s.2(22)(f) — Dividend, the buy-back limb
Makes the whole payment on a buy-back under section 68 of the Companies Act, 2013 a dividend in the shareholder's hands, for a buy-back from 1 October 2024 to 31 March 2026.
Inserted by clause 3(a)(I) of the Finance (No. 2) Act, 2024, Act No. 15 of 2024, with effect from 1 October 2024, by the same clause that omitted exclusion (iv) from the long line of section 2(22) with effect from the same date. The sub-clause is untouched by the Finance Act, 2026, so it continues to govern a buy-back that took place on or after 1 October 2024 in a year assessed under the Income-tax Act, 1961. Its counterpart in the Income-tax Act, 2025, section 2(40)(f), was omitted with effect from 1 April 2026, and the range in section 7(2)(a) of that Act was closed from "(a) to (f)" to "(a) to (e)" in the same breath, so the operative window of the deemed dividend runs from 1 October 2024 to 31 March 2026.
Income-tax Act, 1961
s.2(22)(f)
Income-tax Act, 2025
s.2(40)(f)
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Sub-clause (f) brings within the definition of "dividend" in section 2(22) "any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013)". It is one half of a matched pair, because clause 3(a)(II) of the Finance (No. 2) Act, 2024 omitted, on the same date, exclusion (iv) from the long line of section 2(22), which had carved buy-back payments out of "dividend" altogether, so citing sub-clause (f) without the omission understates the change. Once the receipt is a dividend the charge follows from section 56(1) and section 56(2)(i) under the head "Income from other sources", at the shareholder's ordinary slab or corporate rate, and the concessional capital gains rates have nothing to do with it. The amount charged is the whole payment, because sub-clause (f) carries none of the accumulated-profits qualifier that limits sub-clauses (a), (b), (d) and (e) and Explanation 2 was not extended to it, so on the words of the sub-clause a company with nil or negative reserves still pays a full dividend for tax purposes, which is the firm's reading and is argued the other way in the disputes below. The amount the company received on issue of the shares is not deducted, that subtrahend having lived in the section 115QA machinery which is switched off for this window. And nothing is deductible against the receipt, clause 24(a) of the same Act having carved this species of dividend out of section 57(i) and clause 24(c) having added an express prohibition on any deduction. The shareholder's cost is relocated rather than lost, because the matching proviso to section 46A deems the value of consideration nil and so produces a capital loss equal to the cost. The company withholds under section 194 at ten per cent of the whole dividend for a resident, the section naming sub-clause (f) in its own enumeration, and under section 195 for a non-resident.
What the provision does
Moves the tax from the company to the shareholder and taxes the receipt gross. What it does not do is reach a gain or relieve a cost. It gives no credit for what the shareholder paid for the shares, no credit for what the company received when it issued them, and no deduction for interest on money borrowed to acquire them. It carries no date in its own words, operating from the commencement of the clause that inserted it. On its words it does not reach a repurchase made otherwise than in accordance with section 68 of the Companies Act, 2013, nor a buy-back of specified securities that are not shares, though both readings are contested and are set out in the disputes below. And it does not survive into a tax year beginning on or after 1 April 2026, its counterpart in the Income-tax Act, 2025 having been omitted from that date.
Threshold questions
- Whether the buy-back took place on or after 1 October 2024, the date from which the sub-clause operates
- Whether the repurchase was in accordance with section 68 of the Companies Act, 2013, to which the sub-clause is keyed
- Whether what was bought back is a share, the sub-clause reaching a payment on purchase of a company's own shares
- Whether the whole consideration has been returned as dividend, since on its words the sub-clause has no accumulated-profits cap and allows no deduction of what the company received on issue
- Whether any deduction has been claimed against the receipt, which clause 24 of the Finance (No. 2) Act, 2024 prohibits twice over
- Whether the company deducted under section 194 at ten per cent of the whole dividend for a resident, or under section 195 for a non-resident
- Whether the tax year runs under the Income-tax Act, 2025, whose section 2(40)(f) was omitted with effect from 1 April 2026
In practice
The recurring disputes.
Whether a company with no accumulated profits pays a full deemed dividend
Sub-clauses (a), (b), (d) and (e) of section 2(22) are each qualified by the words "to the extent to which the company possesses accumulated profits", and Explanation 2 extends that expression for those sub-clauses and for sub-clause (c). Sub-clause (f) carries no qualifier and Explanation 2 was not extended to it. For the Revenue the answer is the text. The qualifier was available, it was used four times in the same clause and it was not used in sub-clause (f), Explanation 2 lists the sub-clauses it reaches and sub-clause (f) is not among them, and a definition that says "dividend includes" can include what the general word would not. For the assessee, section 2(22) is an inclusive definition, and an inclusive definition enlarges the class of payments that count as a dividend without displacing what the word itself means, which is a distribution of profits; sub-clause (f) brings a buy-back payment within "dividend" and leaves the ordinary limit of the word in place. Explanation 2 is not a list of the limbs that are capped. It covers sub-clauses (a), (b), (d) and (e) up to the date of distribution or payment and sub-clause (c) up to the date of liquidation, so every limb of the clause but sub-clause (f) is within it, and silence about a sub-clause inserted afterwards is as consistent with the Explanation not having been revisited as with a decision to uncap the new limb. And sub-clause (f) was enacted to move to the shareholder the same distribution that section 115QA had taxed in the company's hands on a measure of consideration less the amount received on issue, not to enlarge the base beyond anything that could be a distribution of profits at all. It is open on the words. The firm's view is that the charge falls on the whole payment, because the qualifier was available, was used in the sub-clauses that carry it and was not used in sub-clause (f), and because the sub-clause does not measure itself by profits in any other respect either. The contrary argument is recorded because it is run, and because a company with nil or negative reserves taxed on every rupee of a buy-back price has nothing else to say.
Whether a repurchase that is not under section 68 of the Companies Act is within the sub-clause at all
Sub-clause (f) reaches a payment made "in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013)", and the proviso to section 46A applies only where the consideration is "of the nature referred to in sub-clause (f)". A repurchase outside section 68 is on the literal words outside both, and the receipt would fall to be tested under sub-clause (d) and section 2(47), with the unamended main limb of section 46A supplying the computation on the actual consideration. For the Revenue, those words describe the transaction Parliament had in mind rather than impose a condition, and a shareholder in a non-compliant repurchase cannot be better placed than one in a compliant one. The condition cannot have been meant to make the shareholder's head of income depend on his own company's default, so the words are satisfied where the repurchase is of the species the section governs and its conditions are met in substance, and a shareholder cannot improve his own charge by proving a contravention; and the omission of exclusion (iv) leaves no carve-out for a buy-back payment anywhere in section 2(22), so a repurchase outside sub-clause (f) is not obviously outside "dividend" either. For the assessee the words are a condition, and the same keying appears in section 69(2) of the Income-tax Act, 2025, where it governs the promoter's additional income-tax but not the computation in section 69(1), which shows the drafter distinguishing the two. It is open. The firm's view is that the words are a condition, so an ordinary gain or loss is computed on the actual consideration, and the argument has a price, because it requires the shareholder to assert that his own company did not comply with section 68, which has consequences beyond the computation.
Whether a buy-back of specified securities that are not shares falls outside the 2024 regime
Sub-clause (f) speaks of a payment on purchase of a company's "own shares", and the proviso to section 46A zeroes the consideration only "in respect of any buy-back of shares". The main limb of section 46A covers "shares or other specified securities", takes that expression from the Explanation to section 77A of the Companies Act, 1956 and was left untouched in 2024, while sub-clause (f) is keyed to section 68 of the Companies Act, 2013. For the Revenue, the 2024 package was built to tax buy-back consideration in the shareholder's hands, a reading that splits one transaction into two regimes creates a gap for no reason, and the main limb shows the drafter using "shares" where it meant the generality. For the assessee, the drafter wrote "shares or other specified securities" when it meant both and "shares" when it meant one, in the very section it was amending, and the two limbs are keyed to two different company statutes. It is open, and it will stay open until an issuer is assessed on the point. On the words the narrower reading is the stronger, and that is the firm's view. The consequence is a reporting one and it runs both ways. On the firm's reading an issuer that applied the nil-consideration proviso to every instrument bought back in the window reported the wrong figure for anything that is not a share, and the holder of such an instrument was taxed on the gross receipt as a dividend, and withheld from under section 194, when his computation should have been an ordinary gain or loss on the actual consideration. On the Revenue's reading the figures as reported are right, and a holder who reopens them is asserting that a package enacted to tax buy-back consideration in the shareholder's hands left a gap in the very transaction it was built for. Either way the instrument is classified on the file, under the Act whose definition applies, before the figure is reported.
Whether the deemed dividend and the section 46A loss can fall in different years
Section 46A fixes the year of the capital gains computation as "the year in which such shares or other specified securities were purchased by the company", while the dividend under this sub-clause is income from other sources and its year is fixed by the ordinary timing rules for that head. Where a buy-back is completed close to 31 March, or payment follows completion across a year end, the two can part company. For the Revenue the two are halves of one transaction, on ordinary facts the purchase and the payment fall in the same year, and "purchased by the company" is satisfied when the buy-back is completed, which is also when the shareholder becomes entitled to the money. For the assessee the two provisions use different language deliberately, the express year rule displaces any assumption that they coincide, and a buy-back can be completed in one year with consideration paid in the next. It is open on the texts, and a split hurts the shareholder rather than the Revenue, because a loss in the earlier year cannot reach a dividend in the later one even if section 71(3) permitted it. The firm's view is that the loss year is fixed by section 46A on its own words and is not moved to match the dividend.