Income Tax Act, 1961 – BuyBack
Income Tax Act

In general terms, it may be understood as a company buying back its own shares from its shareholders. Generally the buyback is carried out under section 77A of the Companies Act. However there are other ways in which the buyback can be carried out, for example as a scheme of arrangement under section 391 to 394, or under section 402(b), though there is no clarification that buyback under sections other than 77A will be governed by the same provisions or not. The same can be taxed either under Sec 45 to Sec 48 or by way of dividend depending upon structure of the scheme.

In India buyback for treasury operations is not permitted by law and company is required to extinguish the shares bought back within 8 days. In buyback as the shareholder surrenders his shares to the company against consideration it results in an extinguishment of the right to receive the dividend and voting, thus attracting capital gains.

Tax liability in the hands of company

    Whether it is deemed dividend?
    Whether it is capital gains?
    Is expenditure on buyback allowed deductible as expenditure?

Tax liability in the hands of Shareholders

    Whether it is capital gains and exempt under section 10(38)?
    Claim for capital-whether admissible?
    Special points in regard to non-residents