Share Buyback Not Acquisition Of Property: Delhi High Court Deletes ₹16.33 Crore Tax Addition Against Globe Capital

The Delhi High Court has upheld the deletion of a Rs 16.33 crore addition against Globe Capital Market Ltd., holding that a company's buyback of its own shares does not amount to acquisition of “property” and Section 56(2)(x) of the Income Tax Act has no application to such transactions.

A Division Bench of Justices Dinesh Mehta and Vinod Kumar dismissed the appeal filed by the Principal Commissioner of Income Tax, affirming the Income Tax Appellate Tribunal's decision, which had upheld relief granted to the assessee, a company engaged in share broking and trade clearing.

Rejecting the Revenue's core premise, the Court observed, “A buyback of its own shares is antitheses to buying an asset.” It held that the assumption that a company acquires “property” while buying back its own shares is legally untenable.

The issue traces back to assessment proceedings for AY 2018 to 2019, when the Assessing Officer invoked Section 56(2)(x), a provision that brings to tax transactions where property is received below its fair market value.

In doing so, the officer viewed the company's buyback of its own shares at Rs 313.40 per share, compared to a fair market value of Rs 370.46, as an acquisition of property. The difference, amounting to Rs 16.33 crore, was consequently added to the company's income.

That approach did not find favour on appeal. The Commissioner of Income Tax (Appeals) held that a buyback is, in substance, a reduction of share capital rather than a purchase of property and deleted the addition. The Tribunal went on to affirm this reasoning.

Before the High Court, the Revenue argued that shares fall within the definition of “property” under the Act and that no distinction exists between the purchase of a company's own shares and those of another company. It also relied on the expanded scope of Section 56(2)(x), introduced to widen taxation of undervalued transactions.

The court, however, rejected this contention after analyzing the legal framework governing buybacks under Section 68 of the Companies Act. It noted that a buyback results in the extinguishment of shares and reduction of capital and not the acquisition of any asset.

"In other words, section 68 of the Companies Act in so many words expresses that the buy-back of share is reduction of the share capital. There can be no doubt that as per sub-section (vii), the respondent-company must have mutilated or destroyed the shares or so-called property which the AO has sought to tax"

Emphasising the nature of the transaction, the court observed that once shares are bought back, they cease to exist, stating that “once the shares are bought back, the purported property extinguishes or vanishes.”

It held that the very basis of the Revenue's case, which treated buyback as acquisition of property at undervalue, was untenable.

While agreeing that the tribunal's reliance on a precedent under a different provision was misplaced, the court clarified that the tribunal had independently affirmed the well-reasoned findings of the appellate authority.

Concluding that the Assessing Officer's approach was “clearly flawed and untenable in the eye of law,” the court dismissed the Revenue's appeal.