The Supreme Court of India, in a recent judgment, has held that the reduction in share capital of a subsidiary company and the resultant proportional reduction in the shareholding of the assessee fall within the purview of the term “sale, exchange or relinquishment of the asset” under Section 2(47) of the Income Tax Act, 1961.
The Bench, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, clarified that such transactions amount to a transfer under the Act.
The court observed that the reduction of share capital or redemption of shares is an exception to Section 77(1) of the Companies Act, 1956, which generally prohibits companies from purchasing their own shares. The Bench held that both actions effectively involved the company’s acquisition of its shares, constituting a transfer as defined under Section 2(47) of the Income Tax Act.
Know How to Investigate Books of Accounts and Other Documents, Click Here
The case involved M/s. Jupiter Capital Pvt. Ltd., a company engaged in investments, financing, and other financial activities. The assessee had invested in Asianet News Network Pvt. Ltd., acquiring 99.88% of its equity shares. Facing significant losses, Asianet News petitioned the Bombay High Court for the reduction of its share capital to offset these losses. Consequently, the company’s share capital was reduced from over 15 crore shares to 10,000 shares, proportionally reducing the assessee’s shareholding.
As part of this reduction, the assessee received a cash consideration of ₹3,17,83,474. The company retained the face value of ₹10 per share. The assessee claimed this transaction resulted in a long-term capital loss under the Income Tax Act. However, the Assessing Officer rejected this claim, arguing that there was no transfer of a capital asset since the face value and shareholding percentage remained unchanged.
The appellate authorities had mixed findings. The CIT(A) upheld the Assessing Officer’s stance, stating that no effective transfer of rights had occurred. However, the ITAT reversed this decision, relying on precedents such as Kartikeya V. Sarabhai v. Commissioner of Income Tax and held that the extinguishment of the assessee’s rights constituted a transfer. The Karnataka High Court later affirmed the ITAT’s decision.
Know How to Investigate Books of Accounts and Other Documents, Click Here
While dismissing the Revenue appeal, the Supreme Court reiterated that the reduction of share capital inherently involves the extinguishment of shareholders’ rights, including voting, dividend entitlement, and liquidation proceeds. It was further noted that Such extinguishment falls squarely within the definition of transfer under Section 2(47) of the Income Tax Act.
Further, precedents, including Anarkali Sarabhai v. CIT, establish that the reduction of share capital or redemption of shares equates to a relinquishment or sale of an asset, taxable under the Act.
The Court held that reduction in share capital significantly impacts the rights of shareholders and thus qualifies as a transfer. This decision provides much required clarity on the tax implications of share capital reduction and strengthens the interpretation of Section 2(47) of the Income Tax Act.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
