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Shares buyback by subsidiary taxable under capital gains

31st March, 2012

The Authority for Advanced Rulings examined whether buy back of shares by an Indian subsidiary – a public limited company from its parent would attract capital gains.

The parent company based in Germany held 99.886% of the shares and the rest was held by 6 nominees. The applicant contended that as per Section 47(iv) of the Income Tax Act, 1961, the transfer of a capital asset by a company to its Indian subsidiary, if the parent or its nominees hold the entire share capital of the subsidiary, will not attract capital gains tax.
The AAR, however, in ruling dated 27th February, 2012 held that in the instant case, the parent along with the nominees held 100% of the share capital and treating all the seven shareholders as one would mean that the Indian subsidiary was not a legal entity as per Section 49(3) of the Companies Act, 1956. Section 47(iv) could not be read as parent company and its nominees holding 100% of the share capital of the Indian subsidiary. Further Section 46A has been specifically introduced in Income Tax Act, 1961 to cover capital gains arising on buyback of shares and the applicant’s case wherein it would receive consideration from the subsidiary was covered by the same.
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