Supreme Court Upholds Tax on Share Buybacks: Genpact India vs. Deputy Commissioner of Income Tax (22 November 2019)

Introduction

Date of the Judgment: 22 November 2019

Citation: Civil Appeal No. 8945 of 2019 @ SLP(C) No.20728 of 2019

Judges: Uday Umesh Lalit, J., Indira Banerjee, J.

Can a company avoid paying tax on share buybacks by structuring the transaction as part of a court-approved scheme of arrangement? The Supreme Court of India recently addressed this question in a case involving Genpact India Private Limited. The core issue was whether Section 115QA of the Income Tax Act, 1961, which imposes a tax on distributed income from share buybacks, applies when the buyback is part of a scheme sanctioned by a High Court. The Supreme Court, in this judgment, clarified the scope of Section 115QA and the availability of appellate remedies in such cases. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Indira Banerjee.

Case Background

Genpact India Private Limited (the appellant) had an opening share capital of 25,68,700 shares held by its sole shareholder, Genpact India Investment, Mauritius. In May 2013, the appellant bought back 2,50,000 shares at Rs. 32,000 per share for a total of Rs. 800 crores. Subsequently, on 10 September 2013, a scheme of arrangement was approved by the High Court of Delhi. Pursuant to this scheme, the appellant bought back another 7,50,000 shares at Rs. 35,000 per share for a total of Rs. 2,625 crores from Genpact India Investment, Mauritius.

In its income tax return for the assessment year 2014-15, the appellant disclosed these transactions but denied any tax liability under Section 115QA of the Income Tax Act, 1961. The Deputy Commissioner of Income Tax (the first respondent) issued a notice under Section 143(2) of the Income Tax Act, 1961, seeking further explanation. Subsequently, an assessment order was passed on 31 December 2016, which included an addition for liability under Section 115QA, asserting that the company was liable to pay tax at the rate of 20% on the distributed income of Rs. 2,625 crores. The appellant argued that the buyback was part of a scheme of arrangement under Section 391 of the Companies Act, 1956, and thus not subject to Section 115QA.

Timeline

Course of Proceedings

The appellant filed a Writ Petition (Civil) No. 686 of 2017 in the High Court of Delhi, challenging the assessment order. The High Court initially raised a preliminary objection regarding the availability of an alternate remedy of appeal. However, it also noted a prima facie view that Section 115QA applied only to transactions covered by Section 77A of the Companies Act, 1956, and not to buybacks under a court-approved scheme. The High Court granted an interim stay on the demand under Section 115QA.

Later, the High Court considered the matter and held that the demand under Section 115QA was an integral part of the assessment order and not a separate issue. It also held that the issue of interpretation of Section 115QA could be addressed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The High Court ultimately declined to entertain the writ petition due to the availability of an alternate remedy and directed the appellant to file an appeal before the CIT(A).

Legal Framework

The core legal provision in this case is Section 115QA of the Income Tax Act, 1961. This section was introduced to tax distributed income from buybacks of shares by unlisted domestic companies.

Section 115QA, as it stood before 1 June 2016, stated:


“Section 115QA: Tax on distributed income to shareholders –
(1) 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 recognised 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 purposes of this section,—
(i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”

The definition of “buy-back” in the explanation to Section 115QA was amended with effect from 1 June 2016, to mean:


“(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;”

The Income Tax Act, 1961, also includes provisions regarding appealable orders under Sections 246 and 246A, which are relevant to the question of whether an appeal is available against an order under Section 115QA.

Arguments

Appellant’s Submissions:

• The appellant argued that no statutory appeal is provided against an order under Section 115QA of the Income Tax Act, 1961.
• The appellant contended that a Section 115QA order cannot be equated with an assessment order under Section 143(3) of the Income Tax Act, 1961, against which an appeal lies under Section 246A of the Income Tax Act, 1961.
• The appellant submitted that the tax payable under Section 115QA is on the payment made by the company and not on its “total income.”
• The appellant argued that the “denial of the assessee’s liability to be assessed” in Section 246A is confined to liability under Section 143(3) and does not apply to tax liability under Section 115QA.
• The appellant emphasized that the buyback was done under a scheme of arrangement approved by the High Court and thus should not be covered under Section 115QA.
• The appellant also argued that the High Court should not have dismissed the Writ Petition on the ground of an alternate remedy, as the High Court had already exercised its discretion to entertain the Writ Petition.

Revenue’s Submissions:

• The Revenue argued that any order determining liability to pay tax under Section 115QA is appealable.
• The Revenue contended that any other view would cause prejudice to assessees.
• The Revenue stated that the concessions given on its behalf, as recorded in the High Court’s directions, would address any inconvenience or prejudice.
• The Revenue argued that Section 115QA was introduced to curb tax avoidance practices by unlisted companies.
• The Revenue emphasized that Section 115QA overrides all other sections of the Income Tax Act, 1961, and is a separate charging section.

Sub-Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether an appellate remedy is available against a determination of liability under Section 115QA of the Income Tax Act, 1961.
2. Whether the High Court was justified in refusing to exercise its jurisdiction under Article 226 of the Constitution due to the availability of an alternate efficacious remedy.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

Cases:

• Commissioner of Income Tax, U.P., Lucknow v. Kanpur Coal Syndicate [AIR (1965) SC 325] – The Supreme Court of India held that the expression “denial of liability” is comprehensive enough to include not only the total denial of liability but also the liability to tax under particular circumstances.
• Commissioner of Income Tax and others v. Chhabil Dass Agarwal [(2014) 1 SCC 603] – The Supreme Court of India summarized the principles regarding the exercise of writ jurisdiction when an alternate remedy is available.
• Authorised Officer, State Bank of Travancore & Anr. v. Mathew K.C. [(2018) 3 SCC 85] – The Supreme Court of India reiterated the principles laid down in Chhabil Dass Agarwal regarding the discretionary nature of writ jurisdiction.
• State of U.P. v. U.P. Rajya Khanij Vikas Nigam Sangharsh Samiti and others [(2008) 12 SCC 675] – The Supreme Court of India held that a writ petition can be dismissed on the ground of alternate remedy even after admission.

Legal Provisions:

• Section 115QA of the Income Tax Act, 1961 – This section imposes a tax on distributed income from buybacks of shares by unlisted domestic companies.
• Section 246 of the Income Tax Act, 1961 – This section deals with appealable orders before the Deputy Commissioner (Appeals).
• Section 246A of the Income Tax Act, 1961 – This section deals with appealable orders before the Commissioner (Appeals).
• Section 143(2) of the Income Tax Act, 1961 – This section deals with notice for scrutiny assessment.
• Section 143(3) of the Income Tax Act, 1961 – This section deals with assessment orders.

Authority Usage Table:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Commissioner of Income Tax, U.P., Lucknow v. Kanpur Coal Syndicate [AIR (1965) SC 325]*: The Court followed this case to interpret that the expression “denial of liability” is comprehensive enough to include not only the total denial of liability but also the liability to tax under particular circumstances.
• Commissioner of Income Tax and others v. Chhabil Dass Agarwal [(2014) 1 SCC 603]*: The Court relied on this case to reiterate the principle that the High Court should not entertain a writ petition if an effective alternate remedy is available.
• Authorised Officer, State Bank of Travancore & Anr. v. Mathew K.C. [(2018) 3 SCC 85]*: The Court reiterated the principles laid down in Chhabil Dass Agarwal, emphasizing the discretionary nature of writ jurisdiction.
• State of U.P. v. U.P. Rajya Khanij Vikas Nigam Sangharsh Samiti and others [(2008) 12 SCC 675]*: The Court relied on this case to hold that a writ petition can be dismissed on the ground of alternate remedy even after admission.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that assessees have access to a proper appellate mechanism when their tax liability is determined under Section 115QA of the Income Tax Act, 1961. The Court emphasized that the phrase “denies his liability to be assessed under this Act” in Sections 246(1)(a) and 246A(1)(a) is comprehensive and should not be restricted to assessments under Section 143(3).

The Court also noted that if an appellate remedy was not available, assessees would be forced to approach the High Court under Article 226, which would not be an efficient way to resolve disputes, especially those involving factual aspects.

Sentiment Analysis of Reasons:

Fact:Law Ratio:

The court’s reasoning was heavily based on the legal interpretation of the relevant sections of the Income Tax Act, 1961, and the need to provide a proper appellate mechanism for assessees.

Logical Reasoning:

The Court considered the arguments of both sides and concluded that the primary objective of Section 115QA was to curb tax avoidance and that the availability of an appellate remedy was crucial for fairness and efficiency.

The Court rejected the appellant’s argument that the buyback under a scheme of arrangement should not be covered under Section 115QA, stating that this issue would be considered at the appropriate stage by the concerned authorities.

The Court also rejected the argument that the High Court should not have dismissed the writ petition on the ground of alternate remedy, as the High Court had already exercised its discretion to entertain the writ petition. The court clarified that the preliminary objection regarding alternate remedy was not disposed of earlier and thus could be considered at the final hearing.

The Court quoted the following from the judgment:

“The expression “denial of liability” is comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances.”

“The expression “denies his liability to be assessed” as held by this Court in Kanpur Coal Syndicate is quite comprehensive to take within its fold every case where the assessee denies his liability to be assessed under the Act.”

“Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.”

The Court’s decision was unanimous, with both judges concurring on the final order.

Key Takeaways

• An appeal is maintainable against the determination of liability under Section 115QA of the Income Tax Act, 1961. The Supreme Court has clarified that the expression “denies his liability to be assessed” in Sections 246(1)(a) and 246A(1)(a) is comprehensive and includes denial of liability under Section 115QA.
• The High Court was justified in refusing to exercise its jurisdiction under Article 226 of the Constitution due to the availability of an alternate efficacious remedy. The Supreme Court has reinforced that writ jurisdiction should not be exercised if an adequate alternate remedy is available.
• The Supreme Court has emphasized that the primary objective of Section 115QA was to curb tax avoidance and that the availability of an appellate remedy was crucial for fairness and efficiency.
• The Supreme Court has clarified that the issue of whether a buyback under a scheme of arrangement should be covered under Section 115QA would be considered at the appropriate stage by the concerned authorities.

Impact on Taxpayers:

This judgment provides clarity for companies regarding the availability of appellate remedies for tax assessments under Section 115QA. It ensures that companies have a proper mechanism to challenge tax liabilities determined under this section.

Impact on Tax Authorities:

This judgment clarifies the scope of Section 115QA and the procedure for tax assessments, ensuring that tax authorities follow the correct legal process.

Impact on Legal Practice:

This judgment reinforces the principles regarding the exercise of writ jurisdiction and the importance of exhausting alternate remedies. It also clarifies the interpretation of “denial of liability” in the context of appealable orders.

Conclusion

The Supreme Court’s decision in the Genpact India case is significant for clarifying the scope of Section 115QA of the Income Tax Act, 1961, and the availability of appellate remedies for tax assessments under this section. The Court’s interpretation of “denial of liability” is comprehensive and provides clarity for assessees and tax authorities alike.

The judgment reinforces the principle that writ jurisdiction should not be exercised if an adequate alternate remedy is available. It also provides guidance on the legal process for tax assessments and appeals under Section 115QA.

The Supreme Court’s decision is a landmark ruling that provides much-needed clarity on the taxability of share buybacks, particularly in cases where such buybacks are part of a scheme of arrangement. The decision underscores the importance of having a robust appellate mechanism for tax disputes.