Madras court stays Rs.9403 crore tax demand in Cognizant’s buyback case

The Madras High Court has stayed the tax demand of Rs. 9403.09 crore in the case of Cognizant Technology’s Rs. 19,000 crore buyback dividend distribution tax controversy.

The bench of Justice R. Mahadevan and Justice Mohammed Shaffiq has directed that the assessee, Cognizant Technology, make a payment of Rs. 1500 crores in cash or give a letter to the bank to remit Rs. 1500 crores to the credit of the respondent or department from the fixed deposits available and furnish property security for the balance tax liability with interest and penalty to the respondent within a period of four weeks. On the payment and deposit of title deeds pertaining to the property, the department shall release the lien on the remaining fixed deposits lying in the banks.

The appellant/assessee has challenged the order passed by the Income Tax Appellate Tribunal, Chennai, dismissing the appeal relating to the assessment year 2017–18. The ITAT has held that Cognizant Technology is liable to pay dividend distribution tax on the buyback of Rs. 19,000 crore of shares. The purchase of its own shares through a scheme sanctioned by the jurisdictional HC in terms of provisions of Section 391-393 of the Companies Act, 1956, amounted to the distribution of accumulated profits, which entails the release of all or part of the assets of a company on reduction of capital, which attracts provisions of Section 2(22) of the Income Tax Act, 1961.

The assessee contended that the consideration paid by the appellant for the purchase of its own shares in accordance with the scheme, which is approved by the Court, is taxable only as capital gains in the hands of the shareholders under Section 46A. The subsequent amendment in Section 115QA, with effect from June 1, 2016, clearly indicates the legislative intent and taxation framework that the purchase of its own shares under the scheme by the appellant was covered under Section 46A. Without properly appreciating it, the Tribunal erred in treating the consideration paid by the appellant for the purchase of its own shares from the shareholders as a dividend as per Section 2(22). Thus, the court held that the appellant is liable to pay under Section 115-O and dismissed the appeal by confirming the orders passed by the CIT (A) and the Assessing Officer.

The department contended that in the assessment year 2013–14, in order to avoid payment of tax, the appellant had distributed its accumulated profits through the buyback of shares, triggering Section 77A of the Companies Act, 1956. It was done just prior to the introduction of Section 115QA, which was brought into force. The provisions of Section 46A are not applicable to all forms of buyback, and thus, the shareholders are liable to pay capital gains tax on the purchase of their own shares in accordance with the law. Thus, the conditions of Section 115-O r/w Section 2(22) are satisfied. Hence, the authorities have rightly invoked it and levied tax on the appellant, which was affirmed by the Tribunal.

The department urged that, as per the order of the appellate authorities, the assessee is liable to pay the tax demanded by the Assessing Officer. Hence, the outstanding demand raised against them needs to be secured to protect the interest of the revenue. The financial difficulty cited on the part of the appellant has no merit, as their current assets as of March 31, 2022, are around Rs. 21,644 crore.

The court granted the interim stay on the tax demand subject to the fulfilment of the condition of payment of Rs. 1500 crores. In the event of default on the part of the appellant in complying with the conditions, the order shall stand vacated automatically, without any further reference to the court. It is also open to the department to recover the tax liability from the appellant in the manner known to law. Live Law