Recently, Bharti Telecom (unlisted) sent payments to its shareholders by way of capital reduction. The shares were acquired through right issues at ₹10 in January 2016. Please let me know the income tax treatment in the hands of a shareholder.

Dilip Kumar Bagaria

As per the provisions of Section 2(22)(d) of the Income Tax Act, any distribution made by a company to its shareholders on reduction of its capital is considered a dividend in the hands of the shareholders, to the extent the company has accumulated profits (capitalised or not), and the company is liable to pay Dividend Distribution Tax (DDT) @ 20.56 per cent of the amount deemed as dividend.

Post introduction of Section 115BBDA w.e.f. April 1, 2017, (AY18-19), the dividend received/deemed to be received by a shareholder in excess of ₹10 lakh is taxed at 10 per cent, plus applicable surcharge and cess, in the hands of shareholders.

Further, any sum received on account of reduction of capital which exceeds the amount considered as dividend, should be considered as taxable receipt, subject to capital gains tax as per Section 45 of the I-T Act. The same was also upheld by the Supreme Court in CIT vs G Narasimhan.

I bought an open plot of residential land in Secunderabad (Telangana) for ₹60 lakh, and got it registered under my name in April 2019. I was not aware of the TDS provisions of the I-T Act and so, neither deducted nor paid the TDS. I recently came to know of TDS and contacted the seller, who said that he had bought a residential house with the sale proceeds of the plot and is not liable to pay any tax. What shall I do at this juncture?

Shivakumar Gogula

As per the provisions of Section 194(IA) of the Income Tax Act, a person who is the transferee of an immovable property (other than agricultural land), shall at the time of making payment to a resident transferor, deduct taxes at 1 per cent on sales consideration for such transfer, provided the amount exceeds ₹50 lakh. Thus, assuming that the seller is a resident individual, you were required to deduct taxes at 1 per cent of the sales consideration while making payment to the seller.

As per the provisions of Section 201 of the Income Tax Act, if a person required to deduct any tax fails to do, he/she shall be considered to be an assessee in default in respect of such taxes and liable to pay the required amount along with consequential interest at 1 per cent per month for such delay.

Also, the tax officer may levy penalty for such default to the extent of the amount of tax due, unless the officer is satisfied that the error was on account of good and sufficient reasons.

Since you have failed to comply with the requirement of deducting and depositing taxes as per the aforementioned provisions, you may be considered as an assessee in default and liable to pay a tax amount along with consequential interest and penalty.

However, if the seller satisfies the following requirements, you may not be considered to be in default:

1. Seller should furnish his return of income as per the provisions of Section 139 of the I-T Act, for the concerned financial year; and

2. Seller should take into account the sum received from you on transfer of the plot, while computing income in the tax return; and

3. Seller should pay tax as due on such income declared by him in his return of income.

In such a scenario, you shall then be required to furnish a certificate to this effect in Form 26A (as per Rule 31ACB of the Income Tax Rules) along with an accountant’s certificate with the Director General of Income Tax (Systems).

You may want to explore the possibility of claiming the benefit of the above provisions, and may reach to your tax consultant to discuss the feasibility of this proposition based on the complete facts of your case.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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