2025 (1) TMI 579 - SC - Income Tax

Share capital reduction by subsidiary constitutes transfer under Section 2(47), capital loss on extinguished shares allowed

PRINCIPAL COMMISSIONER OF INCOME TAX-4 & ANR. Versus M/s. JUPITER CAPITAL PVT. LTD.

The SC held that reduction of share capital by a subsidiary company resulting in proportionate reduction of the holding company's shareholding constitutes ... Reduction of share capital - Disallowance of capital loss claimed by holding that there is extinguishment of rights of 153340900 shares - Interpretation of 'transfer' u/s 2(47) - Scope and ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) - as argued no such extinguishment of rights is made out by the assessee as required u/s 2(47) and there is no reduction in the face value of share - whether reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47)? - HELD THAT:- This Court in the case of Anarkali Sarabhai [1997 (1) TMI 5 - SUPREME COURT] observed that the reduction of share capital or redemption of shares is an exception to the rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer under Section 2(47) of the Income Tax Act, 1961. Thus, we are of the view that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income Tax Act, 1961. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issue presented in this judgment is:Whether the reduction in share capital of a company, leading to a proportional reduction in the number of shares held by an assessee, constitutes a 'transfer' of a capital asset under Section 2(47) of the Income Tax Act, 1961, thereby allowing the assessee to claim a capital loss.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework revolves around the interpretation of 'transfer' under Section 2(47) of the Income Tax Act, 1961, which includes the sale, exchange, or relinquishment of an asset, or the extinguishment of any rights therein. Section 45 of the Act deals with capital gains arising from the transfer of a capital asset. The case of Kartikeya V. Sarabhai v. Commissioner of Income Tax is pivotal, wherein the Supreme Court elaborated on the concept of transfer and capital gains.Court's Interpretation and ReasoningThe Supreme Court reaffirmed that the reduction of share capital leading to the extinguishment of rights in shares constitutes a 'transfer' under Section 2(47). The Court reasoned that even if the face value of shares remains unchanged, the reduction in the number of shares and the consequent extinguishment of rights amount to a transfer. The Court relied heavily on its previous decision in Kartikeya V. Sarabhai, which established that extinguishment of rights in a capital asset is sufficient to constitute a transfer.Key Evidence and FindingsThe key evidence was the reduction in the number of shares from 15,33,40,900 to 9,988, while the face value remained Rs. 10. The assessee received a consideration of Rs. 3,17,83,474. The Court found that this reduction and the receipt of consideration amounted to an extinguishment of rights, thus constituting a transfer.Application of Law to FactsThe Court applied the legal principles from Kartikeya V. Sarabhai to the facts, concluding that the reduction in share capital and the extinguishment of rights in the shares held by the assessee amounted to a transfer. This allowed the assessee to claim a capital loss under Section 45 of the Income Tax Act.Treatment of Competing ArgumentsThe Revenue argued that since the face value and the percentage of shareholding remained unchanged, there was no transfer. The Court dismissed this argument, emphasizing that the extinguishment of rights, not the percentage of shareholding, is the critical factor in determining a transfer under Section 2(47).ConclusionsThe Court concluded that the reduction in share capital and the consequent extinguishment of rights in shares held by the assessee constituted a transfer under Section 2(47) of the Income Tax Act, allowing the claim of a capital loss.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning'Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under Section 45 of the Act.'Core Principles EstablishedThe reduction in share capital leading to the extinguishment of rights in shares constitutes a transfer under Section 2(47) of the Income Tax Act.Extinguishment of rights, rather than the percentage of shareholding, is the determining factor for a transfer.Consideration received in lieu of extinguished rights supports the claim of capital loss.Final Determinations on Each IssueThe Supreme Court dismissed the Revenue's appeal, affirming the High Court's decision that the reduction in share capital constituted a transfer, thus allowing the assessee's claim for capital loss.