Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal holds that capital gains arising under section 46A of the Act, on buyback of shares, not
exempt under section 47(iv) of the Act
January 15, 2020
In brief
The Bangalore bench of the Income-tax Appellate Tribunal (Tribunal)1, in the case of the taxpayer, analysed the taxability of buyback of shares in the hands of shareholders. The Tribunal held that exemption under section 47(iv) of the Income-tax Act, 1961 (Act) is not available in cases of buyback of shares that are taxable under section 46A of the Act. Further, even otherwise, exemption under section 47(iv) of the Act is not available where one company or its nominees do not hold the entire shareholding.
In detail
Facts
• The taxpayer is a domestic company in which the foreign parent company holds 99.99% shares and the remaining o.o1% shares are held by another group company.
• The taxpayer purchased its own shares from the parent company under a buyback scheme and claimed it to be exempt under section 47(iv) of the Act.
• During assessment
proceedings, the Tax Officer (TO) held that exemption under section 47(iv) of the Act is not available as parent company is holding
1 ITA Nos. 1783 and 1784/Bang/2018
only 99.99% shares in the taxpayer.
• The First Appellate
Authority affirmed the TO’s order and also held that section 47(iv) of the Act is applicable in the context of prescribed modes of transfer specified in section 2(47) of the Act and the transaction involving buyback of shares being distinct from such prescribed modes, is not covered under section 47(iv) of the Act.
Issue before the Tribunal
• Whether exemption under section 47(iv) of the Act is av ailable to gain arising on buyback of shares that is
taxable under section 46A of the Act?
• Whether section 47(iv) of the Act is applicable where the parent company or its nominees do not hold the entire shareholding?
Taxpayer’s contentions
• As per the provisions of the Companies Act, 1956, a minimum of two
shareholders are required for the incorporation of a private limited company. In the taxpayer’s case, 99.99%
of the shares was held by the parent company and the balance was held by a group company. Consequently, for all practical purposes, the parent company should be
Tax Insights
2 pwc
considered to hold whole of the share capital.
• If, for applicability of section 47(iv) of the Act, the v iew that the entire share capital should be held by the parent company in its own name, is taken, practically, then there will be no situation in which section 47(iv) of the Act can be applied, and therefore this cannot be a correct view.
• Further, section 45 of the Act and not section 46A of the Act, is a charging section for capital gain and section 47 of the Act provides exemption from chargeability of capital gain.
Therefore, the transaction of buyback of shares should not be taxable.
Revenue’s contentions
• Section 47(iv) of the Act is not applicable, as the parent company is holding 99.99% of the share capital of its
subsidiary company and the remaining shares are held by the group company.
• Section 47 of the Act is limited in its application only to section 45 of the Act, which is a general provision for the taxation of capital gain arising on transfer of capital asset. It does not apply to gain arising on buyback of shares to which provisions of section 46A of the Act applies.
Tribunal’s ruling
• Tribunal observed that to avail the exemption under section 47(iv) of the Act, one of the prescribed conditions is that shareholding in the Indian company should be entirely held by one company or its nominees.
• In the facts of the case, the Tribunal observed that group company was not holding the shares in the capacity of nominee of the parent company. Therefore, the exemption under section 47(iv) of the Act is not av ailable.
• The Tribunal observed that
section 45 of the Act deals with the taxability of capital gain on transfer of capital asset, and section 47 of the Act provides exemption to certain category of transfers.
• Section 46A of the Act, applicable in case of buyback of shares does not require transfer of any capital asset.
• Therefore, buyback of shares taxable under section 46A of the Act is not entitled to exemption under section 47(iv) of the Act.
The takeaways
The Tribunal stressed that to be covered within the purview of section 47(iv) of the Act, strict compliance of the conditions prescribed in that section is required.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
For priv ate circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional adv ice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2020 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India hav ing Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers I nternational Limited (PwCIL), each member firm of which is a separate legal entity.
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in assurance, advisory and tax services.
Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Bhopal, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai, Pune and Raipur. For more information about PwC India’s service offerings, visit www.pwc.in
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
© 2020 PwC. All rights reserved
Follow us on:
Our Offices
Ahmedabad Bengaluru Chennai
1701, 17th Floor, Shapath V, Opp. Karnavati Club, S G Highway,
Ahmedabad – 380051 Gujarat
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor, Bengaluru – 560 008 Karnataka
+91-80 4079 7000
8th Floor
Prestige Palladium Bayan 129-140 Greams Road Chennai – 600 006 Tamil Nadu +91 44 4228 5000
Hyderabad Kolkata Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hy derabad – 500034
Telangana
+91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing Sector - V, Salt Lake Kolkata – 700 091 West Bengal
+91-033 2357 9101/
4400 1111
PwC House Plot No. 18A,
Guru Nanak Road(Station Road), Bandra (West), Mumbai – 400 050 Maharashtra
+91-22 6689 1000
Gurgaon Pune For more information
Building No. 10, Tower - C 17th & 18th Floor,
DLF Cy ber City, Gurgaon – 122002 Hary ana
+91-124 330 6000
7 th Floor, Tower A - Wing 1, Business Bay, Airport Road, Y erwada, Pune – 411 006 Maharashtra
+91-20 4100 4444
Contact us at
