Cognizant moves Madras High Court against ITAT ruling on dividend tax

IT major Cognizant has moved the Madras High Court against a ruling of the Income Tax Appellate Tribunal (ITAT)'s Chennai bench that held the company liable to a dividend distribution tax (DDT) payment on ₹19,000 crore buyback of shares through a scheme of arrangement.

The tribunal had last month held Cognizant's buyback through a court-approved scheme as a "colourable device" to evade tax and said it will attract dividend distribution tax.

Responding to ET's query, Cognizant said, "We do not comment on sub judice matters". In 2017-18, Cognizant bought back around 9.4 million equity shares from shareholders in the US and Mauritius at ₹20,297 per share for a total consideration of ₹19,080 crore.


The assessing officer (AO) categorised the consideration paid by Cognizant for the purchase of its own shares as a dividend under Section 2(22) of the Income Tax Act, 1961 and demanded dividend tax, which was further upheld by the Commissioner of Income Tax (Appeals).

The AO said the scheme formulated by Cognizant is similar to distribution of accumulated profits by a company, whether capitalised or not. The reason is that such a scheme "entails the release by the company to its shareholders of all or any part of the assets of the company, and thus, said payment is taxable as deemed dividend u/s.2(22)(a) of the Act".

The CIT (A) also observed that Cognizant tried to show the scheme as something that would not lead to capital reduction, but "the argument falls flat as 'purchase of own shares' cannot be effected without capital reduction".

Cognizant claimed that the consideration paid by it for the purchase of its own shares should be taxable as capital gains in the hands of shareholders and not as dividend. Further, Cognizant argued that the order passed by the AO and confirmed by CIT (A) fails to consider the amendment, with effect from June 1, 2016, to Section 115 QA of the Act.