Delhi High Court Ruling: Share Buy-Back Below FMV Not Taxable Under Section 56(2)(x)

Introduction

In a landmark judgment dated April 7, 2026, the Delhi High Court ruled that a company's buy-back of its own shares at a price lower than fair market value cannot be taxed as deemed income under Section 56(2)(x) of the Income-tax Act, 1961. The decision in Principal Commissioner of Income-tax v. Globe Capital Market Ltd. [ITA 364/2024] provides crucial clarity for corporations undertaking share buy-backs.

Key Facts of the Case

• Assessment Year: 2018-19

• Transaction: Globe Capital Market Ltd. bought back 28.62 lakh equity shares at ₹313.40 per share

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• FMV under Rule 11UA: ₹370.46 per share

• Difference: ₹16.33 crore added by the Assessing Officer as deemed incomemoneycontrol+1

• AO's Position: Treated buy-back as "acquisition of property" below FMV, invoking Section 56(2)(x)

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The Court's Reasoning

The Delhi High Court dismissed the Revenue's appeal and upheld the decisions of the CIT(A) and ITAT based on the following key observations:

1. Buy-Back Is Capital Reduction, Not Property Acquisition

• Buy-back under Section 68 of the Companies Act, 2013 is fundamentally a reduction of share capital

• Upon buy-back, shares are legally extinguished and destroyed—no asset remains with the company

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2. Section 56(2)(x) Requires Existence of Property

• Section 56(2)(x) applies only when a taxpayer receives property that continues to exist post-transaction

• In buy-back, the "property" (shares) ceases to exist, making taxation logically untenable

3. No Enduring Asset Created

• The company does not receive an enduring asset; instead, it diminishes its share capital

• Taxing "deemed gains" from assets that vanish is conceptually flawed

Final Outcome

Why This Matters for Businesses

This judgment is significant because it:

• Limits overreach of Section 56(2)(x) in corporate transactions

• Reinforces that buy-backs are capital transactions, not income-generating events

• Preserves legislative intent behind both the Income-tax Act and Companies Act

• Provides certainty for companies planning share buy-backs at prices differing from FMV

Conclusion

The Delhi High Court has drawn a clear line: buy-back of own shares is the antithesis of buying an asset. Since shares are extinguished upon buy-back, they cannot constitute "property" under Section 56(2)(x). This ruling protects companies from inappropriate tax demands on capital structure decisions.

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