Buyback Not Property – Sec 56(2)(x) Addition Invalid | HC

Case Details: Principal Commissioner of Income-tax vs. Globe Capital Market Ltd. - [2026] 185 taxmann.com 513 (Delhi)

Judiciary and Counsel Details

• Dinesh Mehta & Vinod Kumar, JJ.
• Vipul Agrawal, SSC, Ms Harshita Kotru, Gaoraang Ranjan, Advs. & Lakshi Shriwal, JSC for the Appellant.
• Sumit Lalchandani & Ms Ananya Kapoor, Advs. for the Respondent.

Facts of the Case

The assessee-company, engaged in the business of share broking and trade clearing, made a buyback of 28.62 lakh equity shares. During the assessment, the Assessing Officer (AO) noticed that the fair market value of shares was Rs. 370.46 per share. However, the assessee made a buy-back at Rs. 313.40 per share. AO held that the buy-back resulted in the acquisition of “property”. According to him, the difference should be taxed as income under the head “Income from other sources”.

On appeal, CIT(A) deleted the additions made by the AO. The Tribunal also affirmed the order of CIT(A). The matter reached the Delhi High Court.

High Court Held

The High Court held that the case involved an interesting issue of law. The facts were not in dispute that the assessee-company had purchased its own shares under the buy-back offer. It can also be seen that the payment was made from free reserves and security premiums. But for Section 68 of the Companies Act and the procedure provided thereunder, there is no way a company can buy its own shares.

Buying its own shares is otherwise alien to the concept of the corporate entity and the provisions of the Companies Act. Securities or shares of a company can, in a given case, be property in the hands of a corporate entity, but for the issuing company, they are certificates issued to its members in lieu of the contributions they have made towards the capital or for subscribing to the shares.

Buy-back of shares essentially means a reduction in the company’s capital, which is otherwise impermissible unless recourse is taken to Section 68 of the Companies Act. One has to bear in mind that Section 68 of the Companies Act mandates that after the completion of the buy-back under this section, the company shall extinguish and physically destroy the shares or securities so bought back. In other words, Section 68 of the Companies Act, in so many words, expresses that the buy-back of shares is a reduction of the share capital.

There can be no doubt that, as per Section 68, the assessee-company must have mutilated or destroyed the shares or so-called property which the AO has sought to tax. A person cannot be taxed for the so-called deemed profit from the property (shares) which accrues to it consequent to the destruction of the very same property. Once the shares are bought back, the purported property extinguishes. Hence, the very hypothesis that the assessee-company had acquired an asset at a rate lower than its fair market value has no legs to stand on. Buy-back of its own shares is the antithesis of buying an asset.

The interpretation which the AO seeks to give to Section 56(2)(x) at first blush appears to be attractive, but if the same is tested on the anvil of principles of the Companies Act, common prudence, and provisions of the Income Tax Act, the same turns out to be holding no water.

List of Cases Reviewed

• Deputy Commissioner of Income-tax vs. Globe Capital Market Ltd. [2023] 156 taxmann.com 620 (Delhi – Trib.)/[2023] 203 ITD 758 (Delhi – Trib.) (para 31) affirmed.
• VITP (P.) Ltd. v. Dy. CIT [2022] 143 taxmann.com 304/197 ITD 395 (Hyd-Trib) (para 29) distinguished.

List of Cases Referred to

• VITP (P.) Ltd. v. Dy. CIT [2022] 143 taxmann.com 304/197 ITD 395 (Hyd-Trib) (para 9).