Problems and Answers - Section 115QA & 115F of the Income Tax Act 1961

INCOME TAX QUESTIONS & ANSWERS SERIES PART -III

Sub: Section 115QA & Section 115F of the Income Tax Act, 1961

Dear Friends,

Today we are going to consider two problems based on provisions of Section 115QA and Section 115F of the Income Tax Act, 1961 respectively.

PROBLEM 1

Mr. X, a resident individual held 25% equity shares of MNC Limited, an Indian company. The Company’s paid up share capital as on March 31, 2021 was Rs. 10,00,000/- divided into 1,00,000 Equity Shares of Rs. 10/-each and issued at premium of Rs. 20/-. The shares were allotted to shareholders in October,2014.

The company paid Rs. 60/- per share on Buy Back of shares.

Please explain and compute the tax effect in the hand of MNC Ltd., and Mr. X in below mentioned situations;

1. Share of MNC Ltd., are listed on Recognized Stock Exchange;
2. Share of MNC Ltd., are not listed on Recognized Stock Exchange;

LET’S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

SECTION 10(34A) 

Provides that ;

1. The income arisen to shareholders on Buy Back of shares by the company is exempted by Income Tax;
2. The Buy Back of share will be taxed in the hand of the company as tax on distribution of income under provisions of Section 115QA of the Income Tax Act, 1961.

SECTION 115QA

Provides that a domestic company distributing its income through buy back of shares will have to pay income tax/distribution tax @20% (surcharge @12% and education chess @4%) i.e. equal to @23.30%.

Since tax on buy back of shares will be payable by the company buying the shares and hence to avoid double taxation of the same income , income in the hand of shareholders is exempted.

ANSWER 1- Please Note That : in both cases ,whether shares of MNC Ltd., are listed on Stock Exchange or not income arises in the hand of shareholders is exempted by provisions of section 10(34A) of the Income Tax Act, 1961.

Lets’ calculate tax in hand of MNC Ltd., on buy back of shares

Amount paid by MNC Ltd., at the time of Buy Back of shares : Rs(60*30000)=18,00,000
Less: amount received at the time of allotment of shares: Rs(30*30000)= 9,00,000

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Distributed Income 9,00,000
==========

Tax on distributed income. 1,80,000
Add: Surcharge @12%. 21,600
Add: Health & Education Cess@4%. 8,064

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Tax Liability of MNC Ltd., under Section 115QA. 2,09,664
==========

PROBLEM 2- Mr. X a non Resident Indian. He acquired/ purchased shares in ABC Ltd., by utilizing foreign currency on January 1, 2011 for Rs.10.00 These shares were sold by him in the Recognized Stock Exchange on January 1, 2020 for Rs. 30.00 lakhs. The Sale Consideration received Rs.30.00 again invested in purchase of shares of PQR Ltd., on March 31,2020. The shares purchased by Mr. X on March 31,2020 of PQR Ltd., again sold by him on June 30, 2020 for Rs.35.50 discuss the tax implications of above transaction by Mr. X.

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

SECTION 115F

Provides for complete exemption of long-term capital gains on the transfer of foreign exchange assets in certain cases. Thus, it is provided that where, in the case of a non-resident Indian, any long- term capital gains arise from the transfer of a foreign exchange asset and the non-resident Indian has within a period of six months from the date of such transfer invested or deposited the whole or any part of the net consideration in any specified asset or in account referred to in Section 10(4) or in Savings Certificates as per Section l0(4B), then no tax is payable. Thus, if the amount of the net consideration is invested in the purchase of a new asset as specified earlier, then no income tax is leviable on such long-term capital gains.

Please Note That: Where, however, the cost of the new asset is less than the net consideration in respect of the original asset, then income tax is to be levied on the proportionate capital gain.

SECTION 115F(2)

Provides that where the net asset is transferred or converted into money within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original assets not so charged under Section 45 on the basis of the cost of such new asset as provided in this Section, it would be deemed to be income chargeable under the head “capital gains” relating to the long-term capital asset of the previous year in which the new asset is transferred or converted into money.

ANSWER

The problem is based on provisions of Section 115F of the Act,1961 as;

1. Capital gain on transfer of shares of ABC Ltd.- since whole consideration has been invested in the shares of PQR Ltd., within a period of six (6) months from the date of sale and hence whole Capital Gain i.e. Rs. 20.00 lakhs will be exempted under provisions of Section 115F of the Act,1961;
2. Transfer of share of PQR Ltd., within a period of 3 years from the date of investment -the exemption given under Section 115F will be revoked. It means Long Term Capital Gain exempted in FY 2019-2020 of Rs.20.00 Lakhs along with Short Term Capital Gain on transfer of shares of PQR Ltd., in FY 2020-21 i.e. of Rs. 5.50 Lakhs will be taxable in hand of Mr. X in FY 2020-21.

Total Tax Payable by Mr. X in FY 2020-21;-

1. Long Term Capital Gain during FY 2019-20 : Rs. 20.00 Lakhs
2. Short Term Capital Gain during FY 2020-21 : Rs. 5.50 Lakh.

DISCLAIMER: The above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.