18 October 2016

CBDT notifies final rules with respect to buy-back of shares

Background
Section 115QA of the Income-tax Act, 1961 (the Act) provides for levy of additional income tax at the rate of 20
per cent of the distributed income on account of buy back of unlisted shares by a company. Section 115QA of the
Act defines the distributed income as 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. There are different situations in which
shares can be issued for e.g. shares issued in different tranches, for different consideration, at different point of
time or may have been issued in lieu of existing shares of another company under amalgamation, merger or
demerger. Concerns were raised regarding lack of clarity in determination of consideration received by the
company at the time of issue of shares being bought back by the company.
The Finance Act, 2016 amended to Section 115QA of the Act to provide that for the purpose of computing
distributed income, the amount received by the company in respect of shares being bought back shall be
determined in the prescribed manner.
On 25 July 2016, the Central Board of Direct Taxes (CBDT) issued draft rules to prescribe the methodology for
determination of the amount received by the companies under different circumstances in which the shares have
been issued. CBDT had invited comments and suggestions from the stakeholders and the general public on the
draft rules.
1 2
Pursuant to comments received from the stakeholders, CBDT has notified final rules for buy-back of shares. The
rules shall come into force from 1 June 2016. The key changes to rules are summarised as follows:

Sub- Particulars of Shares issued Basis of determining ‘Amount received by the

Rule company for issue of shares’

2 Share issued by a company on its Amount actually received in respect of such share
subscription including any amount received by way of premium. The
term ‘paid up amount’ is replaced with the term ‘amount’.

3 Where prior to buy back, the company Earlier it was provided as amount received in respect of
had returned any sum out of amount such share as reduced by the sum so returned.
received
The proviso has been added that if the sum or any part of
it so returned is chargeable to additional income tax under
Section 115-O of the Act and the company has paid such
tax, then such sum or part thereof shall not be reduced.

4 Shares issued under ESOP or as part Fair market value as computed in accordance with Rule
3(8) to the extent credited to share capital and premium
1
CBDT Notification No. 94/2016, dated 17 October 2016
2
Rule 40BB of the Income-tax Rules, 1962

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
 of sweat equity account.
Sweat equity shares shall have the meaning assigned to it
in clause (b) of the Explanation to Section 17(2)(vi) of the
Act.

8 Share issued or allotted as part of Amount Received = A/B

consideration for acquisition of any
A= lower of (a) amount which bears to fair market value of
asset or settlement of any liability
the asset/liability as determined by merchant banker in the
proportion of consideration paid by issue of shares to the
total consideration; and (b) consideration for acquisition of
shares or settlement of liability to the extent credited to
share capital and share premium account.
B= number of shares issued by the company

9 Shares issued or allotted on Amount received= (A-B) / C

succession or conversion of firm into a
A= book value of the assets in the balance sheet as
company or succession of sole
reduced by any amount of tax paid (TDS, TCS, Advance
proprietary concern by the company
Tax) net of tax refund claimed and any amount shown in
the balance sheet as asset including unamortized amount
of deferred expenditure which does not represent the
value of any asset
B= book value of liabilities in the balance sheet as
reduced by capital, reserves and surpluses, provision for
taxation, provision for meeting liabilities other than
ascertained liabilities and contingent liabilities
C= number of shares issued on conversion

11 Shares issued by the company on The amount received by the company in respect of the
conversion of preference shares, bond instrument as is so converted.
or debenture, debenture-stock,
deposit certificate etc. Earlier
conversion of preference shares was
not included.

12 Shares held in dematerialized form Amount received to be determined is on the basis of first-
and which cannot be distinctly in-first-out basis.
identified

Our comments
In the final rules, CBDT has addressed some of the issues raised by the stakeholders. It was not clear whether
the residuary category would also cover the situations such as buy-back of shares issued as ESOP’s or Sweat
Equity. This issue has been addressed in the final rules. Further, there was no guidance as regards determination
of the amount in respect of shares which are issued in dematerialized form. The same has also been provided in
the final rules. The methodology for determination of the amount received by the companies in situations such as
conversion of bond or debenture, debenture-stock, deposit certificate, etc. has been extended to include
conversion of preference shares.
However, it is still not clear whether the residuary category would also cover the situations such as buy-back of
shares issued in kind and share swap.
The final rules are in line with the government’s efforts to bring in an environment of simplified tax regime and at
the same time providing clarity to the taxpayers.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
 www.kpmg.com/in

Ahmedabad
Commerce House V, 9th Floor, Mumbai
Delhi Lodha Excelus, Apollo Mills
902 & 903, Near Vodafone House,
Building No.10, 8th Floor N. M. Joshi Marg
Corporate Road,
DLF Cyber City, Phase II Mahalaxmi, Mumbai 400 011
Prahlad Nagar,
Gurgaon, Haryana 122 002
Ahmedabad – 380 051 Tel: +91 22 3989 6000
Tel: +91 124 307 4000 Fax: +91 22 3983 6000
Tel: +91 79 4040 2200
Fax: +91 124 254 9101
Fax: +91 79 4040 2244
Noida
Hyderabad 6th Floor, Tower A
Bengaluru
8-2-618/2 Advant Navis Business Park
Maruthi Info-Tech Centre
Reliance Humsafar, 4th Floor Plot No. 07, Sector 142
11-12/1, Inner Ring Road
Road No.11, Banjara Hills Noida Express Way
Koramangala, Bangalore 560 071
Hyderabad 500 034 Noida 201 305
Tel: +91 80 3980 6000
Tel: +91 40 3046 5000 Tel: +91 0120 386 8000
Fax: +91 80 3980 6999
Fax: +91 40 3046 5299 Fax: +91 0120 386 8999
Chandigarh
Kochi Pune
SCO 22-23 (Ist Floor)
Syama Business Center 703, Godrej Castlemaine
Sector 8C, Madhya Marg
3rd Floor, NH By Pass Road, Bund Garden
Chandigarh 160 009
Vytilla, Kochi – 682019 Pune 411 001
Tel: +91 172 393 5777/781
Tel: +91 484 302 7000 Tel: +91 20 3050 4000
Fax: +91 172 393 5780
Fax: +91 484 302 7001 Fax: +91 20 3050 4010
Chennai
Kolkata
No.10, Mahatma Gandhi Road
Unit No. 603 – 604,
Nungambakkam
6th Floor, Tower – 1,
Chennai 600 034
Godrej Waterside,
Tel: +91 44 3914 5000
Sector – V, Salt Lake,
Fax: +91 44 3914 5999
Kolkata 700 091
Tel: +91 33 44034000
Fax: +91 33 44034199

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the particular situation.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.