Capital gains on purchase by company of its own shares or other specified securities.
69(1)
If a shareholder or a holder of other specified securities receives any consideration from any company for the purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 72, the difference between the cost of acquisition and the value of consideration so received shall be deemed to be the “Capital gains” arising to such shareholder or the holder in the year in which the company purchases the shares or other specified securities.
69(2)
If the shareholder receives any consideration of the nature referred to in section 2(40)(f), from any company in respect of buy-back of shares, then for the purposes of this section, the value of such consideration shall be deemed to be nil.
69(3)
For the purposes of this section, “specified securities” shall have the same meaning as assigned to it in Explanation 1 to section 68 of the Companies Act, 2013.
Section Summary:
This section deals with the tax treatment of capital gains when a company buys back its own shares or other specified securities from shareholders. It specifies how the capital gains are calculated and treated for tax purposes, particularly in cases of buy-back transactions.
Key Changes:
- Deemed Capital Gains: The section introduces a clear rule that the difference between the cost of acquisition of the shares/securities and the consideration received from the company during buy-back is treated as capital gains.
- Nil Consideration in Certain Cases: If the consideration received by the shareholder falls under the definition of section 2(40)(f) (e.g., certain types of non-monetary benefits), the value of such consideration is deemed to be nil for capital gains calculation.
- Definition of Specified Securities: The term "specified securities" is aligned with the definition provided in the Companies Act, 2013, ensuring consistency across laws.
Practical Implications:
- For Shareholders: Shareholders must recognize capital gains in the year the company buys back the shares or securities. This could increase their taxable income for that year.
- For Companies: Companies must ensure proper valuation and documentation during buy-back transactions to comply with tax laws.
- Tax Planning: Shareholders need to account for the cost of acquisition and the buy-back consideration to accurately compute capital gains.
Critical Concepts:
- Cost of Acquisition: The original price paid by the shareholder to acquire the shares or securities.
- Consideration: The amount or value received by the shareholder from the company during the buy-back.
- Specified Securities: As per the Companies Act, 2013, this includes equity shares, preference shares, debentures, and other instruments specified under the law.
- Section 2(40)(f): Refers to certain types of consideration (e.g., non-monetary benefits) that are treated as nil for capital gains calculation.
Compliance Steps:
- Documentation: Shareholders must maintain records of the cost of acquisition and the consideration received during the buy-back.
- Capital Gains Calculation: Compute the difference between the cost of acquisition and the consideration received (or deemed nil, if applicable).
- Reporting: Include the capital gains in the income tax return for the year in which the buy-back occurs.
Examples:
- Scenario 1: A shareholder bought shares for ₹100 and received ₹150 during a buy-back. The capital gain is ₹50 (₹150 - ₹100), which is taxable.
- Scenario 2: A shareholder received non-monetary consideration (e.g., assets) during a buy-back, which falls under section 2(40)(f). The value of this consideration is deemed nil, so the entire cost of acquisition (₹100) is treated as capital gains.
This section ensures clarity in the tax treatment of buy-back transactions, helping both shareholders and companies comply with tax laws effectively.