. ii. He further referred to the Provisions of Section 100-104 of the Companies Act with respect to reduction of share capital, he referred to the provisions in detail to show that the provisions of Section 77A of the Act as well as to section 100 to 104 of the Companies Act by a tabular composition of provisions governing buyback of shares and reduction of capital. It was the claim that in the Companies Act, 1956, the provisions of buy back of shares are cover under Section 77A of the Act and provision of reduction of capital are coverd under Section 100 to 104 read with section 391 of the Companies Act. The Companies Act, 1956 has now been replaced by Companies Act, 2013, wherein Section 68 of the Act with effect from Page | 11 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 1 st April, 2014 covers the provisions of buy back of shares and Section 66 with effect from 15 th December, 2016, covers the provision by reduction of capital. iii. He further referred to the provisions of Section 115QA of the Act introduced with effect from 1 st June, 2013, iv. He submits that earlier even in the buyback of shares as well as in the return of capital there was no incidence of taxation in the hands of the company. Prior to that date, the buyback was taxable in the hands of the shareholder as capital gain under Section 46 A of the Act. The reduction of share capital was taxable in the hands of the shareholders as deemed dividend under Section 2(22) of the Act to the extent of accumulated profit and any balance amount was chargeable to tax in the hands of the share holders on reduction of share capital as capital gain. v. He further stated that after the introduction of Section 115QA of the Act with effect from 1 st June, 2013, the buyback tax has to be paid by the Companies Act 115QA of the Act and in the hands of the share holder same is exempt under Section 10(34A) of the Act. Page | 12 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 vi. He referred to the definition of „Buyback” where in up to 1/6/2016 only provision of section 77A of the companies Act 1956 was covered. After 1/6/2016, reference to section 77A of the act is removed and it now includes purchase by company of its own shares under law relating to companies. vii. Thus, provisions of Section 115QA of the Act inserted with effect from 1 st June, 2013, has not made any difference in the taxation of reduction of capital in the hands of the shareholders. viii. Therefore till 1/6/2016 , in case of reduction of share capital, there is no tax incidence in the hands of the company but it shall be taxable in the hands of the share holder under Section 2(22)(d)of the Act to the extent of accumulated profit as deemed dividend and balance sum is taxable as capital gain. ix. He further referred to the decision of the co- ordinate Bench in case of Goldman Sachs India Pvt. Ltd. vs. ITO 70 taxmann.com 46, holding that it was rendered with respect to A.Y. 2011- 12 as correctly been applied by the learned CIT (A). x. The learned Authorized Representative further referred to the decision of the co-ordinate Page | 13 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 Bench in ITA No.144/Kol/2021 for A.Y. 2015-16 in CM Rajgaria Pvt. Ltd. dated 22 nd November, 2022, wherein in paragraph no. 5.2 it has been held that prior to 1 st June, 2016, the buyback means purchase of shares by the Companies Under Section 77 of the Companies Act, only. It was further stated that the above decision of the co-ordinate Bench was challenged before the Hon'ble Kolkata High Court wherein vide order dated 10 th May, 2023, same was upheld. xi. He therefore, submitted that buyback of shares if governed by the Provisions of Section 77A of the Act prior to amendment [up to 1/6/2016] provisions of Section 115QA of the Act can be applied. After 1/6/2016, any form of purchase by a company of its shares is covered. xii. He submitted and referred to the page no 18 of the ld CIT (A)‟s order to show that capital reduction in this case has been completed on 31/05/2016, so it is prior to 1/6/2016. Hence, amended provisions do not apply to capital reduction made by assessee. xiii. He further referred to the company‟s scheme petition to show that it was not under Section 77A of the Act but was with specific reference to the capital reduction only. He therefore submitted that learned CIT (A) is correct in Page | 14 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 holding that on the capital reduction no tax under Section 115QA of the Act is payable. 012. On specific query that whether the amount of capital gain tax has been paid by the shareholders or not, the assessee submitted a copy of no.15CB, wherein remittance was made to Mauritius shareholding stating that such capital gain on capital reduction is not chargeable to tax in India according to Article 13 of India Mauritius DTAA. He submitted that 15CA and 15CB submitted on 30 th May, 2016, whereas the actual amount of remittance of ₹113,47,80,000/- was made. He submitted that there is no query on this issue by the learned Assessing Officer. With respect to Kotak advisor as certificate was submitted stating PAN number that they have offered the gain under the head capital gain in their return of income. Thus, in nutshell, the claim of Assessee is that capital gain arising to the Mauritius shareholder is not subject to tax under Section 115QA of the Act. Further, such income is also not chargeable to tax in India in the hands of such shareholder in terms of Article 13 of the Double Tax Avoidance Agreement. 013. We have carefully considered the rival contention and perused the orders of the lower authorities. The only dispute in this appeal is with respect to the chargeability of taxation under section 115QA of the income tax act on capital reduction carried on by the assessee under the provisions of section 100 – 104 Page | 15 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 of the companies act 1956 on or before 31 st of May 2016. 014. According to the provisions of section 115QA of the income tax act if a domestic company distributes any amount on buyback of shares of unlisted shares from its shareholders, the domestic company is required to pay tax, which is an additional income tax at the rate of 20% on the distributed income. 015. What is „buyback” is defined in explanation (i) of the section to show that buyback means purchase by a company of its own shares in accordance with the provisions of section 77A of the companies act 1956. This was the definition of buyback from 1 June 2013 till 31 May 2016. 016. With effect from 1 June 2016 by the finance act 2016, the definition of buyback under explanation (i) to that section reads that “buyback” 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. 017. Thus, it is clear that prior to 31 st of May 2016 if the company purchases its own shares in accordance with the provisions of section 77A of the companies act, such domestic companies are required to pay tax under section 115QA of the act. After 1/6/2016 if the company purchases its own shares in accordance with any of the provisions of any law relating to the Page | 16 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 companies, the buyback tax liability will arise in the hence of the company. Thus, it is clear that prior to 1/6/2016 buyback under section 77A of the companies act is covered by the provisions of taxes in the hence of the company under section 115QA of the act. 018. In the present case, the assessee has not carried out the buyback under section 77A of the companies act 1956 but has carried out capital reduction under the provisions of section 100 – 104 of the companies act. 019. Capital reduction of the assessee has been completed on 31 st of May 2016 undisputedly. i. It started on 27 th of January 2016 wherein the assessee sent request to the shareholders requesting for a no objection certificate for reduction of equity share capital of maximum 91 lakh shares. ii. Further, on 29 January 2016 the shareholders have given their consent to convene the extraordinary general meeting for reduction of equity share capital by maximum of 91 lakh shares. iii. On 30 January 2016, board resolution was passed of proving the capital reduction under section 100 – 104 of the companies act, which was approved by the Board of Directors. Page | 17 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 iv. On 30 January 2016, the notice of extraordinary general meeting was issued to the shareholders to convene the meeting on second of February 2016. v. On second of February 2016, the EGM was convened and a spatial resolution passed where shareholders approved the reduction of maximum of 91 lakh shares. vi. On 4 February 2016 a petition was filed before the honourable Bombay High Court for reduction of capital under section 100-104 of the companies act and vii. on 16 April 2016 the honourable High Court has passed its order approving the capital reduction scheme. viii. On 2 May 2016 the shareholders granted their consent to reduce the share capital for which may 2016 board meeting was convened approving the capital reduction of 86,36,363 shares. ix. On 19 May 2016 the registrar of companies registered the scheme of reduction of share capital and x. on 30 th of May 2016 bank was requested to make remittance to the shareholders on Page | 18 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 account of such capital reduction which was made on 31 st of May 2016. Therefore, all the conditions of reduction of share capital were concluded on 31 st of May 2016. This event schedule is not in dispute between the parties. 020. Therefore, apparently the capital reduction was completed by the assessee on 31 st of May 2016 under the provisions of section 100 – 104 of the companies act. The honourable Bombay High Court in case of capegemeini India private limited in company scheme petition number 434 of 2014 dated 28 April 2015 holding that it is open to a company to buy back its own shares by following the procedure prescribed under section 77A/section 68 or by following the procedure prescribed under section 391 read with section 100-104 of the companies act 1956. 021. The honourable Calcutta High Court in case of Principal Commissioner of Income-tax V C. M. Rajgarhia (P.) Ltd.* 2023] 151 taxmann.com 525 (Calcutta)/[2023] 294 Taxman 288 had held that “4. The issue was pertaining to levy of tax under section 115QA, which was examined by the assessing officer in the assessment proceedings. The Tribunal noted that assessment order having been passed on 28- 12-2017, PCIT could have exercised its Page | 19 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 jurisdiction under section 263 not later than 31- 3-2019. However, the PCIT exercised its jurisdiction on 10-6-2020, which is barred by limitation in respect of the assessment order, which was passed on 28-12-2017. That apart, the Tribunal noted that the assessee in the original assessment proceedings demonstrated that the provision of section 115QA was not applicable to their case as the explanation to section 115QA (1) as applicable prior to 1-6- 2016. Buy-back means, the purchase by the companies of its own shares in accordance with the provisions of the section 77 of the Companies Act. Thus, Tribunal noted that as per the said provision in force during the relevant assessment year, the buy-back pursuant to order of Company Law Board will appear under section 402 of the Companies Act was not included. Therefore, the Tribunal on fact held that the PCIT was not justified in invoking the provisions of section 263 of the Act. Thus, we find that the Tribunal having examined the jurisdictional issue as well as on facts allowed the appeal filed by the assessee.” 022. In view of above facts, we hold that in the present case such capital reduction is not covered in the definition of buyback as per explanation (i) to section 115QA of the income tax act and tax on distributed Page | 20 ITA No.741/Mum/2023 Meriton Infotech Pvt. Ltd; A.Y. 17-18 income to the shareholders is not payable by the assessee company. Hence, we uphold the order of the learned CIT – A. Accordingly ground number 1 – 6 of the appeal of the learned assessing officer are dismissed. 023. In the result, appeal of the AO is dismissed. Order pronounced in the open court on 12.01. 2024. Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 12.01. 2024 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai