The Assessing Officer has computed my client company's buy-back tax by deducting what the tendering shareholder paid for the shares. Which figure does the Act actually require, and where is it laid down?
Rule 40BB matters only for buy-backs governed by s.115QA — that is, buy-backs before 1 October 2024, since the second proviso to s.115QA(1) switches that section off from that date. It prescribes, for clause (ii) of the Explanation to s.115QA(1), "the amount received by a company in respect of the share issued by it, being the subject matter of buy-back", and that figure — not the shareholder's cost — is what is deducted from the buy-back consideration to give the "distributed income" charged at twenty per cent. The general rule in sub-rule (2) is the amount actually received on subscription "including any amount actually received by way of premium"; sub-rule (13) makes the face value the amount received in any case the rule does not otherwise cover.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2016-06-01, reported as Rule 40BB of the Income-tax Rules, 1962; sub-rules (1) to (3) reproduced by the ITAT Rajkot in Bhikhalal Prahladrai Agarwal (HUF) v. ACIT (21 August 2025). It bears on section Rule 40BB, section 115QA, section 115QA(1), section 115-O, section Rule 3, section 46A, section 10(34A) of the Income Tax Act 1961, in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters.
The rule is thirteen sub-rules long because the answer changes with how the share came into existence, and each sub-rule decides real money. Sub-rule (2) puts share premium into the amount received, which is the single most valuable line in the rule for a company defending a demand: shares issued at Rs.10 face value with Rs.15 premium carry an amount received of Rs.25, not Rs.10. Sub-rule (3) reduces the amount received by any sum previously returned out of it, with a proviso preserving the amount where that return was itself charged to additional income-tax under s.115-O and paid. Sub-rule (4) values ESOP and sweat equity shares at the rule 3(8) fair market value, to the extent credited to share capital and share premium. Sub-rules (6) and (7) split the amount received between a demerged and a resulting company in the proportion the net book value of the assets transferred bears to the net worth of the demerged company immediately before the demerger, and reduce the demerged company's figure correspondingly. Sub-rule (8) values shares issued as consideration for acquiring an asset or settling a liability at the lower of a merchant banker's proportionate valuation and the amount credited to share capital and share premium. Sub-rule (9) gives a net-asset formula for shares issued on conversion of a firm or succession of a proprietary concern. Sub-rule (10) is the one that hurts: a share issued without consideration on the basis of existing shareholding — a bonus share — has an amount received deemed to be NIL, so the entire buy-back price of a bonus share is distributed income. Sub-rule (11) carries the amount received on a convertible instrument into the share it converts into. Sub-rule (12) applies first-in-first-out where a dematerialised share cannot be distinctly identified. Getting the sub-rule right is usually worth more than any argument about the buy-back price.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Rule 40BB, transcribed from the departmental page in two continuous runs, provides in sub-rule (1) that for clause (ii) of the Explanation to s.115QA(1) "the amount received by a company in respect of the share issued by it, being the subject matter of buy-back referred to in the said section, shall be determined in accordance with this rule"; in sub-rule (2) that on a subscription the amount actually received "including any amount actually received by way of premium" is the amount received; in sub-rule (3) that any sum previously returned out of that amount reduces it, with a proviso that a sum charged to additional income-tax under s.115-O and paid is not reduced; in sub-rule (4) that ESOP and sweat equity shares take the rule 3(8) fair market value to the extent credited to share capital and share premium; in sub-rule (5) that an amalgamated company inherits the amalgamating company's figure; in sub-rules (6) and (7) the demerger apportionment by reference to the net book value of assets transferred over the net worth of the demerged company immediately before the demerger, with a corresponding reduction in the demerged company's figure; in sub-rule (8) a lower-of formula for shares issued as consideration for an asset or a liability, with a merchant banker's valuation; in sub-rule (9) a net-asset formula for shares issued on conversion of a firm or succession of a proprietary concern; in sub-rule (10) that where a share is issued "without any consideration, on the basis of existing shareholding in the company, the consideration in respect of such share shall be deemed to be 'Nil'"; in sub-rule (11) that a share issued on conversion of preference shares, bonds, debentures, debenture-stock, deposit certificates, warrants or other securities takes the amount received on that instrument; in sub-rule (12) first-in-first-out for dematerialised shares that cannot be distinctly identified; and in sub-rule (13) that "In any other case, the face value of the share shall be deemed to be the amount received by the company for issue of the share."
Not a judgment. The statutory position is that the deduction from buy-back consideration required by clause (ii) of the Explanation to s.115QA(1) is the amount received by the COMPANY on issue of the shares, computed under Rule 40BB, sub-rule by sub-rule according to how the share was issued; that subscription amounts include premium; that a share issued without consideration on the basis of existing shareholding carries a nil amount received; and that the residuary rule is face value.
Not a judgment; no judicial reasoning is stated for the rule. Applying it, the ITAT Rajkot held on 21 August 2025 that where shares were originally issued by the company at Rs.25 per share (face value Rs.10 and share premium Rs.15) and bought back at Rs.26, "the company has correctly paid tax on Rs.1/- per share (Rs.26/- less Rs.25/-) being the difference between the buyback price and the amount which was received by the company for issue of such shares", and that the Assessing Officer's computation from the tendering shareholder's cost of Rs.2 per share was "in complete violation of the provisions of section 115QA".
Where the share has been issued by a company to any person by way of subscription, amount actually received by the company in respect of such share including any amount actually received by way of premium shall be the amount received by the company for issue of such share.
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Handle my notice → Ask a CA on WhatsAppRule 40BB matters only for buy-backs governed by s.115QA — that is, buy-backs before 1 October 2024, since the second proviso to s.115QA(1) switches that section off from that date. It prescribes, for clause (ii) of the Explanation to s.115QA(1), "the amount received by a company in respect of the share issued by it, being the subject matter of buy-back", and that figure — not the shareholder's cost — is what is deducted from the buy-back consideration to give the "distributed income" charged at twenty per cent. The general rule in sub-rule (2) is the amount actually received on subscription "including any amount actually received by way of premium"; sub-rule (13) makes the face value the amount received in any case the rule does not otherwise cover. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section Rule 40BB, section 115QA, section 115QA(1), section 115-O, section Rule 3, section 46A, section 10(34A) of the Income Tax Act 1961. It is reported as Rule 40BB of the Income-tax Rules, 1962; sub-rules (1) to (3) reproduced by the ITAT Rajkot in Bhikhalal Prahladrai Agarwal (HUF) v. ACIT (21 August 2025). The rule is thirteen sub-rules long because the answer changes with how the share came into existence, and each sub-rule decides real money. Sub-rule (2) puts share premium into the amount received, which is the single most valuable line in the rule for a company defending a demand: shares issued at Rs.10 face value with Rs.15 premium carry an amount received of Rs.25, not Rs.10. Sub-rule (3) reduces the amount received by any sum previously returned out of it, with a proviso preserving the amount where that return was itself charged to additional income-tax under s.115-O and paid. Sub-rule (4) values ESOP and sweat equity shares at the rule 3(8) fair market value, to the extent credited to share capital and share premium. Sub-rules (6) and (7) split the amount received between a demerged and a resulting company in the proportion the net book value of the assets transferred bears to the net worth of the demerged company immediately before the demerger, and reduce the demerged company's figure correspondingly. Sub-rule (8) values shares issued as consideration for acquiring an asset or settling a liability at the lower of a merchant banker's proportionate valuation and the amount credited to share capital and share premium. Sub-rule (9) gives a net-asset formula for shares issued on conversion of a firm or succession of a proprietary concern. Sub-rule (10) is the one that hurts: a share issued without consideration on the basis of existing shareholding — a bonus share — has an amount received deemed to be NIL, so the entire buy-back price of a bonus share is distributed income. Sub-rule (11) carries the amount received on a convertible instrument into the share it converts into. Sub-rule (12) applies first-in-first-out where a dematerialised share cannot be distinctly identified. Getting the sub-rule right is usually worth more than any argument about the buy-back price. If it applies to you, the first step is this: Confirm the buy-back took place before 1 October 2024. From that date s.115QA does not apply and Rule 40BB has nothing to operate on.
Rule 40BB, transcribed from the departmental page in two continuous runs, provides in sub-rule (1) that for clause (ii) of the Explanation to s.115QA(1) "the amount received by a company in respect of the share issued by it, being the subject matter of buy-back referred to in the said section, shall be determined in accordance with this rule"; in sub-rule (2) that on a subscription the amount actually received "including any amount actually received by way of premium" is the amount received; in sub-rule (3) that any sum previously returned out of that amount reduces it, with a proviso that a sum charged to additional income-tax under s.115-O and paid is not reduced; in sub-rule (4) that ESOP and sweat equity shares take the rule 3(8) fair market value to the extent credited to share capital and share premium; in sub-rule (5) that an amalgamated company inherits the amalgamating company's figure; in sub-rules (6) and (7) the demerger apportionment by reference to the net book value of assets transferred over the net worth of the demerged company immediately before the demerger, with a corresponding reduction in the demerged company's figure; in sub-rule (8) a lower-of formula for shares issued as consideration for an asset or a liability, with a merchant banker's valuation; in sub-rule (9) a net-asset formula for shares issued on conversion of a firm or succession of a proprietary concern; in sub-rule (10) that where a share is issued "without any consideration, on the basis of existing shareholding in the company, the consideration in respect of such share shall be deemed to be 'Nil'"; in sub-rule (11) that a share issued on conversion of preference shares, bonds, debentures, debenture-stock, deposit certificates, warrants or other securities takes the amount received on that instrument; in sub-rule (12) first-in-first-out for dematerialised shares that cannot be distinctly identified; and in sub-rule (13) that "In any other case, the face value of the share shall be deemed to be the amount received by the company for issue of the share." The matter was decided on 2016-06-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that the deduction from buy-back consideration required by clause (ii) of the Explanation to s.115QA(1) is the amount received by the COMPANY on issue of the shares, computed under Rule 40BB, sub-rule by sub-rule according to how the share was issued; that subscription amounts include premium; that a share issued without consideration on the basis of existing shareholding carries a nil amount received; and that the residuary rule is face value.
Not a judgment; no judicial reasoning is stated for the rule. Applying it, the ITAT Rajkot held on 21 August 2025 that where shares were originally issued by the company at Rs.25 per share (face value Rs.10 and share premium Rs.15) and bought back at Rs.26, "the company has correctly paid tax on Rs.1/- per share (Rs.26/- less Rs.25/-) being the difference between the buyback price and the amount which was received by the company for issue of such shares", and that the Assessing Officer's computation from the tendering shareholder's cost of Rs.2 per share was "in complete violation of the provisions of section 115QA". In the words reproduced by the source cited on this page: "Where the share has been issued by a company to any person by way of subscription, amount actually received by the company in respect of such share including any amount actually received by way of premium shall be the amount received by the company for issue of such share."
It was decided by the CBDT Circulars & Instructions on 2016-06-01 and is reported as Rule 40BB of the Income-tax Rules, 1962; sub-rules (1) to (3) reproduced by the ITAT Rajkot in Bhikhalal Prahladrai Agarwal (HUF) v. ACIT (21 August 2025). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section Rule 40BB, section 115QA, section 115QA(1), section 115-O, section Rule 3, section 46A, section 10(34A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that the deduction from buy-back consideration required by clause (ii) of the Explanation to s.115QA(1) is the amount received by the COMPANY on issue of the shares, computed under Rule 40BB, sub-rule by sub-rule according to how the share was issued; that subscription amounts include premium; that a share issued without consideration on the basis of existing shareholding carries a nil amount received; and that the residuary rule is face value. It arises in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters, on section Rule 40BB, section 115QA, section 115QA(1), section 115-O, section Rule 3, section 46A, section 10(34A) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the amount received share by share, by the route each share came in — subscription, ESOP, bonus, conversion, demerger, consideration for an asset, conversion of a firm — and cite the matching sub-rule for each block. Where shares were issued at a premium, put the premium into the amount received under sub-rule (2) and say so expressly in the reply; an officer who has used only face value, or the shareholder's purchase price, has used the wrong figure. Identify bonus shares separately. Sub-rule (10) deems the amount received on them to be nil, so the buy-back price of a bonus share is distributed income in full — plan for that rather than being surprised by it. For dematerialised holdings that cannot be traced to a particular allotment, apply first-in-first-out under sub-rule (12) and keep the demat statements that support the ordering. If a sum was earlier returned out of the issue proceeds, check sub-rule (3) and its proviso before reducing the amount received — the reduction does not apply where that return bore additional income-tax under s.115-O and the company paid it.
Still good law. The rule as set out is the rule as it stands. The departmental page prints the insertion footnote - inserted by the Income-tax (Twenty-eighth Amendment) Rules 2016 with retrospective effect from 1 June 2016 - and no later amendment footnote, and a separate search for a notification amending Rule 40BB after 2016 turned up nothing. The caution about the source stands: departmental rule pages carry no 'Year:' stamp, so unlike a year-stamped section page the page cannot be shown on its face to be the current version, and the absence of a later footnote is the only evidence that none exists. Two things support the text. The Rajkot Bench of the Tribunal reproduced sub-rules (1) to (3) in identical words in August 2025, and the rule's operative reference - clause (ii) of the Explanation to s.115QA(1), the consideration paid on buy-back reduced by the amount received by the company for the issue of the shares 'determined in the manner as may be prescribed' - matches the section text on the departmental pages stamped Year 2024 (No. 2) and Year 2025. One point remains open and is worth recording: the Act that inserted the prescription power into the Explanation to s.115QA(1) is still not identified, because the Year 2025 s.115QA page prints only footnote 49, which attributes the second proviso to Act No. 15 of 2024 with effect from 1 October 2024 - the provision that takes buy-backs on or after that date out of the charge. Rule 40BB continues to matter for buy-backs between 1 June 2013 and 30 September 2024, where bonus shares are taken at nil and dematerialised shares on a first-in first-out basis. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
`decided_on` is 1 June 2016, the commencement of the rule, taken from the footnote printed on the departmental page itself — footnote 62, "Inserted by the IT (Twenty-eighth Amdt.) Rules, 2016, w.r.e.f. 1-6-2016" — and not from any page vintage. Departmental rule pages carry no "Year:" stamp at all, so this rule cannot be dated from a page vintage the way a section can; it is dated here from that insertion footnote, which was returned on two separately worded fetches of the same page. The retrospective commencement also fixes a floor for the related dating gap in s.115QA itself: the Year 2013 departmental page defines "distributed income" with no reference to any prescribed manner, while every page from Year 2020 onwards carries the words "determined in the manner as may be prescribed", and no footnote naming the amending Act for that substitution appears on any s.115QA page read, including the Year 2025 page, which prints only one footnote in total. What can be said is that the prescription power was in force by 1 June 2016, because Rule 40BB is expressed to operate from that date; the amending Act remains unidentified. Sub-rules (1), (2) and part of (3) are independently corroborated because the ITAT Rajkot reproduced them verbatim in an order dated 21 August 2025; sub-rules (4) to (13) rest on the departmental page alone. The reference in sub-rule (4) and in the Explanation to sub-rule (8) to "rule 3" is to the Income-tax Rules, 1962 valuation rule, which I did not separately retrieve. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that the deduction from buy-back consideration required by clause (ii) of the Explanation to s.115QA(1) is the amount received by the COMPANY on issue of the shares, computed under Rule 40BB, sub-rule by sub-rule according to how the share was issued; that subscription amounts include premium; that a share issued without consideration on the basis of existing shareholding carries a nil amount received; and that the residuary rule is face value.
TaxSphere, “Statutory position — Rule 40BB: how the "amount received by the company" is computed for s.115QA buy-back tax, sub-rule by sub-rule, including bonus shares at nil and dematerialised shares on FIFO”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-rule-40bb-how-the-amount-received-by-the-company-on-issue-of-shares-is-computed-for-buyback-tax/ (validity last checked 2026-09-16)
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The department has raised a demand on my client company under section 115QA on a buy-back. Which buy-backs does the section actually reach, at what rate, on what figure, and is it still alive?
My client claimed the buy-back proceeds as exempt under section 10(34A). The Assessing Officer says the company paid too little buy-back tax, so he has denied the exemption and assessed the whole gain under section 46A. Can he do that?
For a buy-back completed before 1 October 2024 my client claimed the whole receipt as exempt under section 10(34A). The officer says the company got its section 115QA computation wrong, so the exemption goes. Is that right — and does the exemption still exist for a buy-back done now?
My client's shares were bought back at less than the price the company issued them at, so it made a loss. The Assessing Officer says buy-back income is exempt under section 10(34A), so the loss cannot be carried forward — and he has levied concealment penalty. Is the loss really lost?
