2011 (9) TMI 1 - AT - Income Tax

Tribunal Ruling: Share Capital Reduction Not a Transfer, Capital Loss Disallowed, Chennai Industries Deduction Allowed

Bennett Coleman & Co. Ltd. Versus Additional Commissioner of Income-tax, Range-1 (1)

The Tribunal held that the reduction of share capital did not amount to a transfer under section 2(47) as no consideration was received, thus disallowing ... Relinquishment of Asset - extinguishment of rights - Whether on the facts and in the circumstances of the case, the CIT(A) was justified in declaring long term capital loss of ₹ 22,21,85,693/- on account of reduction in paid up equity share capital? - basically the capital was reduced by reducing the face value of ₹ 10/- paid up of each share to ₹ 5/- paid up of each share. As a second step such shares (Rs 5/- per share) were again consolidated into ₹ 10 paid up share and number of shares were reduced to 89,93,149. - Held that:- even if a transfer had taken place, unless and until some consideration is received, the transfer of such asset would not attract the provisions of sec.45. - Unless and until a particular transaction leads to computation of capital gains or loss as contemplated by sections 45 and 48, the same would not attract capital gain tax. - assessee has not received any consideration for reduction of share capital - the loss arising on account of reduction in share capital cannot be subjected to provisions of sec.45 r.w.s. 48 and, accordingly, such loss is not allowable as capital loss. At best such loss can be described as notional loss and it is settled principle that no notional loss or income can be subjected to the provisions of the I.T. Act. - Decided in favor of assessee. Issues Involved:1. Whether the CIT(A) was justified in declaring long-term capital loss on account of reduction in paid-up equity share capital.2. Disallowance of Rs. 48,60,835/- towards obsolete/non-moving material written off.3. Deduction under section 80IB in respect of Chennai Industries undertaking.Detailed Analysis:1. Long-term Capital Loss on Reduction of Paid-up Equity Share CapitalKey Facts and Arguments:- The assessee claimed a long-term capital loss of Rs. 22,21,85,693/- due to the reduction of equity share capital in Times Guarantee Limited (TGL).- TGL reduced the face value of each equity share from Rs. 10/- to Rs. 5/- and then consolidated two shares of Rs. 5/- each into one share of Rs. 10/-.- The assessee argued that this reduction amounted to a transfer under section 2(47) of the Income Tax Act, citing Supreme Court decisions in Kartikeya V. Sarabhai and G. Narsimhan (Deed) And Ors.Decision:- The Tribunal concluded that the reduction of share capital does not amount to a transfer under section 2(47) as no consideration was received by the assessee.- The Tribunal emphasized that for a transaction to attract capital gains tax under section 45, consideration must be received or accrue to the assessee, which was not the case here.- The Tribunal cited the Supreme Court's decision in B.C. Srinivasa Setty, which held that if computation provisions fail, capital gains cannot be assessed.- The Tribunal also noted that the intrinsic value and rights of the shares held by the assessee remained unchanged before and after the reduction of share capital, rendering any loss notional and not allowable under the Income Tax Act.2. Disallowance of Rs. 48,60,835/- for Obsolete/Non-moving Material Written OffKey Facts and Arguments:- The assessee claimed a write-off for obsolete/non-moving material.- The CIT(A) confirmed the disallowance made by the Assessing Officer.Decision:- The Tribunal referred to its earlier orders in the assessee's own case for previous assessment years, where similar claims were allowed.- Following the precedent, the Tribunal allowed the claim for the write-off of obsolete/non-moving material, reversing the CIT(A)'s decision.3. Deduction under Section 80IB for Chennai Industries UndertakingKey Facts and Arguments:- The assessee claimed a deduction under section 80IB for profits from its Chennai Industries undertaking.- The CIT(A) disallowed the deduction.Decision:- The Tribunal referred to its earlier orders in the assessee's own case, where it was held that the Chennai unit qualifies as an 'Industrial Undertaking' under section 80IB.- Following the precedent, the Tribunal directed the Assessing Officer to allow the deduction under section 80IB for the Chennai Industries undertaking.Conclusion:The Tribunal ruled against the assessee on the issue of long-term capital loss from the reduction of share capital, stating that no actual transfer occurred and no consideration was received. However, the Tribunal ruled in favor of the assessee on the issues of the write-off for obsolete/non-moving material and the deduction under section 80IB, following its earlier decisions in the assessee's own case.