Delhi High Court Holds Share Buy-Backs Below Fair Market Value Not Deemed Income

Delhi High Court Upholds Taxpayer's Victory in Share Buyback Case

In a significant ruling, the Delhi High Court has dismissed the Income Tax Department's appeal against Globe Capital Market Ltd, holding that a company's buyback of its own shares cannot be treated as taxable income. The judgment upholds earlier decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT), which had deleted an addition of Rs 16.33 crore made by the Assessing Officer (AO) in the Assessment Year 2018–19.

The case relates to the Assessment Year 2018–19, when the AO examined the company's buyback of 28.62 lakh shares at Rs 313.40 per share. The tax officer noted that the fair market value (FMV), calculated under Rule 11UA, was Rs 370.46 per share. On this basis, the AO treated the difference of Rs 57.06 per share—amounting to Rs 16.33 crore as income invoking Section 56(2)(x), arguing that the company had acquired 'property' (shares) at a price below FMV. The total assessed income was accordingly increased to Rs 126.96 crore.

Section 56(2)(x) of the Income Tax Act, 1961, relates to deemed income and taxes the recipient on any sum of money or property, whether it is immovable or movable, received without consideration or for inadequate consideration exceeding Rs 50,000 in a financial year. It is treated as Income from Other Sources, aimed at preventing tax evasion and applying to all classes of assesses.

The CIT(A), in its January 2023 order, rejected the tax department's view, holding that buyback of shares is not a 'purchase of property' but a transaction leading to a reduction of share capital. This view was further affirmed by the income tax tribunal.

| Year | Assessed Income | | --- | --- | | 2018-19 | Rs 126.96 crore | | After deletion of addition | Rs 110.63 crore |

The Income Tax Department argued that shares fall within the definition of 'property' under Section 56(2)(x) of the act, and any purchase below FMV should attract tax. The taxpayer company Globe Capital, on the other hand, contended that buyback is governed by the Companies Act and is not a purchase of an asset but a capital restructuring exercise.

The High Court sided with the taxpayer, emphasizing the true nature of buyback transactions. The HC held that the buyback of shares is fundamentally a reduction of share capital and not an acquisition of property. Under company law, shares bought back must be extinguished and destroyed, meaning no asset survives in the company's hands. The HC noted that taxing such a transaction would be illogical, as it would imply taxing a company on profit arising from an asset that no longer exists.