Share Buy-back at Lower than Book Value, not Subject to Deemed Income-tax Implications

The Mumbai bench of the Income-tax Appellate Tribunal (‘ITAT’), in a recent ruling,[1] has ruled on the applicability of Section 56(2)(viia)[2] of the Income-tax Act, 1961 (‘ITA’) on buy-back of shares by an Indian company. Section 56(2)(viia), inter alia, provides that in case of receipt of shares for a consideration below fair market value, the excess of fair market value over the consideration is subject to tax in the hands of the recipient (subject to certain exceptions). The fair market value for this purpose means the book net asset value of the shares being received. The ITAT has held that Section 56(2)(viia) will be applicable only where the shares become ‘property’ of the recipient which is only possible where the recipient receives shares of another company (and not possible where the recipient company receives its own shares). In case of a share buy-back, the company purchases its own shares which are extinguished by reducing the capital and, hence, the test of becoming property fails in this case. Accordingly, the ITAT has held that Section 56(2)(viia) does not apply in case of a share buy-back.

[1]   M/s Vora Financial Services Private Limited V ACIT: ITA No. 532/Mum/2018.
[2]   Section 56(2)(viia) has been superseded by Section 56(2)(x) of the ITA with effect from April 1, 2017.