Court rules share buyback is capital reduction, not property receipt under undervaluation provisions.
Meetu Kumari | Apr 28, 2026 |
HC Clarifies Buyback Transactions Outside Deemed Income Provisions
The Revenue challenged the order of the ITAT, which had upheld the deletion of the addition made under Section 56(2)(x) in the hands of the assessee, a share broking company engaged in clearing trades. During AY 2018–19, the assessee undertook a buyback of 28.62 lakh shares at Rs. 313.40 per share. The Assessing Officer compared this with the fair market value (Rs.370.46 per share under Rule 11UA) and treated the difference of Rs. 16.33 crore as taxable income under Section 56(2)(x), alleging that the company had acquired “property” below fair value. The CIT(A) deleted the addition, holding that the buyback of own shares is not an acquisition of property but a capital reduction exercise. The ITAT affirmed this view, leading to the Revenue’s appeal before the High Court.
Issue Before Court: Whether buyback of a company’s own shares constitutes “receipt of property” at undervalue so as to attract Section 56(2)(x) of the Income Tax Act ?
HC’s Decision: The Delhi High Court dismissed the Revenue’s appeal and upheld the deletion of the addition, ruling that buyback of own shares cannot be treated as purchase of property under Section 56(2)(x). The Court observed that: Buyback is governed by Section 68 of the Companies Act, 2013 and fundamentally represents a reduction of share capital, not acquisition of an asset.
Once shares are bought back, they are extinguished and destroyed, meaning no “property” survives in the company’s hands.The entire premise of Section 56(2)(x)—taxing acquisition of property at less than fair value—fails in such a situation.
The Court categorically held that buyback is the antithesis of property acquisition, and treating it as such would be legally flawed.It further noted that although Section 56(2)(x) has a wide scope, it cannot be stretched to cover transactions that are structurally different in nature, such as capital restructuring.While the Court acknowledged that the ITAT’s reliance on a decision under Section 56(2)(viia) was technically misplaced, it clarified that the ultimate conclusion remained correct in law.
To Read Full Judgment, Download PDF Given Below.
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