Exemption on Deemed Dividend from Share Buyback: Key Mumbai ITAT Ruling in Navroze Shiamak Marshall Vs ITO

Overview of the Controversy

The Mumbai Bench of the ITAT in Navroze Shiamak Marshall Vs ITO has reiterated an important legal position: when the Revenue itself characterises consideration received on buyback or reduction of share capital as deemed dividend under Section 2(22)(d), it cannot thereafter refuse the corresponding exemption available under Section 10(34) read with Section 115-O.

In the case, the assessee received substantial consideration from M/s. Spirax Marshall Pvt. Ltd. pursuant to a Court-approved scheme involving purchase of shares by the company. While the assessee initially declared this as Long-Term Capital Gain (LTCG) and claimed deduction under Section 54F, the Department, in group cases of other shareholders, had already taken a stand that similar receipts were deemed dividend and not capital gains. These earlier matters had travelled up to the Bombay High Court, which confirmed that once the payment falls within Section 2(22)(d), it qualifies as dividend for the purposes of Section 115-O, and such dividend is exempt in the hands of the shareholder under Section 10(34).

Relying on this binding precedent and the Department’s own stand in connected cases, the Tribunal held that the assessee’s receipt must also be treated as deemed dividend under Section 2(22)(d) and consequently exempt under Section 10(34). The addition made by the Assessing Officer (AO) was therefore deleted in full.

Factual Background

Shareholding and Transaction Details

  • The assessee, now deceased, held 25,466 shares in M/s. Spirax Marshall Pvt. Ltd.
  • These shares were acquired on 31.03.2006 for Rs. 1,04,67,163/-.
  • The same shares were later transferred to the company on 05.04.2007 for Rs. 4,96,58,700/-, pursuant to a scheme of arrangement sanctioned by the High Court, effectively a buyback/reduction of capital.

In the return for AY 2008-09, the assessee:

  • Declared net LTCG of Rs. 3,91,91,537/-, after claiming indexed cost of acquisition; and
  • Claimed deduction under Section 54F in respect of investment in a residential flat at Marble Diva amounting to Rs. 3,99,67,910/-.

Reassessment Proceedings

The original assessment was reopened under Section 147. During reassessment:

  1. The AO questioned:

    • Whether the gain could be treated as LTCG; and
    • The eligibility of deduction u/s 54F.

  2. The assessee filed detailed submissions to justify:

    • The capital gains nature of the income; and
    • Satisfaction of the conditions under Section 54F.

  3. The AO, however:

    • Rejected the Section 54F claim, alleging non-fulfilment of the condition of constructing a residential house within three years of transfer;
    • Denied LTCG treatment and disallowed indexation; and
    • Added back Rs. 3,91,91,537/- to the assessee’s income.

The first appellate authority (NFAC) confirmed the AO’s view. The assessee carried the matter to the ITAT.

Assessee’s Core Argument Before ITAT

Reliance on Group Cases and Consistency

The assessee’s primary contention was not merely about capital gains versus dividend classification, but about consistency and the legal consequences of the Revenue’s own stand in identical transactions of related shareholders.

The assessee pointed out:

  • Her children and other family members were also shareholders of M/s. Spirax Marshall Pvt. Ltd.
  • They entered into the same buyback/scheme of arrangement, disposing their shares back to the company.
  • In those cases, although the assessees had also declared the income as capital gains, the Department reclassified the receipts as deemed dividend under Section 2(22)(d).

The Tribunal was referred to the following decisions:

  1. Addl. CIT vs. Kamal Imran Panju, ITA No. 7620/Mum/2011, order dated 31.12.2013.
  2. **ACIT vs. Smt.