Buy Back of Shares :
Section 77A of the Companies Act, 1956 allows a company to purchase its own shares subject to certain conditions. Section 2(22) of the Income-tax Act, 1961 provides that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions of the Companies Act, 1956. Further, section 46A provides that the difference between any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities and the cost of the shares/securities shall be deemed to be capital gains arising to such shareholder or the holder of other specified securities in the year in which such shares or other specified securities were purchased by the company.
Buyback of unlisted shares by domestic companies
In order to discourage the practice of domestic companies resorting to buy back of unlisted shares instead of payment of dividends in order to avoid payment of tax by way of DDT, especially if the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate, Chapter XII-DA, comprising of sections 115QA, 115QB and 115QC, levies additional income-tax on buy back of such shares by domestic companies. The income arising to the shareholders in respect of such buy back of unlisted shares by the domestic company would be exempt under section 10(34A), where the company is liable to pay the additional income-tax on the buy-back of shares.
Section 115QA provides that the distributed income (i.e., consideration paid by the company for buyback of its own unlisted shares which is in excess of the sum received by the company at the time of issue of such shares) would be subject to additional income-tax@20% (plus surcharge@12% and education cess@2% and secondary and higher education cess@1%) in the hands of the domestic company. The company is liable to pay such additional income-tax even though no income-tax may be payable by it in respect of its total income computed under the provisions of the Act.