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IN THE HIGH COURT OF JUDICATURE AT MADRAS

(Ordinary Original Civil Jurisdiction)

IN APPEAL NO. _____ OF 2019

IN THE MATTER OF:

The Income-tax Act, 1961

And

IN THE MATTER OF:

Section 260A of the Income-tax Act, 1961

And

IN THE MATTER OF:

Order dated 24th October, 2018 by the
Income-tax Appellate Tribunal, Chennai,
in relation to levy of tax u/s 115QA on the Income-tax Act, 1961 consequent of
buy-back of shares.

M/s Special Appliances India Limited… Appellant

Versus

Commissioner of Income Tax … Respondent

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MEMORANDUM OF APPEAL

The Appellant prefers this Appeal against the order dated 24 th October, 2018
passed by the Income-tax Appellate Tribunal (hereinafter referred to as “the
Tribunal”) in relation to levy of tax u/s 115QA on the Income-tax Act, 1961
(hereinafter referred to as “the IT Act”) consequent of buy-back of shares on 01st
June, 2013.

I. Statement of facts:

1. The Appellant, Special Appliances India Limited (hereinafter referred to as

“SAIL”), is a company incorporated in India and registered under Indian
Companies Act 1956. SAIL was incorporated on 01st January, 2000 with an
authorised capital of Rs 10 Lakhs, constituting 100,000 equity shares of face
value Rs 10/-.

2. Special Appliances Mauritius Limited (hereinafter referred to as “SAML”)

and Special Appliance Inc. (hereinafter referred to as “SAI”) subscribed to
50,000 shares each, at a premium of Rs 990/- per share. Thus, the subscribed
capital of SAIL on 01st January, 2000 stood at Rs. 10 Crores, constituting Rs
10 Lakh as face value of 100,000 equity, and premium of Rs 9.90 Crores on
the 10 Lakh shares.

3. SAML was a company incorporated and resident of Mauritius. SAML was

an investment vehicle of SAI. SAI was a company incorporated and resident
of USA. SAI was established as a family managed company in 1900s
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specialising in the manufacturing of agricultural equipment and automobile

tyres.

4. With technical support of SAI, SAIL set up a manufacturing plant at

Tanjavoor in 2002 to manufacture certain specialised appliances to be used
in harvesting of paddy. SAIL turned profitable in 2005. With the profits
generated from its Tanjavoor plant, SAIL set up another manufacturing plant
at Patiala, Punjab, in 2008 for manufacturing of the specialised appliances
for harvesting of wheat. As the profits generated from the manufacturing
activities at Tanjavoor and Patiala were used for expansion of the units,
SAIL never paid any dividend to its investors. The profits were ploughed
back into the businesses, for undertaking R&D activities and for
modernisation of the plant.

5. In the year 2010, SAI decided to exit the business of manufacturing of

agricultural appliance and wanted to focus on manufacturing of automotive
tyres. Therefore, on 01st April, 2010, SAI and SAML sold the 50,000 shares
held by them in SAIL to Agriculture Appliance Singapore Limited
(hereinafter referred to as “AASL”), a competitor of SAI. SAI and SAML
sold the shares for a total consideration of Rs 100 Crores. In other words,
each share of SAIL which was originally subscribed by SAI and SAML at
Rs 1,000/- each, was sold by the investors to AASL for Rs 10,000/- each.

6. SAIL filed an application before the Authority of Advance Ruling

((hereinafter referred to as “AAR”) claiming that (a) the gains derived by
SAML was exempt from taxation in India, under the Double Taxation
Avoidance Agreement between India and Mauritius, and (b) the gains
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derived by SAI was taxable in India as long term capital gains @ 10%. The
application filed by SAIL before the AAR was allowed.

7. The Finance Bill, 2013 proposed to introduce a New Chapter XII-DA to the
IT Act, seeking to tax income distributed by Indian companies through buy-
back of shares. The Finance Act proposed to introduce the section with
effect from 01st June, 2013.

8. On 01st April, 2013, the board of directors of SAIL approved a scheme of

buy-back of shares, wherein 1,000 shares held by AASL in SAIL were to be
bought back for a consideration of Rs. 9,500/- each and cancelled. The
Board approved the scheme, subject to the condition that the scheme was to
be implemented with a period of two months, i.e. before 31st May, 2013.
The scheme was approved in the Annual General Meeting held on 30th April,
2013.

9. As per the scheme proposed for buy-back of the shares, the Company
Secretary of SAIL sent out formal communications on 01 st May, 2013 to
AASL intimating it about the buy-back scheme and seeking AASL to apply
for participation in the scheme. The communication specifically provided
that the communication of participation should be submitted before the 12 th
May, 2013. AASL communicated its intention to participate in the buy-back
scheme on 13th May, 2013, as 12th May, 2013 was a holiday. The application
of AASL was put up before the Board Meeting held on 15 th May, 2013 and
the Board approved the buy-back vide a resolution passed on 15th May,
2013. The Company Secretary proceeded with completing other
compliances required for competing the buy-back.
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10. Physical share certificate of SAIL was sent by AASL for cancelation on 31 st
May, 2013. The shares were then cancelled on 01 st June, 2013 and the
consideration was paid on 01st June, 2013. SAIL treated the buy-back
scheme to have concluded on 31st May, 2013, being the date on which it
received the physical certificate for cancelation. In any case, the scheme
was to be concluded before 31st May, 2013 as per the approval granted by
the Board and the share holders.

11. The scheme adopted by SAIL was widely published in financial magazines
as a prudent measure adopted to avoid payment of new taxes introduced by
the Parliament.

12. On 01st January, 2014, the Assessing Officer issued a notice seeking SAIL
and Mr. A (Managing Director) of SAIL, to show cause as to why SAIL and
Mr A. should not be treated as assessee in default u/s 115QC of the IT Act,
for not having paid tax on buy-back of shares u/s 115QA of the IT Act. SAIL
responded to the notice, inter alia, arguing that

a) The transaction was concluded on 31st May, 2013 and hence cannot be
subject to tax u/s 115QA of the IT Act which came into effect on 01st
June 2013.

b) In any case, the reserves that were distributed on buy-back of shares

pertained to a period prior to 01st June, 2013 and hence could not be
subject to tax u/s 115QA of the IT Act.

c) In any case, given that the income from transfer of shares by AASL
cannot be subject to tax in India under the Double Taxation Avoidance
Agreement between India and Singapore, SAIL cannot be subject to tax
u/s 115QA of the IT Act.
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d) In any case, given that the shares were bought back at a price less than
the price at which AASL acquired them from SAML, ‘no income’ arises
to AASL and hence, the provisions of the IT Act would itself not be
applicable.

e) when AASL acquired the shares at Rs 10,000/- from SAI, SAI had
already paid taxes on the gains considering Rs. 10,000/- as the
consideration from the sale of shares. Levying tax u/s 115QA of the Act
on Rs. 10,000/- would amount to double taxation.

13. The Assessing Officer rejected the contentions of SAIL and held that

a) The transaction of buy-back was concluded on 01st June, 2013, being the
date on which the shares were cancelled and the consideration was paid.

b) Tax u/s 115QA of the IT Act is a transaction based tax. Tax is levied on
the event of distribution of profits, and the ‘distributed profits’ is deemed
as income as on the date of distribution. Hence, the period to which the
reserves distributed pertain to is of no relevance.

c) Section 115QA of the IT Act tax starts with the phrase “Notwithstanding
anything contained in any other provision of this Act … …” . Hence,
the section would override Section 90(2) of the IT Act. Consequentially,
no protection would be available under the Double Taxation Avoidance
Agreement to tax levied u/s 115QA of the IT Act.

d) Buy-back tax is an additional income-tax on SAIL. Hence taxability of

the transaction in the hands of AASL is of no consequence while levying
tax on SAIL. Even if AASL would have incurred losses due to the buy-
back, SAIL would still be levied with buy-back tax, from a plain reading
of Section 115QA of the IT Act.
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e) Taxing statute and equity are strangers. Double taxation by itself is not
prohibited, if the statute specifically provides for double taxation. In the
present case, the statute specifically provides for double taxation and
hence is a valid legislature.

14. The Assessing Officer issued a notice u/s 156 of the IT Act for the amount
of tax and interest determined as payable u/s 115QA and 115QB of the IT
Act. A protective assessment order was passed in the name of the Mr. A as
well.

15. SAIL and Mr. A. filed separate appeals against the order before the first
appellate authority, which was rejected for the same reasoning given by the
Assessing Officer. The first appellate authority however allowed the appeal
of Mr A. on the ground that Mr A. the Managing Director cannot be regarded
as principal officer in the context of Section 115QA of the IT Act. The
CIT(A) held that the Company Secretary ought to have been regarded as the
Principal Officer.

16. SAIL filed an appeal against the order of the first appellate authority before
the Income-tax Appellate Tribunal (hereinafter referred to as “ITAT”). No
appeal was filed by the assessing officer against the order passed in the case
of Mr. A. Before the ITAT, SAIL had raised certain additional grounds on
jurisdiction of the Assessing Officer to issue the notice, inter alia on the point
that the IT Act does not provide for an assessment mechanism for
determining the tax payable u/s 115QA, However, the additional grounds
were not pressed during the course of assessment.

17. The ITAT dismissed the appeal filed by SAIL holding that
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a) The transaction of buy-back was concluded on 01st June, 2013, being

the date on which the shares were cancelled and the consideration
was paid. The fact that the scheme approved by the Board of
Directors and the shareholders in the Annual General Meeting
permitted the scheme only to be valid till 31May, 2013 is of no
consequence, when SAIL has cancelled the shares and the Registrar
of Companies has accepted the cancellation in the filings made by
SAIL

b) Tax u/s 115QA of the IT Act is a transaction based tax, but still a tax
on ‘income’. In the context of Section 115QA and in the widest
meaning of ‘income’, the ‘distributed profits’ would be deemed to
income of SAIL arising on the date of buy-back.

c) Section 115QA of the IT Act levies tax on SAIL. Protection under

Tax Treaty can be sought only when the tax involves levy of tax or
collection of tax from a non-resident. Hence, the question of taking
cover the Tax Treaty between India and Singapore does not arise
when the tax is levied on SAIL.

d) Section 115QA of the IT Act is a complete code in itself. Buy-back

tax is an additional income-tax on SAIL. The ‘distributed profits’ is
deemed as income under the Section. Hence taxability of the
transaction in the hands of AASL is of no consequence while levying
tax on SAIL. Even if AASL would have incurred losses due to the
buy-back, SAIL would still be levied with buy-back tax, from a plain
reading of Section 115QA of the IT Act.
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e) Levy of tax u/s 115QA of the IT Act does not result in double
taxation, in its strict sense. Tax as capital gains was levied on SAI
on transfer of shares of SAIL to AASL. AASL is now being sought
to tax u/s 115QA of the IT Act on a distinct transaction of buy-back
of shares. The incidence of tax on two different persons, not even
forming part of the same business group. Hence, levy of tax u/s
115QA of the IT Act is not a double taxation.
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II. Substantial questions of law:

The Appellant submits that the following substantial question of law arises from
the Order of the Tribunal:

(i) Whether, on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that tax u/s 115QA of the IT
Act is a tax on income of SAIL?

(ii) If the answer to Question (i) is yes, i.e. if the tax is on income of
SAIL, was the Tribunal right in holding that ‘distributed profits’ is
the income of SAIL, and consequentially right in upholding levy of
tax u/s 115QA of the IT Act on SAIL?

(iii) If the answer to Question (i) is no, i.e. if the tax is not on income of
SAIL but of AASL, can the IT Act provide for assessment and
collection of final tax on the income from SAIL?

(iv) If the answer to Question (i) is no, i.e. if the tax is not on income of
SAIL but of AASL, can tax u/s 115QA of the IT Act be levied and
collected from SAIL, given that AASL has incurred a capital loss
from the transaction?

(v) If the answer to Question (i) is no, i.e. if the tax is not on income of
SAIL but of AASL, can tax u/s 115QA of the IT Act be levied and
collected from SAIL, given that AASL is a resident of Singapore
and that AASL is not taxable in India on transfer of shares of SAIL?
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(vi) Whether, on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that buy-back of shares
happened on 01st June, 2013 and not on 31st May, 2013?

(vii) Whether, on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that tax u/s 115QA of the IT
Act does not result in double taxation, and consequentially right in
upholding levy of tax u/s 115QA of the IT Act on SAIL?

III. Grounds of Appeal

That the Appellant seeks to challenge the impugned order passed by the
Tribunal on the following grounds, inter- alia:-

A. Income-tax is a tax on income. Without income, there cannot be tax. In

the present facts, the only person who could have earned income from buy-
back of shares is AASL. The tax on the income of AASL from transfer of
shares of SAIL is collected in the form of tax u/s 115QA of the IT Act,
from SAIL. When AASL is not liable to tax on the transfer on account of
transaction resulting in loss to AASL, tax u/s 115QA of the IT Act cannot
be levied on SAIL.
B. Given that tax u/s 115QA of the IT Act is a tax on income of AASL, if
AASL is not taxable in India under the Double Taxation Avoidance
Agreement between India and Singapore, SAIL cannot be subject to tax u/s
115QA of the IT Act. Though Section 115QA of the IT Act is a code in
itself, it cannot be interpreted and applied de hors other provisions of the
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Act, Though Section 115QA of the IT Act starts with a ‘notwithstanding

clause’, it has to be read as ‘notwithstanding anything to the contrary’. In
the absence of anything contrary between Section 115QA and Section 90
of the IT Act, the levy u/s 115QA of the IT Act would be protected by the
Double Taxation Avoidance Agreement between India and Singapore.
C. Levy of tax and collection of tax are two separate and independent arms of
taxing statute. Tax Treaties deal only with levy of taxes, i.e.distribution
of taxing rights amongst the States. Where the Tax Treaty between India
and Singapore provides that tax on gains arising from transfer of shares of
an Indian company will be taxable only in Singapore, and that the subject
transaction is infact a transaction of transfer of shares of SAIL,
applicability of the Treaty cannot be ousted merely because the domestic
law provides that the tax on the transaction will be collected in a different
name and in a different manner.
D. SAIL and AASL always sought to complete the transaction of buy-back on
31st May, 2013. Both parties agree that the transaction was completed on
31st May, 2013. Merely because a statute provides for a manner of
completing a transaction amongst the parties and that the procedural
provisions are not complied with, it cannot be said that the transaction was
not completed on the date on which the parties intended to conclude the
transaction.

IV. The Appellant reserves the right to alter, modify or amend the grounds of
appeal raised hereinabove.

V. The Appellant submits that the Appeal is filed within the time prescribed.
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VI. The Appellant states that the Appellant is assessed to tax at Chennai. Thus,
this Hon’ble Court has jurisdiction to try, entertain and dispose off the present
appeal.

VII. The Appellant states that the Appellant has paid the court fees of Rs.10,000.

VIII. The Appellant prays that:

a. This Hon’ble Court may be pleased to admit the present appeal and after
considering the aforesaid substantial questions of law to allow the appeal;

b. This Hon’ble Court may be pleased to set aside the impugned order and
decide the issues in favour of the Appellant;

c. For costs of and incidental to this appeal; and

d. This Hon’ble Court may be pleased to grant such further and other relief
as it may deem fit.

Note: The Appeal has been admitted on all the questions and has been fixed for
final hearing.