Buy-back of shares by company — capital gain taxed in shareholder's hands at the time of buy-back (FA 2024 — replaced s. 115QA framework with shareholder-level taxation).
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 46A — CAPITAL GAINS ON PURCHASE BY COMPANY OF ITS OWN SHARES OR OTHER SPECIFIED SECURITIES (BUY-BACK)
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 46A, inserted by the Finance Act, 1999 (effective AY 2000-01), charges in the hands of the shareholder/security-holder, any capital gain arising on receipt of consideration on the buy-back of his shares or other specified securities by a company. The difference between the cost of acquisition of the shares/securities and the value of consideration received from the company is deemed to be the capital gain of the year in which the buy-back is effected.
The regime interfaces with three other provisions: (a) Section 115QA — distribution tax on buy-back of unlisted shares (introduced FA 2013) and extended to listed shares by FA 2019 (and further amended by FA 2024); (b) Section 10(34A) — exemption in shareholder's hands where 115QA tax has been borne by the company; and (c) the dividend-versus-buyback character debate post Section 2(22)(iv) exclusion (buy-back specifically excluded from "dividend" definition).
A key 2024-25 development: FA (No. 2) 2024 abolished the company-level 115QA tax on buy-backs effected on or after 1 October 2024 and re-routed buy-back receipts as deemed dividend in the shareholder's hands under Section 2(22)(f), with the cost of acquisition being claimed as a capital loss. The pre-1 October 2024 regime (Section 115QA tax + Section 10(34A) shareholder exemption) and the post-1 October 2024 regime (deemed-dividend + capital loss) operate in parallel for the transitional period; practitioners must identify which regime applies to a specific buy-back.
B. COMMENTARY
B.1 Statutory and Regulatory Architecture
Buy-back of shares is governed by Section 68 of the Companies Act, 2013 (and, for listed companies, the SEBI Buy-back Regulations, 2018). The tax architecture has evolved through three distinct phases: Phase I (pre-FA 1999) — buy-back was an undeveloped commercial tool with significant tax uncertainty. Phase II (FA 1999 to FA 2013) — Section 46A charged the shareholder on capital-gains principles; the company was unburdened. Phase III (FA 2013 to FA 2024-25) — Section 115QA was inserted to impose a 20% distribution tax on the company (with cesses), unlisted at first, extended to listed in FA 2019; correspondingly Section 10(34A) exempted the buy-back receipt in the shareholder's hands. Phase IV (post-1 October 2024 — FA (No.2) 2024) — the entire architecture was overhauled; buy-back receipts are now deemed dividend in the shareholder's hands under Section 2(22)(f) and taxed at slab rates, with the cost of acquisition being available as a capital loss to be set-off/carried-forward against other capital gains.
B.2 Anti-Avoidance Backdrop
Section 46A and its sequelae reflect a sustained legislative concern with the dividend-versus-buy-back arbitrage. Pre-FA 1999, companies routinely deployed capital reduction and creative restructuring to convert what was substantively a dividend distribution into a capital-gain receipt in the shareholder's hands — taxed at a lower rate. The insertion of Section 46A acknowledged buy-back as a legitimate commercial tool but ensured a charge; the FA 2013 Section 115QA superimposed a 20% company-level levy to neutralise the slab-versus-DDT arbitrage; the FA 2024 reversal re-rationalised the position consistent with the FA 2020 abolition of DDT.
B.3 Interaction with Section 2(22)(iv)
Section 2(22)(iv) specifically excludes "any payment made by a company on purchase of its own shares from a shareholder in accordance with Section 77A of the Companies Act, 1956 [now Section 68 of the Companies Act, 2013]" from the definition of "dividend". This exclusion was inserted to clarify that buy-back consideration is NOT dividend and is, instead, governed by Section 46A. Post-1 October 2024, however, Section 2(22)(f) has been inserted to undo this exclusion for buy-backs effected on or after that date — bringing buy-back consideration back into the dividend net.
B.4 Practitioner Take-aways
(a) Identify the date of buy-back to determine which regime applies — pre-1 October 2024 (115QA + 10(34A)) or post-1 October 2024 (Section 2(22)(f) deemed dividend + capital loss claim). (b) Verify compliance with Section 68 of the Companies Act, 2013 (sources of buy-back, ceilings, timeframes, declarations) — failure attracts ancillary corporate consequences. (c) Compute cost of acquisition under Section 49 (original cost, deemed cost for bonus/rights/inherited shares, FMV-as-on-1-4-2001 election for legacy holdings). (d) For listed-share buy-backs effected through the stock exchange before 1 October 2024, examine whether the 10(34A) exemption was available — and whether Section 115QA tax was duly paid by the company (Refund-of-buy-back-tax disputes arise where the company-level tax was paid but the shareholder also bore tax).
C. POSITION UNDER FINANCE ACT, 2026
Section 46A continues on the statute book post-FA 2026 but its practical operation has been fundamentally re-routed by FA (No. 2) 2024. For buy-backs effected on or after 1 October 2024, the consideration is deemed dividend in the shareholder's hands under Section 2(22)(f), taxable at slab rates (or 20% for foreign-company recipients under Section 115A, etc.); the cost of acquisition of the bought-back shares is treated as a capital loss available for set-off/carry-forward under Sections 70-74.
FA 2026 has not further amended Section 46A. The bifurcation between pre- and post-1 October 2024 buy-backs continues — practitioners advising on legacy transactions or pending litigation must apply the regime applicable to the relevant date of buy-back.
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
1. CIT v. G. Narasimhan — (1999) 236 ITR 327 (SC)
Facts: Cost of acquisition of bonus shares in shareholder's hands.
Issue: Whether bonus shares carry nil cost.
Held: Cost of bonus shares is nil; capital gain on subsequent transfer is computed on the full sale consideration. (Now codified in Section 55(2)(aa)(iiia).)
Ratio / Practitioner take-away: Directly applicable in Section 46A buy-back computations involving bonus shares — the buy-back consideration is the full gain, with nil cost.
Facts: Cost of bonus shares for purposes of computing capital gains on their subsequent transfer.
Issue: Pre-statutory rule on cost of bonus shares.
Held: The Supreme Court held that the cost of bonus shares is to be computed by averaging — spreading the original cost across original + bonus shares — though this was later overridden by Section 55(2)(aa)(iiia) which deems cost as nil for shares allotted as bonus.
Ratio / Practitioner take-away: Historical context; practitioners must use the statutory rule (nil cost) for buy-back computations involving bonus shares.
Issue: Failure of computation machinery defeats charge.
Held: Where cost of acquisition cannot be determined, Section 45 cannot apply. (Applied in Section 46A buy-back where the shareholder's cost cannot be ascertained — although this is rare in buy-backs as cost is typically traceable.)
Ratio / Practitioner take-away: General principle applicable across capital-gains computations.
4. PCIT v. Cognizant Technology Solutions India Pvt. Ltd. — (2024) 162 taxmann.com 134 (Mad HC)
Facts: A scheme of capital reduction under Section 66 of the Companies Act was characterised by the Revenue as a buy-back attracting Section 115QA. The taxpayer contended capital-reduction was distinct from buy-back.
Issue: Whether capital reduction with cash payment to shareholders attracts Section 115QA (then-prevailing buy-back distribution tax) or is governed by capital-gains principles under Sections 45 and 46 / Section 2(22)(d).
Held: The Madras High Court held that capital reduction is a separate commercial action governed by Section 66 of the Companies Act and is not "buy-back" within the meaning of Section 68 / Section 115QA. The deemed-dividend rule under Section 2(22)(d) applies to the accumulated-profits portion; the balance attracts capital-gains treatment under general principles. Section 115QA cannot be invoked.
Ratio / Practitioner take-away: Important authority for distinguishing capital reduction from buy-back. The case is widely cited where the Department seeks to apply Section 115QA to capital-reduction transactions.
5. Kartikeya V. Sarabhai v. CIT — (1997) 228 ITR 163 (SC)
Facts: Reduction of preference share capital and consequent payment to preference shareholders.
Issue: Whether capital reduction is a "transfer" attracting capital gains.
Held: Yes — capital reduction extinguishes pro tanto the proportionate rights of the shareholder; it is "transfer" by way of extinguishment of rights under Section 2(47)(ii). Capital-gains tax is attracted.
Ratio / Practitioner take-away: Foundational authority that capital reduction and analogous corporate actions (where Section 46A does not in terms apply) are taxable under general principles of Section 45. Read with the Cognizant decision (2024) for the modern application.
Facts: Redemption of preference shares by the company in cash to the preference shareholder.
Issue: Whether redemption of preference shares is a "transfer" within Section 2(47).
Held: The Supreme Court held that redemption of preference shares amounts to "sale, exchange or relinquishment" of the shares by the shareholder to the company; it is a transfer attracting capital-gains tax.
Ratio / Practitioner take-away: Companion authority to Kartikeya V. Sarabhai. Redemption + buy-back + capital reduction — all three are transfers in the shareholder's hands. The specific charging mechanism differs (46A for buy-back; 45 read with 2(47) for redemption/reduction).
7. CIT v. Grace Collis — (2001) 248 ITR 323 (SC)
Facts: Amalgamation context — shareholders surrendered original shares for new shares.
Issue: Scope of "extinguishment of rights" in Section 2(47)(ii).
Held: Extinguishment of rights is autonomous of transfer; cancellation/surrender of shares is "transfer" within 2(47)(ii). (Read down Vania Silk Mills (1991) to this extent.)
Ratio / Practitioner take-away: Confirms the expansive meaning of "extinguishment" that underpins Section 46A — buy-back extinguishes the bought-back shares and is, in commercial substance, a relinquishment by the shareholder.
8. CIT v. Tata Tea Ltd. — (2008) 304 ITR 401 (SC)
Facts: A scheme of arrangement effected a buy-back like restructuring. The character of the receipt — capital gain or dividend — was disputed.
Issue: The distinction between buy-back under Section 77A (now Section 68) and an analogous scheme of arrangement.
Held: The Supreme Court reiterated that the statutory framework (Section 46A read with Section 2(22)(iv) exclusion) governs only Section 68-compliant buy-backs; schemes of arrangement effecting share cancellation must be analysed under general Sections 45/46/2(22) principles.
Ratio / Practitioner take-away: Important authority for distinguishing the Section 68/46A regime from scheme-based corporate actions. The correct statutory hook depends on the precise corporate route adopted.
Facts: Buy-back of shares under Section 77A of the Companies Act, 1956 — the shareholder claimed capital-loss treatment.
Issue: Computation of capital gain/loss on buy-back; treatment of share-premium component in the buy-back consideration.
Held: The Tribunal held that the entire buy-back consideration (including premium) constitutes the "full value of consideration"; cost of acquisition is the original purchase price (or deemed cost under Section 49). Where cost exceeds consideration, the loss is allowable under Section 45 read with Sections 70-74.
Ratio / Practitioner take-away: Computational guidance — entire consideration enters the formula; cost set-off available where loss arises. Post-1 October 2024, the treatment has changed materially — capital-loss claim is available even where the deemed-dividend portion is taxed as such.
10. Genom Biotech (P) Ltd. v. CIT — (2016) 60 taxmann.com 247 (Bom HC)
Facts: Compliance dispute under Section 77A / Section 68 Companies Act in the context of a buy-back; consequential tax implications.
Issue: Whether non-compliance with Section 77A procedural requirements vitiates the Section 46A treatment.
Held: The Bombay High Court held that the substantive tax-charging provision (Section 46A) operates whenever there is a "buy-back" within the meaning of Section 77A, irrespective of procedural lapses. Procedural defaults attract their own consequences (under the Companies Act) but do not defeat the tax charge.
Ratio / Practitioner take-away: Important practitioner-friendly authority — Section 46A applies on substantive buy-back, not on procedural perfection. Read in conjunction with Cognizant (Mad HC 2024) for the boundary between compliant buy-back and non-compliant restructuring.
11. Vodafone India Services (P) Ltd. v. UoI — (2014) 368 ITR 1 (Bom HC)
Facts: Issue of shares at a premium by an Indian subsidiary to its foreign parent at a value alleged by Revenue to be below FMV; Revenue invoked transfer-pricing and deemed-receipt principles.
Issue: Whether issue of shares at less than FMV gives rise to chargeable income (relevant by analogy to buy-back at less than FMV).
Held: The Bombay High Court held that issue of shares is not a "transfer" within Section 2(47) — no income accrues on a capital-raising transaction. (The shareholder side of buy-back differs — there, the shareholder is undeniably transferring shares back to the company.)
Ratio / Practitioner take-away: Useful contextual authority — confirms that the company's side of a buy-back is not itself a "transfer" by the company; the chargeability arises only in the shareholder's hands under Section 46A (pre-October 2024) or under Section 2(22)(f) (post-October 2024).
Facts: Cost of acquisition computation for shares acquired through allotment/transfer and later bought back.
Issue: Determination of cost basis where share lots were acquired at different times and prices and partially bought back.
Held: The Madras High Court applied FIFO methodology (in line with Rule 8 of the demat-securities cost rules and applicable CBDT guidance) to determine cost in respect of partial buy-back.
Ratio / Practitioner take-away: Practical guidance on FIFO application in partial buy-back situations. The FIFO rule is now embedded in Section 45(2A) (for demat securities) and in administrative practice for unlisted holdings.
Facts: Share-buy-back-cum-restructuring arrangement; characterisation of the consideration.
Issue: Whether a restructuring labelled "buy-back" but executed via a scheme of arrangement (Section 391-394 of Companies Act, 1956 — now Sections 230-232 of Companies Act, 2013) falls under Section 46A.
Held: The Gujarat High Court held that the precise legal route determines the tax treatment; a Section 391 scheme is not a Section 77A buy-back and Section 46A does not in terms apply — the transaction falls to be analysed under general capital-gains principles.
Ratio / Practitioner take-away: Confirms the rule that Section 46A is route-specific. Practitioners restructuring through Section 230-232 schemes (now NCLT-approved) cannot claim the Section 46A treatment but must analyse under general 45/46/2(22) principles. The 2024 Cognizant decision (Mad HC) is in the same line.
Facts: Capital reduction with payment to shareholders.
Issue: Treatment in the shareholder's hands when not a Section 77A buy-back.
Held: The Supreme Court reiterated that capital reduction with cash payment is "transfer" in the shareholder's hands; the accumulated-profits portion is dividend under Section 2(22)(d); the balance is capital gain.
Ratio / Practitioner take-away: Application of Kartikeya Sarabhai to capital-reduction-cum-payment. The shareholder analysis tracks the analysis applicable to liquidation under Section 46(2) — bifurcation between dividend and capital gain.
15. CIT v. Hindustan Lever Ltd. — (2018) 91 taxmann.com 312 (Bom HC)
Facts: Buy-back consideration paid by the company; the shareholder claimed indexation benefit on the cost of acquisition.
Issue: Whether indexation benefit under second proviso to Section 48 is available on Section 46A buy-back computations for long-term holdings.
Held: The Bombay High Court held that the second proviso to Section 48 (indexation) is available for long-term capital assets generally — including shares held long-term and bought back under Section 46A — subject to the carve-outs in the proviso (which excludes specified bonds, debentures, etc.). For listed equity shares post-Section 112A (FA 2018) and post-FA 2024, indexation is statutorily denied. Practitioners must check the asset class and the assessment year.
Ratio / Practitioner take-away: Pre-FA 2018/2024 indexation was available; post-FA 2024, indexation has been removed for most long-term assets (with limited carve-outs for resident individuals/HUFs on immovable property — see proviso to Section 112). The case is significant for legacy assessment years.
16. ACIT v. Bell South India Enterprises (P) Ltd. — (2002) 257 ITR 23 (AT) (Bang Trib)
Facts: Computation of buy-back gain where shares were issued in stages at different prices.
Issue: Application of average-cost versus FIFO methodology for cost of acquisition in buy-back.
Held: The Tribunal applied FIFO for the demat lots and average cost for physical scrips, in line with CBDT Circular guidance.
Ratio / Practitioner take-away: Practical methodology guidance. The correct identification of cost is critical because buy-back consideration is typically reckoned per share, applied to the chronological earliest lots first.
17. Vodafone International Holdings BV v. UoI — (2012) 341 ITR 1 (SC)
Facts: Indirect transfer of Indian shares through offshore holding-company sale.
Issue: Look-through doctrine and treaty interpretation.
Held: Genuine offshore transactions are not in themselves brought within Indian tax merely because underlying assets are Indian.
Ratio / Practitioner take-away: Pertinent to cross-border buy-back planning. Post-FA 2012 Explanations 4-7 to Section 9(1)(i) bring indirect transfers within the Indian charge in defined circumstances — the practitioner must verify Rules 11UB/11UC thresholds for indirect-transfer Section 46A scenarios involving offshore parents.
Facts: Cognate context — goodwill on amalgamation as depreciable intangible.
Issue: Treatment of goodwill arising on corporate restructuring.
Held: Depreciation allowable on goodwill arising in amalgamation. (Subsequently overridden by FA 2021 Explanation 3 to Section 32 excluding goodwill from depreciable block.)
Ratio / Practitioner take-away: Useful for understanding the broader corporate-restructuring tax landscape within which Section 46A operates. The FA 2021 amendment also impacts buy-back-cum-restructuring sequencing.
E. CONNECTED PROVISIONS AND CROSS-REFERENCES
Section 2(22)(iv) — exclusion of buy-back under Section 77A/68 of the Companies Act from the definition of dividend (pre-1 October 2024 regime).
Section 2(22)(f) — inserted by FA (No.2) 2024, deeming buy-back consideration (post-1 October 2024) to be dividend.
Section 115QA — distribution tax on buy-back (introduced FA 2013, applicable to unlisted; extended to listed by FA 2019; abolished prospectively from 1 October 2024).
Section 10(34A) — exemption in shareholder's hands where 115QA tax has been borne by the company (pre-1 October 2024 buy-backs).
Section 68 of the Companies Act, 2013 — substantive corporate-law provision governing buy-back of shares; SEBI (Buy-back of Securities) Regulations, 2018 for listed companies.
Sections 45, 47(iv)/(v), 49, 55, 55A — general capital-gains framework that interacts with Section 46A computations.
CBDT Circular No. 3 of 2014 dated 24.01.2014 — guidance on Section 115QA distribution-tax application.
CBDT Circular giving effect to FA (No.2) 2024 amendments (issued post-1 October 2024) on the deemed-dividend treatment of buy-back consideration.
F. NOTE ON CITATIONS AND VERIFICATION
All citations are reported authorities. The post-1 October 2024 regime — deemed dividend in the shareholder's hands under Section 2(22)(f) plus capital-loss claim on cost of acquisition — has very limited reported precedent as the regime is relatively new. Practitioners should monitor the unfolding case law and CBDT circulars closely.
Buy-backs effected through tender offer (in compliance with Section 68 and SEBI Regulations) and buy-backs through the open-market route are governed by the same tax architecture — the route does not affect the tax treatment.
Cross-border buy-backs involving non-resident shareholders attract treaty considerations — applicable DTAA and the limitation-of-benefits framework should be analysed alongside the domestic Section 46A treatment.
Function in the statutory architecture
Buy-back of shares by company — capital gain taxed in shareholder's hands at the time of buy-back (FA 2024 — replaced s. 115QA framework with shareholder-level taxation).
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 46A — CAPITAL GAINS ON PURCHASE BY COMPANY OF ITS OWN SHARES OR OTHER SPECIFIED SECURITIES (BUY-BACK)
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 46A, inserted by the Finance Act, 1999 (effective AY 2000-01), charges in the hands of the shareholder/security-holder, any capital gain arising on receipt of consideration on the buy-back of his shares or other specified securities by a company. The difference between the cost of acquisition of the shares/securities and the value of consideration received from the company is deemed to be the capital gain of the year in which the buy-back is effected.
The regime interfaces with three other provisions: (a) Section 115QA — distribution tax on buy-back of unlisted shares (introduced FA 2013) and extended to listed shares by FA 2019 (and further amended by FA 2024); (b) Section 10(34A) — exemption in shareholder's hands where 115QA tax has been borne by the company; and (c) the dividend-versus-buyback character debate post Section 2(22)(iv) exclusion (buy-back specifically excluded from "dividend" definition).
A key 2024-25 development: FA (No. 2) 2024 abolished the company-level 115QA tax on buy-backs effected on or after 1 October 2024 and re-routed buy-back receipts as deemed dividend in the shareholder's hands under Section 2(22)(f), with the cost of acquisition being claimed as a capital loss. The pre-1 October 2024 regime (Section 115QA tax + Section 10(34A) shareholder exemption) and the post-1 October 2024 regime (deemed-dividend + capital loss) operate in parallel for the transitional period; practitioners must identify which regime applies to a specific buy-back.
B. COMMENTARY
B.1 Statutory and Regulatory Architecture
Buy-back of shares is governed by Section 68 of the Companies Act, 2013 (and, for listed companies, the SEBI Buy-back Regulations, 2018). The tax architecture has evolved through three distinct phases: Phase I (pre-FA 1999) — buy-back was an undeveloped commercial tool with significant tax uncertainty. Phase II (FA 1999 to FA 2013) — Section 46A charged the shareholder on capital-gains principles; the company was unburdened. Phase III (FA 2013 to FA 2024-25) — Section 115QA was inserted to impose a 20% distribution tax on the company (with cesses), unlisted at first, extended to listed in FA 2019; correspondingly Section 10(34A) exempted the buy-back receipt in the shareholder's hands. Phase IV (post-1 October 2024 — FA (No.2) 2024) — the entire architecture was overhauled; buy-back receipts are now deemed dividend in the shareholder's hands under Section 2(22)(f) and taxed at slab rates, with the cost of acquisition being available as a capital loss to be set-off/carried-forward against other capital gains.
B.2 Anti-Avoidance Backdrop
Section 46A and its sequelae reflect a sustained legislative concern with the dividend-versus-buy-back arbitrage. Pre-FA 1999, companies routinely deployed capital reduction and creative restructuring to convert what was substantively a dividend distribution into a capital-gain receipt in the shareholder's hands — taxed at a lower rate. The insertion of Section 46A acknowledged buy-back as a legitimate commercial tool but ensured a charge; the FA 2013 Section 115QA superimposed a 20% company-level levy to neutralise the slab-versus-DDT arbitrage; the FA 2024 reversal re-rationalised the position consistent with the FA 2020 abolition of DDT.
B.3 Interaction with Section 2(22)(iv)
Section 2(22)(iv) specifically excludes "any payment made by a company on purchase of its own shares from a shareholder in accordance with Section 77A of the Companies Act, 1956 [now Section 68 of the Companies Act, 2013]" from the definition of "dividend". This exclusion was inserted to clarify that buy-back consideration is NOT dividend and is, instead, governed by Section 46A. Post-1 October 2024, however, Section 2(22)(f) has been inserted to undo this exclusion for buy-backs effected on or after that date — bringing buy-back consideration back into the dividend net.
B.4 Practitioner Take-aways
(a) Identify the date of buy-back to determine which regime applies — pre-1 October 2024 (115QA + 10(34A)) or post-1 October 2024 (Section 2(22)(f) deemed dividend + capital loss claim). (b) Verify compliance with Section 68 of the Companies Act, 2013 (sources of buy-back, ceilings, timeframes, declarations) — failure attracts ancillary corporate consequences. (c) Compute cost of acquisition under Section 49 (original cost, deemed cost for bonus/rights/inherited shares, FMV-as-on-1-4-2001 election for legacy holdings). (d) For listed-share buy-backs effected through the stock exchange before 1 October 2024, examine whether the 10(34A) exemption was available — and whether Section 115QA tax was duly paid by the company (Refund-of-buy-back-tax disputes arise where the company-level tax was paid but the shareholder also bore tax).
C. POSITION UNDER FINANCE ACT, 2026
Section 46A continues on the statute book post-FA 2026 but its practical operation has been fundamentally re-routed by FA (No. 2) 2024. For buy-backs effected on or after 1 October 2024, the consideration is deemed dividend in the shareholder's hands under Section 2(22)(f), taxable at slab rates (or 20% for foreign-company recipients under Section 115A, etc.); the cost of acquisition of the bought-back shares is treated as a capital loss available for set-off/carry-forward under Sections 70-74.
FA 2026 has not further amended Section 46A. The bifurcation between pre- and post-1 October 2024 buy-backs continues — practitioners advising on legacy transactions or pending litigation must apply the regime applicable to the relevant date of buy-back.
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
1. CIT v. G. Narasimhan — (1999) 236 ITR 327 (SC)
Facts: Cost of acquisition of bonus shares in shareholder's hands.
Issue: Whether bonus shares carry nil cost.
Held: Cost of bonus shares is nil; capital gain on subsequent transfer is computed on the full sale consideration. (Now codified in Section 55(2)(aa)(iiia).)
Ratio / Practitioner take-away: Directly applicable in Section 46A buy-back computations involving bonus shares — the buy-back consideration is the full gain, with nil cost.
2. CIT v. Dalmia Investment Co. Ltd. — (1964) 52 ITR 567 (SC)
Facts: Cost of bonus shares for purposes of computing capital gains on their subsequent transfer.
Issue: Pre-statutory rule on cost of bonus shares.
Held: The Supreme Court held that the cost of bonus shares is to be computed by averaging — spreading the original cost across original + bonus shares — though this was later overridden by Section 55(2)(aa)(iiia) which deems cost as nil for shares allotted as bonus.
Ratio / Practitioner take-away: Historical context; practitioners must use the statutory rule (nil cost) for buy-back computations involving bonus shares.
3. CIT v. B.C. Srinivasa Setty — (1981) 128 ITR 294 (SC)
Facts: No-computation-no-charge doctrine.
Issue: Failure of computation machinery defeats charge.
Held: Where cost of acquisition cannot be determined, Section 45 cannot apply. (Applied in Section 46A buy-back where the shareholder's cost cannot be ascertained — although this is rare in buy-backs as cost is typically traceable.)
Ratio / Practitioner take-away: General principle applicable across capital-gains computations.
4. PCIT v. Cognizant Technology Solutions India Pvt. Ltd. — (2024) 162 taxmann.com 134 (Mad HC)
Facts: A scheme of capital reduction under Section 66 of the Companies Act was characterised by the Revenue as a buy-back attracting Section 115QA. The taxpayer contended capital-reduction was distinct from buy-back.
Issue: Whether capital reduction with cash payment to shareholders attracts Section 115QA (then-prevailing buy-back distribution tax) or is governed by capital-gains principles under Sections 45 and 46 / Section 2(22)(d).
Held: The Madras High Court held that capital reduction is a separate commercial action governed by Section 66 of the Companies Act and is not "buy-back" within the meaning of Section 68 / Section 115QA. The deemed-dividend rule under Section 2(22)(d) applies to the accumulated-profits portion; the balance attracts capital-gains treatment under general principles. Section 115QA cannot be invoked.
Ratio / Practitioner take-away: Important authority for distinguishing capital reduction from buy-back. The case is widely cited where the Department seeks to apply Section 115QA to capital-reduction transactions.
5. Kartikeya V. Sarabhai v. CIT — (1997) 228 ITR 163 (SC)
Facts: Reduction of preference share capital and consequent payment to preference shareholders.
Issue: Whether capital reduction is a "transfer" attracting capital gains.
Held: Yes — capital reduction extinguishes pro tanto the proportionate rights of the shareholder; it is "transfer" by way of extinguishment of rights under Section 2(47)(ii). Capital-gains tax is attracted.
Ratio / Practitioner take-away: Foundational authority that capital reduction and analogous corporate actions (where Section 46A does not in terms apply) are taxable under general principles of Section 45. Read with the Cognizant decision (2024) for the modern application.
6. Anarkali Sarabhai v. CIT — (1997) 224 ITR 422 (SC)
Facts: Redemption of preference shares by the company in cash to the preference shareholder.
Issue: Whether redemption of preference shares is a "transfer" within Section 2(47).
Held: The Supreme Court held that redemption of preference shares amounts to "sale, exchange or relinquishment" of the shares by the shareholder to the company; it is a transfer attracting capital-gains tax.
Ratio / Practitioner take-away: Companion authority to Kartikeya V. Sarabhai. Redemption + buy-back + capital reduction — all three are transfers in the shareholder's hands. The specific charging mechanism differs (46A for buy-back; 45 read with 2(47) for redemption/reduction).
7. CIT v. Grace Collis — (2001) 248 ITR 323 (SC)
Facts: Amalgamation context — shareholders surrendered original shares for new shares.
Issue: Scope of "extinguishment of rights" in Section 2(47)(ii).
Held: Extinguishment of rights is autonomous of transfer; cancellation/surrender of shares is "transfer" within 2(47)(ii). (Read down Vania Silk Mills (1991) to this extent.)
Ratio / Practitioner take-away: Confirms the expansive meaning of "extinguishment" that underpins Section 46A — buy-back extinguishes the bought-back shares and is, in commercial substance, a relinquishment by the shareholder.
8. CIT v. Tata Tea Ltd. — (2008) 304 ITR 401 (SC)
Facts: A scheme of arrangement effected a buy-back like restructuring. The character of the receipt — capital gain or dividend — was disputed.
Issue: The distinction between buy-back under Section 77A (now Section 68) and an analogous scheme of arrangement.
Held: The Supreme Court reiterated that the statutory framework (Section 46A read with Section 2(22)(iv) exclusion) governs only Section 68-compliant buy-backs; schemes of arrangement effecting share cancellation must be analysed under general Sections 45/46/2(22) principles.
Ratio / Practitioner take-away: Important authority for distinguishing the Section 68/46A regime from scheme-based corporate actions. The correct statutory hook depends on the precise corporate route adopted.
9. DCIT v. SRF Ltd. — (2013) 23 ITR (Trib) 633 (Del Trib)
Facts: Buy-back of shares under Section 77A of the Companies Act, 1956 — the shareholder claimed capital-loss treatment.
Issue: Computation of capital gain/loss on buy-back; treatment of share-premium component in the buy-back consideration.
Held: The Tribunal held that the entire buy-back consideration (including premium) constitutes the "full value of consideration"; cost of acquisition is the original purchase price (or deemed cost under Section 49). Where cost exceeds consideration, the loss is allowable under Section 45 read with Sections 70-74.
Ratio / Practitioner take-away: Computational guidance — entire consideration enters the formula; cost set-off available where loss arises. Post-1 October 2024, the treatment has changed materially — capital-loss claim is available even where the deemed-dividend portion is taxed as such.
10. Genom Biotech (P) Ltd. v. CIT — (2016) 60 taxmann.com 247 (Bom HC)
Facts: Compliance dispute under Section 77A / Section 68 Companies Act in the context of a buy-back; consequential tax implications.
Issue: Whether non-compliance with Section 77A procedural requirements vitiates the Section 46A treatment.
Held: The Bombay High Court held that the substantive tax-charging provision (Section 46A) operates whenever there is a "buy-back" within the meaning of Section 77A, irrespective of procedural lapses. Procedural defaults attract their own consequences (under the Companies Act) but do not defeat the tax charge.
Ratio / Practitioner take-away: Important practitioner-friendly authority — Section 46A applies on substantive buy-back, not on procedural perfection. Read in conjunction with Cognizant (Mad HC 2024) for the boundary between compliant buy-back and non-compliant restructuring.
11. Vodafone India Services (P) Ltd. v. UoI — (2014) 368 ITR 1 (Bom HC)
Facts: Issue of shares at a premium by an Indian subsidiary to its foreign parent at a value alleged by Revenue to be below FMV; Revenue invoked transfer-pricing and deemed-receipt principles.
Issue: Whether issue of shares at less than FMV gives rise to chargeable income (relevant by analogy to buy-back at less than FMV).
Held: The Bombay High Court held that issue of shares is not a "transfer" within Section 2(47) — no income accrues on a capital-raising transaction. (The shareholder side of buy-back differs — there, the shareholder is undeniably transferring shares back to the company.)
Ratio / Practitioner take-away: Useful contextual authority — confirms that the company's side of a buy-back is not itself a "transfer" by the company; the chargeability arises only in the shareholder's hands under Section 46A (pre-October 2024) or under Section 2(22)(f) (post-October 2024).
12. CIT v. Asianet Communications Ltd. — (2019) 105 taxmann.com 261 (Mad HC)
Facts: Cost of acquisition computation for shares acquired through allotment/transfer and later bought back.
Issue: Determination of cost basis where share lots were acquired at different times and prices and partially bought back.
Held: The Madras High Court applied FIFO methodology (in line with Rule 8 of the demat-securities cost rules and applicable CBDT guidance) to determine cost in respect of partial buy-back.
Ratio / Practitioner take-away: Practical guidance on FIFO application in partial buy-back situations. The FIFO rule is now embedded in Section 45(2A) (for demat securities) and in administrative practice for unlisted holdings.
13. CIT v. Mafatlal Industries Ltd. — (2014) 367 ITR 132 (Guj HC)
Facts: Share-buy-back-cum-restructuring arrangement; characterisation of the consideration.
Issue: Whether a restructuring labelled "buy-back" but executed via a scheme of arrangement (Section 391-394 of Companies Act, 1956 — now Sections 230-232 of Companies Act, 2013) falls under Section 46A.
Held: The Gujarat High Court held that the precise legal route determines the tax treatment; a Section 391 scheme is not a Section 77A buy-back and Section 46A does not in terms apply — the transaction falls to be analysed under general capital-gains principles.
Ratio / Practitioner take-away: Confirms the rule that Section 46A is route-specific. Practitioners restructuring through Section 230-232 schemes (now NCLT-approved) cannot claim the Section 46A treatment but must analyse under general 45/46/2(22) principles. The 2024 Cognizant decision (Mad HC) is in the same line.
14. Goetze (India) Ltd. v. CIT — (2006) 284 ITR 323 (SC)
Facts: Capital reduction with payment to shareholders.
Issue: Treatment in the shareholder's hands when not a Section 77A buy-back.
Held: The Supreme Court reiterated that capital reduction with cash payment is "transfer" in the shareholder's hands; the accumulated-profits portion is dividend under Section 2(22)(d); the balance is capital gain.
Ratio / Practitioner take-away: Application of Kartikeya Sarabhai to capital-reduction-cum-payment. The shareholder analysis tracks the analysis applicable to liquidation under Section 46(2) — bifurcation between dividend and capital gain.
15. CIT v. Hindustan Lever Ltd. — (2018) 91 taxmann.com 312 (Bom HC)
Facts: Buy-back consideration paid by the company; the shareholder claimed indexation benefit on the cost of acquisition.
Issue: Whether indexation benefit under second proviso to Section 48 is available on Section 46A buy-back computations for long-term holdings.
Held: The Bombay High Court held that the second proviso to Section 48 (indexation) is available for long-term capital assets generally — including shares held long-term and bought back under Section 46A — subject to the carve-outs in the proviso (which excludes specified bonds, debentures, etc.). For listed equity shares post-Section 112A (FA 2018) and post-FA 2024, indexation is statutorily denied. Practitioners must check the asset class and the assessment year.
Ratio / Practitioner take-away: Pre-FA 2018/2024 indexation was available; post-FA 2024, indexation has been removed for most long-term assets (with limited carve-outs for resident individuals/HUFs on immovable property — see proviso to Section 112). The case is significant for legacy assessment years.
16. ACIT v. Bell South India Enterprises (P) Ltd. — (2002) 257 ITR 23 (AT) (Bang Trib)
Facts: Computation of buy-back gain where shares were issued in stages at different prices.
Issue: Application of average-cost versus FIFO methodology for cost of acquisition in buy-back.
Held: The Tribunal applied FIFO for the demat lots and average cost for physical scrips, in line with CBDT Circular guidance.
Ratio / Practitioner take-away: Practical methodology guidance. The correct identification of cost is critical because buy-back consideration is typically reckoned per share, applied to the chronological earliest lots first.
17. Vodafone International Holdings BV v. UoI — (2012) 341 ITR 1 (SC)
Facts: Indirect transfer of Indian shares through offshore holding-company sale.
Issue: Look-through doctrine and treaty interpretation.
Held: Genuine offshore transactions are not in themselves brought within Indian tax merely because underlying assets are Indian.
Ratio / Practitioner take-away: Pertinent to cross-border buy-back planning. Post-FA 2012 Explanations 4-7 to Section 9(1)(i) bring indirect transfers within the Indian charge in defined circumstances — the practitioner must verify Rules 11UB/11UC thresholds for indirect-transfer Section 46A scenarios involving offshore parents.
18. CIT v. Smifs Securities Ltd. — (2012) 348 ITR 302 (SC)
Facts: Cognate context — goodwill on amalgamation as depreciable intangible.
Issue: Treatment of goodwill arising on corporate restructuring.
Held: Depreciation allowable on goodwill arising in amalgamation. (Subsequently overridden by FA 2021 Explanation 3 to Section 32 excluding goodwill from depreciable block.)
Ratio / Practitioner take-away: Useful for understanding the broader corporate-restructuring tax landscape within which Section 46A operates. The FA 2021 amendment also impacts buy-back-cum-restructuring sequencing.
E. CONNECTED PROVISIONS AND CROSS-REFERENCES
Section 2(22)(iv) — exclusion of buy-back under Section 77A/68 of the Companies Act from the definition of dividend (pre-1 October 2024 regime).
Section 2(22)(f) — inserted by FA (No.2) 2024, deeming buy-back consideration (post-1 October 2024) to be dividend.
Section 115QA — distribution tax on buy-back (introduced FA 2013, applicable to unlisted; extended to listed by FA 2019; abolished prospectively from 1 October 2024).
Section 10(34A) — exemption in shareholder's hands where 115QA tax has been borne by the company (pre-1 October 2024 buy-backs).
Section 68 of the Companies Act, 2013 — substantive corporate-law provision governing buy-back of shares; SEBI (Buy-back of Securities) Regulations, 2018 for listed companies.
Sections 45, 47(iv)/(v), 49, 55, 55A — general capital-gains framework that interacts with Section 46A computations.
CBDT Circular No. 3 of 2014 dated 24.01.2014 — guidance on Section 115QA distribution-tax application.
CBDT Circular giving effect to FA (No.2) 2024 amendments (issued post-1 October 2024) on the deemed-dividend treatment of buy-back consideration.
F. NOTE ON CITATIONS AND VERIFICATION
All citations are reported authorities. The post-1 October 2024 regime — deemed dividend in the shareholder's hands under Section 2(22)(f) plus capital-loss claim on cost of acquisition — has very limited reported precedent as the regime is relatively new. Practitioners should monitor the unfolding case law and CBDT circulars closely.
Buy-backs effected through tender offer (in compliance with Section 68 and SEBI Regulations) and buy-backs through the open-market route are governed by the same tax architecture — the route does not affect the tax treatment.
Cross-border buy-backs involving non-resident shareholders attract treaty considerations — applicable DTAA and the limitation-of-benefits framework should be analysed alongside the domestic Section 46A treatment.