Levy of additional income-tax on distributed income of a domestic company on account of buy-back of unlisted shares [Chapter XII-DA] under Assessment of Companies :
(i) Under section 115-O, dividend distribution tax (DDT) is levied on a company at the time when it distributes, declares or pays any dividend to its shareholders. Consequently, the amount of dividend received by the shareholders is not included in the total income of the shareholder, by virtue of exemption provided under section 10(34).
(ii) So far, the consideration received by a shareholder on buy-back of shares by a company is not treated as dividend but is taxable as capital gains under section 46A.
(iii) While payment of dividend is one option available to a company to distribute its reserves to its shareholders, another option available is to buy-back its own shares at a consideration determined by it. If the company exercises the former option, the payment of dividend would be subject to DDT under section 115-O and income in the hands of shareholders would be exempt as per section 10(34). However, if the company prefers the second option, the income would be taxed in the hands of shareholder under section 46A as capital gains.
(iv) 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. For this purpose, buyback means purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 19568.
(a) Levy of additional income-tax@20% on buyback of unlisted shares [Section 115QA]
(1) 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.
(2) 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.
(3) Such tax should be paid to the credit of the Central Government within 14 days from the date of payment of any consideration for such buyback to the shareholder.
(4) The additional income-tax payable by the company shall be the final payment of tax on such income. No credit or deduction shall be claimed by the company or any other person in respect of such tax paid.
(5) Further, no deduction under any provision of the Income-tax Act, 1961 shall be allowed to the company or the shareholder in respect of income, which has been subject to additional income-tax, or tax thereon.
(b) Interest payable for non-payment of additional income-tax by the company [Section 115QB]
The principal officer of the domestic company and the company will be liable to pay simple interest on the amount of additional income-tax not paid within the specified time. Such interest is leviable at the rate of 1% for every month or part of the month on the amount of such tax not paid or short paid for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.
(c) The principal officer of the domestic company and the company will be deemed to be an assessee-in-default in respect of amount of tax payable by him or it, in case the additional incometax is not paid to the credit of Central Government within the specified time. In such a case, all the provisions of the Act for the collection and recovery of income-tax would apply [Section 115QC].
Illustration
XYZ Ltd., a domestic company, purchases its own unlisted shares on 4th July, 2015. The consideration for buyback amounted to Rs 21 lakh, which was paid on the same day. The amount received by the company two years back for issue of such shares was Rs 13 lakh. Compute the additional income-tax payable by XYZ Ltd. Compute the interest, if any, payable if such tax is paid to the credit of the Central Government on 29th September, 2015.
Solution
XYZ Ltd is liable to pay Rs 1,84,576 as additional income-tax, which is the amount calculated @23.072% (20% plus surcharge@12% plus cess@3%) on Rs 8 lakh, being its distributed income (i.e., Rs 21 lakh – Rs 13 lakh).
The additional income-tax was payable on or before 18th July, 2015. However, the same was paid only on 29th September 2015.
Period for which interest@1% per month or part of a month is leviable –
| Period | No. of months/part of month |
| 19th July – 18h August, 2015 (whole of first month) | 1 |
| 19th August – 18th September, 2015 (whole of second month) | 1 |
| 19th September – 29th September, 2015 (part of third month) | 1 |
| Total number of months | 3 |
Interest under section 115QB is payable @1% per month for 3 months on the amount of additional tax payable i.e., Rs 1,84,576. Therefore, interest payable under section 115QB is Rs 5,537.