Summary
Dismissing the Revenue's petition, the Supreme Court held that a court-sanctioned reduction of a company's share capital, which proportionately cut the assessee's shareholding from 15,33,40,900 to 9,988 shares with the face value unchanged, extinguished the assessee's rights in those shares and was a 'transfer' under Section 2(47) of the Income Tax Act, 1961, so the claimed capital loss was allowable.
Issues
- Whether reduction of a company's share capital, resulting in a proportionate reduction in the number of shares held by the assessee while the face value and percentage shareholding stay the same, amounts to a 'transfer' of a capital asset under Section 2(47) of the Income Tax Act, 1961.
- Whether the assessee was entitled to claim capital loss on such reduction.
Provisions considered
- Section 2(47), Income Tax Act, 1961Reading the inclusive definition, which covers sale, exchange or relinquishment of the asset and extinguishment of any right in it, the Court held that the proportionate reduction in the assessee's shareholding on reduction of capital extinguished its rights in the cancelled shares and fell within the definition of transfer. (¶¶ 11, 12, 13, 14, 15, 18)
- Section 45, Income Tax Act, 1961Profit or gain arising from a transfer of a capital asset, including by relinquishment or extinguishment of rights not amounting to sale, is chargeable as capital gains; consequently the corresponding loss on the capital reduction was treated as a capital loss. (¶¶ 11, 15)
- Section 48, Income Tax Act, 1961Relying on a Gujarat High Court decision, the Court noted that receipt of consideration for extinguishment of rights is not a condition precedent for computing capital gains. (¶ 16)
- Section 66, Companies Act, 2013Referred to as the source of a company's power to reduce its share capital, the Court observing that reduction of capital, like redemption, is a return of capital that operates as a purchase of the shareholder's rights. (¶¶ 12, 17)
Held
- Whether reduction of share capital amounts to transfer is no longer res integra after Kartikeya V. Sarabhai v. CIT: although the shareholder continues to hold shares, the reduction extinguishes part of his rights as shareholder, including rights to dividend and to share in net assets on liquidation, proportionately to the reduction, and this is a transfer under Section 2(47). (¶¶ 11, 12)
- Sale is only one mode of transfer; relinquishment of an asset or extinguishment of a right in it, which may not amount to sale, is also a transfer, and gain arising from it is taxable under Section 45. (¶ 15)
- The expression 'extinguishment of any rights therein' is of wide import and covers any transaction that destroys, terminates or cancels all or any of the bundle of rights, qualitative or quantitative, that the assessee holds in a capital asset, corporeal or incorporeal. (¶ 13)
- That the face value per share and the assessee's percentage shareholding remained the same after reduction does not matter; by the reduction the assessee extinguished its rights in 15,33,40,900 shares and received 9,988 shares of Rs 10 each together with Rs 3,17,83,474, and Kartikeya V. Sarabhai makes no reference to percentage shareholding. (¶ 14)
- Receipt of consideration is not a condition precedent for computing capital gains or loss on extinguishment of rights. (¶ 16)
- Reduction of share capital, like redemption of shares, involves a company in effect buying back its own shares, and the reduction in the subsidiary's capital with the consequent proportionate reduction in the assessee's holding falls within 'sale, exchange or relinquishment of the asset' in Section 2(47); the High Court committed no error in upholding the Tribunal's allowance of the capital loss. (¶¶ 10, 17, 18)
Result
Delay condoned; the Revenue's special leave petition dismissed, leaving the allowance of the assessee's capital loss undisturbed.