Delhi High Court: PCIT v. M/s Globe Capital Market Ltd. [ITA No. 364/2024]
The controversy arose from the assessment proceedings for Assessment Year 2018–19, wherein the Assessing Officer invoked Section 56(2)(x) of the Income-tax Act, 1961, which taxes the receipt of property for inadequate consideration. The Assessing Officer treated the company’s buyback of its own shares at a price lower than their fair market value as an acquisition of “property” and, applying Rule 11UA, brought the differential amount to tax as deemed income under Section 56(2)(x). On appeal, the Commissioner of Income-tax (Appeals) held that a buyback of a company’s own shares is, in substance, a reduction of share capital under Section 68 of the Companies Act, 2013, and not an acquisition of property, and accordingly deleted the addition. The Income Tax Appellate Tribunal affirmed this view. Before the Delhi High Court, the Revenue contended that shares are expressly included within the definition of “property” under Section 56(2)(x) and that the provision makes no distinction between the acquisition of a company’s own shares and those of another company. It was further argued that Section 56(2)(x), introduced to widen the scope of taxation of undervalued transactions, squarely applied to the buyback in question. .
The High Court ruled in favour of the taxpayer and he Delhi High Court held that buy-back of a company’s own shares under Section 68 of the Companies Act, 2013 is a capital reduction mechanism and not an acquisition of “property” by the company. Upon buy-back, the shares are statutorily extinguished and destroyed; therefore, the company cannot be said to have acquired a capital asset so as to attract Section 56(2)(x) of the Income-tax Act. Consequently, the difference between the buy-back price and the fair market value cannot be taxed as deemed income under Section 56(2)(x).
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