Section 115-O provides for levy of Dividend Distribution Tax(‘DDT’) on the company at the time when company distributes, declares or pays any dividend to its shareholders. Consequent to the levy of DDT the amount of dividend received by the shareholders is not included in the total income of the shareholder.
However, the consideration received by a shareholder on buy-back of shares by the company is not treated as dividend but is taxable as capital gains under section 46A.
Unlisted Companies, as part of tax avoidance scheme, were resorting to buy-back of shares instead of payment of dividends in order to avoid payment of tax by way of DDT particularly where the capital gains arising to the shareholders were either not chargeable to tax or were taxable at a lower rate.
In order to curb such practice, new Chapter XII-DA was inserted to provide for levy of 20% of additional income-tax on buy-back of shares by unlisted companies. Such tax is levied on consideration paid by the company for purchase of its own unlisted shares which is in excess of the sum received by the company at the time of issue of such shares (distributed income).
There are situations where shares may have been issued by the company in tranches, for different considerations, at different point of time or may have been issued in lieu of existing shares of another company under amalgamation, merger or demerger. It is difficult to determine amount received by company in such situations. Thus, the CBDT had prescribed draft rules to determine manner of determination of amount received by company in such scenarios. Now the CBDT has prescribed final Rules for such purposes.