Navroze Shiamak Marshall Vs ITO (ITAT Mumbai)
Revenue Itself Treated It as Deemed Dividend – Then Exemption u/s 10(34) Must Follow- Mumbai ITAT Deletes Tax on Share Buyback
n an interesting and significant ruling, the Mumbai ITAT held that where the Revenue itself treats consideration received on buyback/reduction of share capital as deemed dividend u/s 2(22)(d), the consequential exemption u/s 10(34) cannot be denied to the shareholder.
The assessee had purchased shares of Spirax Marshall Pvt. Ltd. in March 2006 and sold them back to the company under a scheme of arrangement approved by the High Court. The assessee originally offered the gains as Long-Term Capital Gains (LTCG) after claiming indexation and deduction u/s 54F.
During reassessment, the AO rejected the assessee’s claim for exemption u/s 54F and also denied LTCG treatment and indexation benefits.
Before the ITAT, the assessee pointed out that in identical transactions involving her own children and other shareholders of the same company, the department itself had consistently taken a stand that the consideration received on buyback was not capital gains but deemed dividend u/s 2(22)(d). Those decisions had already been upheld by the Bombay High Court.
The Tribunal noted that in earlier group cases such as Kamal Imran Panju and Kayan Jamshid Pandole, the Revenue had successfully argued that the transaction amounted to reduction of capital resulting in deemed dividend under section 2(22)(d). However, both the ITAT and Bombay High Court simultaneously held that such deemed dividend was exempt in the hands of shareholders u/s 10(34) read with section 115-O.
The Bombay High Court had categorically ruled that once a payment falls within section 2(22)(d), the exemption u/s 10(34) automatically follows and cannot be denied merely because the company may not have paid dividend distribution tax. The Court observed that recovery consequences, if any, lie against the company and not the shareholder.
Applying the same reasoning, the ITAT held that the assessee’s case stood on identical footing. Accordingly, while treating the receipt as deemed dividend u/s 2(22)(d), the Tribunal held that the income was exempt u/s 10(34) and directed deletion of the entire addition.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee assailing the order dated 23.06.2025 passed by National Faceless Appeal Centre, (NFAC), Delhi for the Assessment Year (AY) 2008-09.
