Buy-back of shares before 1.6.2013 not taxable as dividend distribution tax; fair value issue remitted for review.

Buy-back of shares made before 1.6.2013 could not be re-characterised as dividend distribution, because payment for purchase of a company's own shares under section 77A of the Companies Act, 1956 was excluded from dividend under section 2(22)(iv) of the Income-tax Act, and section 115QA applied only from 1.6.2013. The stated tax clarification also treated such pre-1.6.2013 buy-back receipts as capital gains in the hands of the recipient, not dividend. Accordingly, dividend distribution tax could not be levied merely because the shareholder was treaty-protected. The question whether the buy-back price exceeded fair market value was left open and remitted for examination.

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Issues: Whether buy-back of shares made prior to 1.6.2013 could be treated as dividend so as to attract dividend distribution tax, and whether the difference between the buy-back price and the fair market value required separate examination.

Analysis: A payment made by a company on purchase of its own shares in accordance with section 77A of the Companies Act, 1956 was excluded from the definition of dividend under section 2(22)(iv) of the Income-tax Act, 1961. Section 115QA, which fastened additional tax on distributed income from buy-back, came into force only from 1.6.2013 and was therefore inapplicable to the relevant year. The clarification issued by the tax administration also recognised that buy-back consideration received during the earlier period was to be taxed as capital gains in the hands of the recipient and not as dividend. On that basis, the transaction of buy-back prior to 1.6.2013 could not, in principle, be re-characterised as dividend distribution or subjected to dividend distribution tax merely because the recipient shareholder was non-taxable in India under the treaty framework.

Conclusion: The buy-back transaction, as such, was not liable to be taxed as dividend distribution tax for the period prior to 1.6.2013. The issue of whether the buy-back price was artificially inflated beyond fair market value was not decided finally and was sent back for examination.

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