Are Provisions of section 50CA and section 56(2)(x) applicable to buyback of shares? i.e., is it possible to buy back the equity shares, at a price which is lower than the fair market value, without any incidence of tax?
No. For Buy back of shares section 115QA of the Income tax Act, 1961 is applicable. Section 115QA(1) reads as under:
“Notwithstanding anything contained in any other provision of this Act, in addition to the Income tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy back of shares (not being shares listed on a recognized stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income tax at the rate of twenty per cent on the distributed income
Explanation – For the purpose of this section –
(i) “Buy back” 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;
(ii) “Distributed income” means the consideration paid by the company on buyback of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed —————–“.
Thus, this section starts with non-obstante clause. Therefore for buyback of shares, section 50CA or section 56(2)(x) will not apply. Section 115QA provides for levy of tax @ 20% on the difference between amount paid by the company for purchase of shares from its shareholders and the amount paid for subscription of the shares. The tax would be payable by the company on the distributed income. In the hands of shareholders the same shall be exempt under section 10(34A) of the Act,
Rule 40BB of the Income tax Rules, 1962 provide for determination of fair market value of the shares of unlised company. So, the company will have to pay tax on the fair market value of shares as determined under the said rule.
Query No. 2 : [Property sold by HUF but purchased in the name of co-parcener – No benefit u/s. 54F]
A property owned by the HUF was sold for ₹ 80,00,000/-. The new house property was purchased in the name of co-parcener (daughter). Whether HUF is entitled to get benefit under section 54F of the Income-tax Act, 1961 as co-parcener is a part of the HUF?
No. In Vipin Malik (HUF) v. CIT [330 ITR 309] the Delhi High Court held that the agricultural land which was sold of by the assessee – HUF and the flat purchased in the co-operative society was not in the name of the HUF. The flat was in the individual name of V along with his mother. To claim the benefit of section 54F, the residential house which was purchased or constructed had to be of the same assessee whose agricultural land was sold. Therefore, there was no question of section 54F of the Act.
Thus, it is clear that under the Income-tax Act HUF is a separate entity than the Co-parcener (individual). Therefore no benefit would be available, if HUF invests in the name of co-parcener.
Query No. 3 : [Penalty u/s. 271AAC]
As per section 270A in the case of misreporting of income the penalty leviable is 200% of the amount of tax payable. In case the income is assessed u/s. 68 to 69D, the tax payable is 60% of income. So now in this case what will be levy of penalty?
Section 115BBE provides for taxing income under sections 68 to 69D. The section prescribes a flat rate of 60% for all income brought to tax for lack of proof as to the source under sections 68 to 69D, plus surcharge @ 25% of the tax. This would mean that such income would be taxed on standalone basis, whose aggregate income including such income falling under the provisions falls below taxable limit.
Section 115 BBE(2) provides that no deduction would be allowed for any expenditure or allowance or set off of any loss against receipt of gross amount.
Section 270A would not be applicable for such incomes. But section 271AAC would be applicable for such incomes, which provides for penalty @ 10% of the tax payable on such incomes. The proviso to the said section provides that no penalty shall be levied in respect of such incomes, if the assessee has included in his return of income furnished under section 139 and tax is paid under section 115BBE on or before the end of the relevant previous year.
Query No.4 : [Receipt of Share Application Money]
Assessee-company had received share application money from various companies by cheque. AO recorded statement of directors of such companies which had applied for shares of the assessee company. Such statements were recorded behind the back of the assessee and in spite of categorical request for cross examination of such directors; no such cross examination was granted. Finally, such statements were used against the assessee and addition was made u/s. 68 in respect of such share application. Whether statements of directors of concerned companies recorded behind the back of the assessee can be taken as evidence against the assessee without allowing the sufficient opportunity of cross-examination to the assessee? What are the consequences of breach of principles of natural justice? Whether self-serving statements of such directors obviate documentary evidence available on record.
No. The Supreme Court in Lovely Exports Ltd. [216 CTR 195] held that when share application money received from the shareholders whose name and PA Nos. are on record then the Assessing Officer is free to proceed to reopen the assessment of the shareholders and no addition should be made in the hands of the company. Similar observation you would find in CIT v. Steller Investment Ltd. [251 ITR 263 (SC)].
So, on the basis of above Supreme Court Judgments and without supplying the statements of directors who have subscribed the shares of the assessee company, no addition could be made in the hands of the company, who has received application money.
Query No. 5 : [Penalty u/s. 271AAB(1A)]
During the course of search income declared pertaining to the previous year for which the return was not filed and was not due or that pertains to the broken period in the year in which the search took place. The ROI was filed post search disclosing the undisclosed income and taxes and interest due have been paid on or before filing the ROI. In view of this whether penalty u/s. 271AAB(1A) is mandatory?
No. It is optional. Section 271AAB(1A) provides that notwithstanding contained in any other provisions of this Act, the Assessing Officer may direct, that in case where search has been initiated under sections 132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receive the assent of the President, the assessee shal pay by way of penalty, in addition to tax, if any payable by him:
a) A sum computed @ 30% of the undisclosed income of the specified previous year, if the assessee –
i) In the course of search, in a statement u/s. 132(4) admits the undisclosed income and specifies the manner in which such income has been derived.
ii) Substantiates the manner in which the undisclosed income was derived and
iii) On or before due date of furnishing return of income or the date on which the period specified in the notice issued u/s. 153A for furnishing return,.
A) Pays the tax, together with interest, if any, in respect of the undisclosed income and
B) Furnishes the return of income for specified previous year declaring such undisclosed income thereon:
b) If it is not covered above, a penalty @ 60% of undisclosed income..
As per section 271AAB(3), the provisions of sections 274 and 275 shall apply in relation to the penalty referred to in this section.