Musings on a buyback ruling

Thoughts (Not a summary of case law…) on Buybacks & Gift-tax in India [Sec. 56(2)(x) | Sec. 92(2)(m)]

Hon’ble high court of Delhi, in a recent decision (Globe Capital Market Ltd [TS-529-HC-2026(DEL)]) - stated that a buyback if done at a value below its tax fair value (Rule 57 value), shall not be subject to gift tax in the hands of the company itself. In Indian corporate law, bought back shares have to be destroyed/extinguished within 7 days of the completion of buyback. It is a means of reduction of capital. (No concept of treasury shares in India.) Hence, it was held that a person cannot be taxed on a ‘deemed-profit’ from shares which are held to be destroyed.

Great. A welcome precedent for the corporates.

Well, I have been deliberating with my colleagues on two points relating to buyback taxation - sharing the thougths here…

Thought #1

A technical by-product of this Delhi HC decision on the shareholders offerring shares for buyback - Capital gains v. Dividend classification

It seems a buyback is covered by dividend tax as well as capital gains tax. It makes a difference because capital gains allows for acquisition cost deduction, dividend tax does not…

1. 2026 amendment - buyback tax regime has changed - buyback to be taxed as capital gains for shareholders [Sec. 69].

2. But definition of dividend [Sec. 2(40)(d)] says distribution to shareholders consequent to reduction of capital is dividend. Court said buyback is effectively reduction of capital.

3. Some years ago this very definition of dividend contained an exclusion for buybacks - today this exclusion is absent.

Can one apply the principle of G Narasimhan (SC) on capital reduction, here? OR Would you argue specific [only buybacks - Sec. 69] overrides the general [all types of capital reduction - Sec. 2(40)(d)] and hence, the conflict is resolved in favour of capital gains?

Thought #2

A possible contrary thought process to Delhi HC’s decision

In interpreting a law, the golden rule is literal interpretation - “it is what it reads.” Sec. 92(2)(m) requires fulfilment of two conditions - a person should receive property from another + the consideration against such receipt of property should be inadequate or absent altogether. In a buyback, the shares are “received” by the company, credited to the DEMAT (escrow) of the company, and thereafter the shares are extinguished. If you have paid consideration < Rule 57 value, then why can’t the buyback be also covered the mischief of Sec. 92(2)(m)? This is a good technical debate - likely to be resolved in favour of non-taxation under Sec. 92(2)(m).

There may be arguments on both sides but this is still something to think about.