Madras High Court offers Cognizant partial relief in buyback case

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Updated: September 7, 2019 6:33:32 AM

The I-T Department had issued an order on March 23 that the transactions made for the buyback arrangement had to be taxed under Section 115-O of the Income Act as it would constitute dividend and not capital gain.

cognizant, cognizant noida, cognizant news, cognizant careers, cognizant share price, cognizant gurgaon, cognizant india, cognizant income tax, cognizant taxThe court offered relief to the company by setting aside some observations of the single judge on transactions linked to the 2016 share buyback arrangement.

Partially allowing IT major Cognizant’s appeal against a single judge’s order in an income tax matter related to a share buyback scheme, a division bench of the Madras High Court on Friday upheld its direction to the company to approach the tax appellate authority for a remedy. The court offered relief to the company by setting aside some observations of the single judge on transactions linked to the 2016 share buyback arrangement.

The division bench’s order came on an appeal filed by the company against the single judge order that dismissed its petition against the Income Tax Department’s demand of `2,806 crore in connection with a scheme the company had made to buy back shares from shareholders in 2016.

In his interim order, the single judge had directed the company to deposit `495 crore till the time its appeal was decided by the appellate authority.

Considering the appeal by Cognizant, the division bench comprising MM Sundresh and M Nirmal Kumar said, “… the direction of the single judge with respect to the deposit and the liberty granted to file an appeal are accordingly upheld.”

“However, the findings rendered on the nature of transaction and the scope under Section 115-O of the Act are accordingly set aside. The issue as to whether the impugned order should be preceded by a procedure involving adjudication and the requirement of violation of principles of natural justice are also left open to be decided in the appeal. Accordingly, the writ appeal stands allowed in part,” said the court.

The division bench granted four weeks to the company from the date of receipt of a copy of the order to file an appeal before the appellate authority. As and when such an appeal is filed, the same will have to be disposed of within a period of eight weeks thereafter, it added.

“When in a fiscal statute, hierarchy of remedy of appeals are provided, the party has to exhaust them instead of seeking relief by invoking the jurisdiction of this court under Article 226 of the Constitution,” observed the division bench.

The bench, however, dismissed the findings of the single judge including that the transactions were not mere buying back of shares but granting dividend to shareholders, observing that the single judge should not have gone into the merits of the case, while granting liberty to appeal before tax appellate authority.

The I-T Department had issued an order on March 23 that the transactions made for the buyback arrangement had to be taxed under Section 115-O of the Income Act as it would constitute dividend and not capital gain.

Subsequently, the bank accounts of the company were frozen.

Challenging the order, the company approached the High Court. Following a conditional interim order granted by the single judge, the company paid a sum of `495 crore. The division bench said that it did not find any error in the order of the single judge with respect to the deposit made during the pendency of the interim order. It is only an interim arrangement directed to be made pending the appeal.

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