PCIT Vs Globe Capital Market Ltd. (Delhi High Court)
In PCIT vs Globe Capital Market Ltd., the Delhi High Court examined whether buy-back of a company’s own shares at a price lower than their fair market value attracts taxation under Section 56(2)(x) of the Income Tax Act, 1961.
The case arose from assessment proceedings for AY 2018–19, where the Assessing Officer (AO) noted that the assessee company had bought back 28,62,500 equity shares at ₹313.40 per share, while the fair market value (FMV) under Rule 11UA was ₹370.46 per share. The AO treated the difference of ₹57.06 per share, aggregating to ₹16.33 crore, as taxable income under Section 56(2)(x), on the ground that the buy-back constituted acquisition of property at a price below FMV.
The AO held that shares are “property” under Section 56(2)(x), and purchasing them below FMV results in taxable deemed income. Accordingly, an addition of ₹16.33 crore was made to the assessee’s income.
The assessee challenged this before the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeal. The CIT(A) held that buy-back of shares is not a simple purchase of property but a transaction involving reduction of share capital. It observed that applicability of Rule 11UA depends on Section 56(2)(x), and since Section 56(2)(x) applies only where property is acquired, it cannot apply to buy-back of a company’s own shares. Consequently, the addition was deleted.
