Page 95 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes (c) Any distribution made to shareholders of a company on its liquidation, to the extent to
which it is attributable to the accumulated profits of the company.
(d) Any distribution to its shareholders on the reduction of its capital. to the extent to which
the Company possess accumulated profits whether capitalised or not.
But “dividend” does not include:
As per section 22 (iv) of the Act (as amended), any payment made by a company on purchase of
its own shares from a shareholder in accordance with the provisions of section 77A of the
Companies Act, 1956. Thus buy back of shares and securities does not tantamount to distribution
of dividend to shareholders.

Tax on distributed profits of domestic companies

Section 115-O of the Act says that, in addition to the income-tax chargeable in respect of the total
income of a domestic company for any assessment year, any amount declared, distributed or
st
paid by such company by way of dividends on or after the 1 April, 2003, whether out of current
or accumulated profits shall be charged to additional income-tax at the rate of twelve and one-
half per cent.
The Principle officer of the company shall be liable to pay the tax on distributed profits to the
credit of the Central Government within fourteen days from the date of:
(a) declaration of any dividend
(b) distribution of any dividend
(c) payment of any dividend

whichever is earliest
As regards expenses incurred in the buy back process, judicial pronouncements are not clear
with some holding that expenses are of revenue nature whereas others have advocated as capital
nature. In fact, it is for the Company to present its stand about the usefulness of the buy back and
claim the expenses as they deem best in their interest.

Once the buy back process is complete, the shares are cancelled. Buy back does not result into a
transfer and hence, no stamp duty if payable. It is neither a transfer nor a release as per Indian
Stamp Act.
The accounting entry is
(i) In case investment are sold for buying back of own shares:
Bank Dr

To Investment Account
(The difference if any will be credited to Profit on sale of Investment Account or debited to
Loss on sale of Investment Account, which in turn will be transferred to profit & loss
account)
(ii) In case the proceeds of fresh issues are used for buy-back purpose, then on fresh issue.
Bank Dr

To Debentures/other Investments Account
To Securities Premium Account (if any)

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