Capital v. Revenue: Premium paid on buyback of shares

 CA Aishwaryaa V

In a recent ruling that will have a bearing on the buyback activities, the Bombay High Court held that the premium paid for buyback of shares shall be tax deductible as business expenditure. (CIT v. Chemosyn Ltd).

Companies resort to buyback of shares for a variety of reasons. Lack of investment opportunities in their core business, companies that are cash-rich, provision of exit route to shareholders, exercising put/call options under investment agreements.

In this instant case, the assessee was directed by the Company Law Board (‘CLB’) to buy back the shares, to facilitate the smooth running of the company. There was a dispute between the two groups of shareholders of the taxpayer company, following which CLB directed the company to buy back shares at a premium price. The Tribunal had relying on the decision in the case of Echjay Industries Ltd v.DCIT 88 TTJ 1089 (Mum ITAT) and on identical facts and circumstances, held that the premium paid on buyback was a revenue expenditure.

Similar tax deductions have been held by the Pune ITAT in DCIT v. Brahma Corp. Hotels & Resorts Ltd. (ITA No.772/PN/2013) and Mumbai ITAT in USV Ltd., Vs. JCIT (ITA No.376/M/2001).

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