Reduction In Share Capital Amounts To Transfer Of Capital Asset Under Income Tax Act : Supreme Court
The Supreme Court (recently on January 02) reiterated that reduction in share capital is covered under Section 2(47) of the Income Tax Act, 1961, which talks about transfer of a capital asset. It explained that such reduction would be come under the expression “sale, exchange or relinquishment of the asset” used in the provision.For reference, the concerned portion of Section 2(47)...
The Supreme Court (recently on January 02) reiterated that reduction in share capital is covered under Section 2(47) of the Income Tax Act, 1961, which talks about transfer of a capital asset. It explained that such reduction would be come under the expression “sale, exchange or relinquishment of the asset” used in the provision.
For reference, the concerned portion of Section 2(47) reads as:
“transfer' in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law…”
The Bench of Justices J.B. Pardiwala and R. Mahadevan said that this provision provides an inclusive definition of transfer, covering relinquishment of an asset or extinguishment of any right.
“While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.,” it added.
It went on to elaborate that one of the modes for reducing the share capital is to reduce the face value of the preference share. As a result of reducing the face value, several rights of a preference shareholder including in his share capital, and distribution of the net assets upon liquidation, is also extinguished proportionately. This, the Court said, amounts to a reduction in the right of capital asset.
“When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of section 2(47) of the Income Tax Act, 1961.''
Reliance was placed upon Kartikeya V. Sarabhai., (1997) 7 SCC 524, wherein inter-alia, the Apex Court had held:
“It is not necessary that for a capital gain to arise there must be sale of a capital asset. Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. 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.”
In the present case, assessee was a company engaged in the business of investing in shares. It had made an investment in Asianet News Network Pvt. Ltd., an Indian company engaged in the business of telecasting news, by purchasing shares. As a result, assessee's shareholding had increased. However, the company incurred losses and consequently, the share of the assessee was also reduced proportionately.
Based on this, the assessee claimed long-term capital loss accrued on the reduction in share capital. However, the assessing officer rejected this claim and it reasoned that though there was a reduction in the share capital of the company, the face value of each share remained the same. Subsequently, when the matter reached the High Court, it found the officer's view to be untenable and instead affirmed ITAT's order that had allowed the assessee's claim for capital loss. Thus, the present appeal was filed by the revenue.
The Court pointed out that the face value per share has remained the same before and after the reduction of share capital. However, it observed that relinquishment of any right can also amount to transfer.
“Sale is only one of the modes of transfer envisaged by Section 2(47) of the Income Tax Act, 1961. Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income Tax Act, 1961.,'' the Court held.
To bolster its findings, the Court also referred to its decision in Anarkali Sarabhai v. CIT., (1997) 3 SCC 238. Therein, it was held that the reduction of share capital would involve the purchase of its own shares by the company and thus would fall within the scope of transfer provided under Section 2(47).
Based on these observations, the Court dismissed the present appeal and held:
“In view of the aforesaid, 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.”
Case Name: PRINCIPAL COMMISSIONER OF INCOME TAX-4 & ANR v. M/S. JUPITER CAPITAL PVT. LTD., SPECIAL LEAVE PETITION NO. 63 OF 2025
Citation : 2025 LiveLaw (SC) 41