Listen to this article in summarized format
×
Subscribe to
Unlock AI Briefing and Premium Content
New Year Offer 24 Hours Left
Subscribe NowAlready a member? Sign In
What's Included
- Exclusive Stories
- Daily ePaper Access
- Smart Market Tools
- Curated Investment Ideas
- Ad-lite Experience
Subscription
iStockNew Delhi: Buyback of shares by companies at a price below the fair market value does not amount to an "income" and hence no income tax can be levied on it, the Delhi High Court held on Friday, making a distinction between capital reduction and the acquisition of an asset.
Share buybacks are capital restructuring and not asset acquisition, a division bench comprising Justices Dinesh Mehta and Vinod Kumar said, upholding an order of the Income Tax Appellate Tribunal in a case involving brokerage firm Globe Capital Market.
Rejecting the income tax department's stand that such repurchases lead to generation of profit, or deemed profit, and hence taxable, the bench held that this argument was "clearly flawed and untenable in the eyes of law".
Senior Supreme Court lawyer Tarun Gulati said the judgment correctly held that the buyback of shares did not amount to acquisition of an asset and the difference between the fair market value of the share and the acquisition price could not be treated as income in the hands of the company. "This decision will be a big relief to all companies intending to buy back shares and will reduce the cost of buyback of shares," he said.
The court said securities or shares of a company could be a property in the hands of a corporate entity but for the issuing company, it is a certificate issued to its members with respect to the contribution they have made towards the capital or for subscribing to the shares.
It accepted the tribunal's view that the transaction was not a purchase of shares simpliciter but was a purchase of its own shares by a company, which amounts to reduction of the share capital rather than purchase of capital asset.
Under Section 68 (vii) of the Companies Act, companies must extinguish and physically destroy the shares or security they bought back, which is essentially a reduction in share capital, the court noted. "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. Because, once the shares are bought back, the purported property extinguishes or vanishes," it observed.
(You can now subscribe to our Economic Times WhatsApp channel)
Share buybacks are capital restructuring and not asset acquisition, a division bench comprising Justices Dinesh Mehta and Vinod Kumar said, upholding an order of the Income Tax Appellate Tribunal in a case involving brokerage firm Globe Capital Market.
Rejecting the income tax department's stand that such repurchases lead to generation of profit, or deemed profit, and hence taxable, the bench held that this argument was "clearly flawed and untenable in the eyes of law".
Senior Supreme Court lawyer Tarun Gulati said the judgment correctly held that the buyback of shares did not amount to acquisition of an asset and the difference between the fair market value of the share and the acquisition price could not be treated as income in the hands of the company. "This decision will be a big relief to all companies intending to buy back shares and will reduce the cost of buyback of shares," he said.
The court said securities or shares of a company could be a property in the hands of a corporate entity but for the issuing company, it is a certificate issued to its members with respect to the contribution they have made towards the capital or for subscribing to the shares.
It accepted the tribunal's view that the transaction was not a purchase of shares simpliciter but was a purchase of its own shares by a company, which amounts to reduction of the share capital rather than purchase of capital asset.
Under Section 68 (vii) of the Companies Act, companies must extinguish and physically destroy the shares or security they bought back, which is essentially a reduction in share capital, the court noted. "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. Because, once the shares are bought back, the purported property extinguishes or vanishes," it observed.
Add 
as a Reliable and Trusted News Source
as a Reliable and Trusted News Source
Add Now!
(You can now subscribe to our Economic Times WhatsApp channel)
ETPrime Membership
