s.115QA — Tax on distributed income to shareholders
The company's own additional income-tax at twenty per cent of distributed income on a buy-back of shares, which applies only to a buy-back that took place before 1 October 2024 and, in its early years, only to a buy-back of unlisted shares.
Sunset rather than repealed, and the sunset is partial. The second proviso to sub-section (1), inserted by clause 39 of the Finance (No. 2) Act, 2024 with effect from 1 October 2024, provides that the sub-section shall not apply in respect of any buy-back of shares that takes place on or after that date, so the charge runs to 30 September 2024 and no further. Its reach at the other end of the period is narrower than the insertion date suggests. Chapter XII-DA was inserted by clause 31 of the Finance Act, 2013 with effect from 1 June 2013, and as originally enacted sub-section (1) charged a buy-back of shares "(not being shares listed on a recognised stock exchange)", so in its early years the charge reached only a buy-back of unlisted shares. Those words no longer appear in the sub-section, and the first proviso now keeps outside the charge a buy-back of listed shares in respect of which a public announcement was made on or before 5 July 2019. Because the second proviso operates on sub-section (1) alone, sub-sections (2) to (5) remain in force for those years, which is why recovery, interest under section 115QB and the sub-section (5) bar on deduction are still live in assessments of pre-sunset years. The Income-tax Act, 2025 carries no counterpart to the section.
Income-tax Act, 1961
s.115QA
Income-tax Act, 2025
No equivalent: charge not re-enacted
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 115QA(1) charges a domestic company additional income-tax at twenty per cent of distributed income on a buy-back of shares, in addition to the income-tax chargeable on its total income, and by sub-section (2) that charge is payable even where no income-tax is payable on the total income, so a loss-making company pays it. Distributed income is defined by Explanation (ii) to sub-section (1) as the consideration paid by the company on the buy-back as reduced by the amount which was received by the company for issue of such shares, determined in the manner as may be prescribed, so the shareholder's own cost and the price he paid in the secondary market are both irrelevant, and rule 40BB of the Income-tax Rules, 1962 supplies the subtrahend, sub-rule (10) deeming the amount received on a share issued without consideration on the basis of existing shareholding to be nil. Sub-section (3) requires the principal officer of the domestic company and the company to pay the tax within fourteen days from the date of payment of any consideration to the shareholder, sub-section (4) makes it the final payment of tax in respect of that income with no further credit to the company or anyone else, and sub-section (5) allows no deduction under any other provision to the company or a shareholder in respect of that income or the tax on it. Neither the surcharge nor the cess comes from the First Schedule to the Finance Act; both come from section 2 of the Finance Act for the year, and the surcharge is the larger of the two multipliers, so the surcharge as well as the cess is verified for the year before any percentage is accepted: on the Finance Act, 2017 a twelve per cent surcharge with a two plus one per cent cess gives 23.072 per cent, and on the Finance Act, 2025 pattern the same surcharge with a single four per cent cess gives 23.296 per cent. As originally enacted sub-section (1) was confined to a buy-back of shares "(not being shares listed on a recognised stock exchange)", so in its early years it reached only unlisted shares; those words no longer appear in the sub-section, and the first proviso keeps outside the charge a buy-back of listed shares in respect of which a public announcement was made on or before 5 July 2019 under the SEBI (Buy-back of Securities) Regulations, 2018. The shareholder's side of the same regime was section 10(34A). The Income-tax Act, 2025 has no counterpart to either, and nothing in Chapter XIII of that Act charges a company on a buy-back or on distributed income of any kind.
What the provision does
Taxes the company instead of the shareholder. It charges additional income-tax at twenty per cent of distributed income, payable whether or not the company owes income-tax on its total income, makes that payment final so that no credit for it may be claimed by the company or by any other person, and bars any deduction in respect of the income charged or the tax on it. It fastens the obligation to pay within fourteen days on the principal officer of the domestic company as well as on the company. What it does not do is tax a gain. It gives no allowance for the shareholder's cost of acquisition or for what he paid in the secondary market, the only subtrahend being what the company received on issue of the shares; in its early years it did not reach a buy-back of listed shares at all, sub-section (1) being confined then to a buy-back of shares not listed on a recognised stock exchange; it does not reach a buy-back of listed shares publicly announced on or before 5 July 2019; it does not reach a buy-back that takes place on or after 1 October 2024; it fixes no surcharge and no cess, both of which come from section 2 of the Finance Act for the year; and it says nothing about the shareholder's charge, which section 10(34A) removed by reference to this section as the matching half of the same regime.
Threshold questions
- Whether the buy-back took place before 1 October 2024, which the second proviso to sub-section (1) makes the condition of the charge
- Whether the shares bought back were listed shares and the buy-back fell in the early years of the charge, when sub-section (1) reached only a buy-back of shares not listed on a recognised stock exchange
- What the company received when it issued the shares bought back, which is the only subtrahend Explanation (ii) allows
- Whether any of the shares bought back were issued without consideration on the basis of existing shareholding, because sub-rule (10) of rule 40BB deems the consideration for such a share to be nil
- Whether the shares are listed shares in respect of which a public announcement was made on or before 5 July 2019, which the first proviso takes out
- Which Finance Act supplies the surcharge and the cess, because the surcharge is the larger multiplier and the cess rate decides whether the burden is 23.072 or 23.296 per cent
- Whether the tax was paid within fourteen days of the date the consideration was paid, failing which interest runs under section 115QB
- Whether rule 40BB has been applied to a buy-back before 1 June 2016, when the rule-making hook entered Explanation (ii)
In practice
The recurring disputes.
Whether a buy-back announced before 1 October 2024 and completed after it takes place before the sunset
Four provisions carry the 2024 switch and they use three formulae. The second proviso to sub-section (1) and the proviso to section 46A both speak of a buy-back "that takes place on or after the 1st day of October, 2024"; the proviso to section 10(34A) speaks of a buy-back "by a company on or after" that date; and section 2(22)(f) carries no date of its own, operating from the commencement words of clause 3(a) of the Finance (No. 2) Act, 2024. None of the expressions is defined anywhere in the Act. For the Revenue, the four limbs were enacted in one Act to work as a set, the only event that can date a buy-back is its completion, which is what section 68(7) of the Companies Act, 2013 runs from, and an announcement alone distributed nothing. For the assessee, an offer authorised, opened, closed and tendered into before the date took place before it, "takes place" is not "is completed", and a drafter who used three formulae in one clause-set meant the difference. The firm's view is that completion is the better reading, because the company's own obligation under sub-section (3) ran from payment of the consideration and not from the resolution. It is undecided, and nothing prevents the three formulae from splitting on the same facts, so on a straddling file the dates are pleaded and proved.
Whether rule 40BB can supply the subtrahend for a buy-back before 1 June 2016
The words ", determined in the manner as may be prescribed" are the rule-making hook on which rule 40BB hangs, and they entered Explanation (ii) to sub-section (1) by clause 58 of the Finance Act, 2016 with effect from 1 June 2016, while Chapter XII-DA had been in force since 1 June 2013. For the Revenue, rule 40BB is machinery. The figure to be found, the amount received by the company on issue, was in the Explanation from the start, and a rule prescribing how an existing figure is computed can be applied in any assessment made after it is notified. And on the facts that matter the rule changes nothing. Nothing was received by the company when it issued a bonus share, so the subtrahend is nil on the unqualified words as much as it is under sub-rule (10), and sub-rule (13) does no more for a share issued at face value. The assessee has to show not merely that the rule cannot be applied but that the unqualified words produce a different figure on his own facts. For the assessee, a rule has no application to a period before the rule-making power existed, and rule 40BB does not merely measure the amount received, because sub-rule (10) deems it nil, sub-rule (12) imposes first-in-first-out on a pooled dematerialised holding and sub-rule (13) deems it to be face value, which are substitutions for the statutory figure rather than methods of finding it. The date of the hook is not arguable; what the hook decides is. The firm's view is that for an earlier buy-back the subtrahend falls on the unqualified words, so whether anything was received on an issue of bonus shares is open on those words rather than closed by a deeming sub-rule. The question is live only where an early year is reopened, which is where it arises.
Which Finance Act supplies the surcharge and the cess on the liability
Both come from section 2 of the Finance Act for the year and not from the First Schedule. Section 2(1) of each Finance Act is tied to a named assessment year, while the sub-section that carries the twelve per cent surcharge on tax charged and paid under this section, sub-section (4) in both of the Finance Acts in point, has no year hook of its own. For the Revenue, sub-section (3) requires payment within fourteen days from the date of payment of the consideration, so the liability arises then and the Act in force on that date governs it. For the assessee, the surcharge sub-section sits in a section whose first sub-section is confined to one assessment year, and sub-section (1) charges its tax "in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year", which locates the charge in an assessment year. The text does not answer it. The firm's view is that the Act in force when the fourteen-day obligation arises governs, because that is the only date the section itself fixes. The choice is immaterial where two successive Finance Acts carry the same surcharge and cess and decides the figure where the cess changed, so a computation should name the Act it applies and expect the attribution to be tested.
Whether the section was an exhaustive code that ousted section 56(2)(x)
The contention was pressed in Sanjana Cryogenic (ITAT Mumbai, 31 August 2026), where an addition under section 56(2)(x) was made in the company's own hands on a buy-back, and at paragraph 23 the Tribunal held it "unnecessary for us to decide the broader contention of the assessee that section 115QA constitutes such an exhaustive and exclusive code governing buy-back that section 56(2)(x) can never operate alongside it", deciding the appeal instead on the ground that the company received no property. For the Revenue, the two charges sit in different chapters on different measures, this section taxes distributed income and says nothing about clause (x), which applies to any person, sub-section (5) bars a deduction in respect of that income and the tax on it rather than excluding another charge, and nothing in the Chapter is expressed to be exhaustive. For the assessee, Chapter XII-DA was a complete scheme, carrying a charge, a measure, a prescribed subtrahend, a payment date, interest, recovery, finality and a deduction bar, and a transaction charged in full in the company's hands cannot also generate income in those hands on the same facts. It is expressly undecided by the only forum before which it arose. The firm's view is that it is worth pleading in the alternative on a pre-sunset year, but second, because the ground that has succeeded in both of the clause (x) cases is the absence of a receipt.