India: Capital reduction is not subject to buyback taxation (tribunal decision)
Court-approved scheme of capital reduction cannot be recharacterized as a buyback of shares under the expanded definition of buyback.
The Delhi Bench of the Income Tax Appellate Tribunal held that a court-approved scheme of capital reduction cannot be recharacterized as a buyback of shares for the purposes of erstwhile buyback taxation under the Income-tax Act, 1961. The tribunal observed that capital reduction and buy-back are distinct concepts, with capital reduction involving the cancellation of shares rather than the purchase of its own shares by the company.
The case is: Seaview Developers Private Limited v. DCIT
Background
The Finance Act, 2016 amended the definition of buyback for the purposes of buy-back taxation to mean the purchase of its own shares by a company under any law for the time being in force relating to companies, rather than merely section 77A of the Companies Act, 1956. The Revenue argued that the 2016 amendment expanded the scope of buy-back taxation to include capital reduction.
Tribunal decision
The tribunal rejected the Revenue’s argument that the 2016 amendment expanded the scope of buy-back taxation to include capital reduction.
The tribunal also rejected the Revenue’s allegation that the arrangement was a colourable device, noting that the transaction had already been taxed under the provisions applicable to capital reduction—partly by way of dividend distribution tax (DDT) and partly as capital gains tax (CGT).
Read a July 2026 report prepared by the KPMG member firm in India