Section 56(2)(x) is inapplicable to share buybacks as they constitute capital reduction rather than acquisition of property.

The Respondent-Assessee, a share broking company, undertook a buyback of 28,62,500 equity shares at ₹313.40 per share during the Assessment Year 2018-19

During assessment proceedings under Section 153A of the Income Tax Act, 1961 (the Act), the Assessing Officer (AO) determined the Fair Market Value (FMV) of the shares to be ₹370.46 as per Rule 11UA of the Income Tax Rules, 1962

The AO treated the difference of ₹57.06 per share (totaling ₹16,33,34,250/-) as income under Section 56(2)(x) of the Act, asserting that the buyback constituted an acquisition of "property" at a price lower than the FMV

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, holding that a buyback is a reduction of share capital rather than a purchase of a capital asset

The Income Tax Appellate Tribunal (ITAT) subsequently dismissed the Revenue’s appeal

The Revenue appealed to the High Court, contending that the definition of "property" under Section 56(2)(x) does not distinguish between a company’s own shares and shares of other companies

Whether the transaction of a company buying back its own shares under Section 68 of the Companies Act, 2013, constitutes an acquisition of "property" attracting the provisions of Section 56(2)(x) of the Income Tax Act, 1961

Whether the difference between the buyback price and the Fair Market Value determined under Rule 11UA can be taxed as "Income from Other Sources" in the hands of the company

Section 56(2)(x) of the Income Tax Act, 1961, which provides for the taxation of the value of property received for inadequate consideration

Section 68 of the Companies Act, 2013, which governs the power and procedure for a company to purchase its own securities

Section 68(7) of the Companies Act, which mandates that a company must "extinguish and physically destroy" shares bought back within seven days

Section 115QA of the Income Tax Act regarding tax on distributed income through buybacks

The Court reasoned that while "shares and securities" are included in the definition of "property" under Section 56(2)(x), a buyback is a specialized statutory process under Section 68 of the Companies Act that results in the reduction of share capital rather than the acquisition of a capital asset

The Court emphasized that under Section 68(7) of the Companies Act, the company is legally obligated to extinguish and destroy the shares bought back

Therefore, the hypothesis that the company "acquired" an asset at a lower rate is untenable because a person cannot be taxed for a "deemed profit" from a property that vanishes or is destroyed by operation of law immediately upon acquisition

The Court held that buyback of its own shares is the "antithesis" to buying an asset; for the issuing company, the share is merely a certificate of contribution to capital, not a property it can hold in the traditional sense

While the Court noted the ITAT's incidental and misplaced reliance on Section 56(2)(viia) (which applied to different circumstances), it upheld the core logic that Section 56(2)(x) cannot be triggered by a capital reduction event

The Court affirmed that such a transaction constitutes a reduction of capital and not an acquisition of property, as the shares are mandatorily extinguished under the Companies Act

Consequently, no addition on account of "deemed profit" or difference in FMV could be made in the hands of the Respondent-Assessee