Delhi High Court has ruled that share buy-back is capital reduction, not acquisition of assets. Accordingly, it cannot be taxed.
“The view which the AO (Assessment Officer) had taken in treating the buy-back of shares of the company to be a transaction leading to generation of profit/deemed profit is clearly flawed and untenable in the eye of law,” a division bench of Justices Dinesh Mehta and Vinod Kumar said in a recent ruling.
According to the bench, section 68 of the Companies Act expresses that the buy-back of shares 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.
“A person cannot be taxed for so-called deemed profit from the property (shares) which accrues to it consequent to destruction of the very same property,” it said while explaining that once the shares are bought back, the purported property extinguishes or vanishes.
Hence, “the very hypothesis that the respondent-company had acquired an asset at lesser rate than the fair market value has no legs to stand on. Buy-back of its own shares is antitheses to buying an asset,” the bench said. It may be noted that per Companies Act 2013 after the completion of the buy-back under this Section, the company needs to extinguish and physically destroy the shares or security so bought back.
Sandeep Sehgal, Partner at AKM Global, opined that the said ruling is a significant reaffirmation of first principles. A buy-back is fundamentally a capital restructuring exercise as it leads to extinguishment of shares and a corresponding reduction in share capital, rather than any acquisition of property by the company. In that context, attempting to invoke Section 56(2)(x) on the premise of ‘receipt’ at an undervalue seems to be conceptually misplaced.
The judgment aligns the tax treatment with the underlying legal character of the transaction under company law. Once shares are extinguished, the very basis of treating them as ‘property received’ ceases to exist. The ruling also implicitly cautions against an overly expansive reading of deeming provisions, particularly where they are applied outside their intended scope.
“From a practical standpoint, this provides much-needed certainty to taxpayers and avoids the risk of unintended taxation in genuine corporate actions like buy-backs. It reinforces the principle that tax outcomes should follow the substance and legal form of the transaction, rather than a strained interpretation of anti-abuse provisions,” he said.