2018 (12) TMI 317 - AT - Income Tax

Assessee wins appeal for capital loss claim on share capital reduction

M/s. Jupiter Capital Pvt. Ltd. Versus The Assistant Commissioner of Income Tax, Circle – 4 (1) (1), Bangalore.

The Tribunal allowed the appeal filed by the assessee, holding that the claim for capital loss on account of reduction in share capital in ANNPL was ... Disallowing the claim of capital loss incurred by the appellant due to reduction of capital by the investee company - an extinguishment and relinquishment by the appellant - transfer u/s 2(47) - face value of shares remains the same - Held that:- The face value per share remains same i.e. ₹ 10 per share before reduction of share capital and after reduction of share capital but the total number of shares has been reduced from 153505750 to 10000 and out of this, the present assessee was holding prior to reduction 153340900 shares and after reduction 9988 shares. In addition to this reduction in number of shares held by the assessee company in ANNPL, the assessee received an amount of ₹ 3,17,83,474/- from ANNPL. Hence it is seen that in the facts of present case, on account of reduction in number of shares held by the assessee company in ANNPL, the assessee has extinguished its right of 153340900 shares and in lieu thereof, the assessee received 9988 shares at ₹ 10/- each along with an amount of ₹ 3,17,83,474/-. As per this judgment of Kartikeya V. Sarabhai Vs. CIT [1997 (9) TMI 2 - SUPREME COURT], there is no reference to the percentage of share holding prior to reduction of share capital and after reduction of share capital and hence, in our considered opinion, the basis adopted by the CIT(A) to hold that this judgment of Hon’ble Apex Court is not applicable in the present case is not proper and in our considered opinion, this is not proper. In our considered opinion, in the facts of present case, this judgment of Hon’ble Apex Court is squarely applicable and by respectfully following this judgment we hold that the assessee’s claim for capital loss on account of reduction in share capital in ANNPL is allowable.- Decided in favour of assessee Issues Involved:1. Whether the reduction in share capital of the investee company resulted in a transfer of capital asset under Section 2(47) of the Income Tax Act.2. Whether the assessee is entitled to claim a capital loss due to the reduction of capital by the investee company.3. The applicability of the judgment of the Hon’ble Apex Court in the case of Kartikeya V. Sarabhai Vs. CIT to the present case.Detailed Analysis:1. Transfer of Capital Asset under Section 2(47):The core issue revolved around whether the reduction in share capital of Asianet News Pvt. Ltd. (ANNPL) resulted in a transfer of capital asset as per Section 2(47) of the Income Tax Act. The Assessing Officer (AO) contended that the reduction in shares did not result in a transfer of capital assets because the face value and shareholding pattern remained unchanged. The AO argued that there was no relinquishment or extinguishment of rights as the shareholding percentage of the assessee remained the same before and after the reduction. The CIT (A) upheld the AO’s view, stating that there was no effective transfer or extinguishment of rights as the percentage of shareholding remained unchanged.2. Claim of Capital Loss:The assessee claimed a capital loss of Rs. 164,48,55,840 due to the reduction in share capital of ANNPL. The AO disallowed this claim, arguing that the reduction in share capital did not amount to a transfer of capital assets. The assessee argued that there was an extinguishment of rights as the number of shares held was reduced, and hence, the transaction fell within the purview of Section 2(47) of the Income Tax Act. The CIT (A) rejected the assessee’s claim, stating that the reduction in the number of shares did not result in a transfer of rights as the overall shareholding percentage remained the same.3. Applicability of Kartikeya V. Sarabhai Vs. CIT Judgment:The assessee relied on the judgment of the Hon’ble Apex Court in the case of Kartikeya V. Sarabhai Vs. CIT, arguing that the reduction in share capital amounted to a transfer of capital assets under Section 2(47) of the Income Tax Act. The CIT (A) distinguished the present case from the Kartikeya V. Sarabhai case, stating that in the present case, there was no reduction in the face value of shares, and the shareholding percentage remained unchanged. The CIT (A) concluded that the judgment of the Hon’ble Apex Court was not applicable in the present case.Tribunal’s Decision:The Tribunal considered the rival submissions and the judicial position. It noted that the CIT (A) had distinguished the Kartikeya V. Sarabhai case based on the fact that the shareholding percentage remained unchanged. However, the Tribunal found that the CIT (A)’s reasoning was not proper. The Tribunal observed that in the Kartikeya V. Sarabhai case, the Hon’ble Apex Court held that relinquishment or extinguishment of any right amounts to a transfer of a capital asset under Section 2(47) of the Income Tax Act. The Tribunal noted that in the present case, the assessee’s right in 153340900 shares was extinguished, and the assessee received 9988 shares along with Rs. 3,17,83,474. The Tribunal concluded that the judgment of the Hon’ble Apex Court in the Kartikeya V. Sarabhai case was squarely applicable to the present case.Conclusion:The Tribunal allowed the appeal filed by the assessee, holding that the assessee’s claim for capital loss on account of reduction in share capital in ANNPL was allowable. The Tribunal’s decision was based on the judgment of the Hon’ble Apex Court in the Kartikeya V. Sarabhai case, which held that relinquishment or extinguishment of any right amounts to a transfer of a capital asset under Section 2(47) of the Income Tax Act. The Tribunal found that the CIT (A)’s reasoning for distinguishing the Kartikeya V. Sarabhai case was not proper and concluded that the assessee was entitled to claim the capital loss.