Friday, March 4, 2016

Buy-back of shares under scheme of arrangement can't be said to be a colourable device to evade tax: HC

In law, petitioner is entitled to buy back its own shares by means of a scheme under section 391 read with sections 100 – 104 of the Companies Act, 1956 [corresponding to Sections 230 to 232 of Companies Act, 2013], scheme cannot be said to be a colourable device to evade income tax, it is a legally permissible procedure which petitioner is entitled to follow to buy back its shares

Facts:

a) The Petitioner filed plea seeking sanction of the Scheme of Arrangement with its Equity Shareholders in accordance with the provisions of Section 391 read with Sections 100 to 103 of the Companies Act,1956 [corresponding to Sections 230 to 232 of Companies Act, 2013]. 

b) As per the Scheme, the Petitioner-Company proposed to buy-back Equity Shares of the Company representing 30% of the issued, subscribed and paid up share capital. There was no compulsory purchase. An option, was given to the equity shareholders under the Scheme

c) Regional Director's objected to the saying that scheme was a colorable device intended to evade buy-back distribution tax (BBT) liability under the Income Tax Act, 

d) According to the Regional Director, if a buyback of shares is effected under Section 77A/Section 68, then the distributed income of the company as defined in Section 115QA of the Income Tax Act would be charged to tax, and it is for this reason that the company is not following the procedure prescribed under Section 77A/Section 68 and has opted for the procedure under Section 391 which would not attract such a tax under Section 115QA of the Income Tax Act.

The High Court held as under:
1) Indian company law, as it presently stands, permits a company to buy-back its shares either without court approval (by adopting procedure of buy-back regulations) or with the court approval. If the law permits a company to follow one of the two methods, it cannot be compelled to follow only that method that results in higher tax liability.

2) In law, petitioner is entitled to buy back its own shares by means of a scheme under section 391 read with sections 100 – 104 of the Companies Act, 1956 [corresponding to Sections 230 to 232 of Companies Act, 2013].scheme cannot be said to be a colourable device to evade income tax, it is a legally permissible procedure which petitioner is entitled to follow to buy back its shares

3) While seeking section of the scheme of arrangement with its equity shareholders, it is open to the petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the petitioner to follow only the procedure prescribed by section 77A/section 68, the fact that the same may not attract income tax will not amount to it being a device to evade tax. Further, the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being so, there is no question of there being any draining away of foreign exchange. - [2016] 67 taxmann.com 1 (Bombay) 
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