Reduction in Share Capital of Subsidiary & Subsequent Reduction in Shareholding is ‘Transfer’ u/s 2(47) | SC
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Case Details: Jupiter Capital (P.) Ltd. vs Principal Commissioner of Income-tax - [2025] 170 taxmann.com 305 (SC)
Judiciary and Counsel Details
- J.B. Pardiwala & R. Mahadevan, JJ.
Facts of the Case
The assessee held shares in an Indian company. The company filed a petition before the High Court for a reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered for a reduction in the share capital of the company. The assessee’s share was reduced proportionately, and the company paid an amount to the assessee as consideration. During the year, the assessee claimed a long-term capital loss accrued on the reduction in share capital from the sale of shares of such company.
However, the Assessing Officer (AO) contended that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Thus, reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in section 2(47).
The matter reached before the Supreme Court.
Supreme Court Held
The Supreme Court held that section 2(47) is an inclusive definition providing that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. 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.
The expression ‘extinguishment of any right therein’ is of wide import. It covers every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights, qualitative or quantitative, which the assessee has in a capital asset, whether such asset is corporeal or incorporeal.
In the instant case, the face value per share remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares were reduced.
Relying upon the decision in case of Kartikeya V. Sarabhai v. Commissioner of Income Tax reported in (1997) 7 SCC 524, it was held that reduction of right in a capital asset would amount to ‘transfer’ under section 2(47). Sale is only one of the modes of transfer envisaged by section 2(47). 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.
Also, a company under section 66 of the Companies Act, 2013 has a right to reduce the share capital, and one of the modes which could be adopted is to reduce the face value of the preference share. 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).
Thus, it was held 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).
List of Cases Reviewed
- Principal Commissioner of Income Tax-4 v. Jupiter Capital (P.) Ltd. in Income Tax Appeal (ITA) No. 299 of 2019 dated 20-2-2023 [Para 10] – affirmed
- Kartikeya V. Sarabhai v. Commissioner of Income-tax (1997) 7 SCC 524 [Para 12] – followed
List of Cases Referred to
- Kartikeya v. Sarabhai v. CIT (1997) 7 SCC 524 (para 7)
- CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Gujarat) (para 13)
- CIT v. Jaykrishna Harivallabhdas [1998] 231 ITR 108 (Gujarat) (para 16)
- Anarkali Sarabhai v. CIT (1997) 3 SCC 238 (para 17).
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