The Supreme Court held that a reduction in the subsidiary’s share capital constitutes a ‘transfer’ under Section 2(47) of the Income Tax Act, 1961.
In this case, the Revenue has appealed against the judgement passed by the Karnataka High Court, which affirmed the orders passed by the Income Tax Appellate Tribunal ( ITAT ) Bangalore.
The assessee was engaged in investments, leasing, and financing and had purchased 14,95,44,130 shares with a face value of Rs 10 each in Asianet News Network Pvt. Ltd., later increasing its stake to 15,33,40,900 shares, which is 99.88% ownership.
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Due to losses eroding the company’s net worth, Asianet filed for share capital reduction. The Bombay High Court approved reducing the total shares from 15,35,05,750 to 10,000, proportionately reducing the assessee’s shares to 9,988, and the face value remained unchanged. The court also ordered Asianet to pay Rs 3.17 crores to the assessee as consideration.
The assessee claimed a long-term capital loss from the reduction in the share capital of its subsidiary. The Assessing Officer (AO) rejected the claim, stating that the reduction did not constitute a “transfer” of a capital asset under Section 2(47) of the Income Tax Act, 1961. The AO noted that while the number of shares was reduced, the face value and shareholding pattern remained unchanged.
Although the Commissioner of Income Tax Appeals [CIT(A)] upheld the additions made by the AO, the ITAT ruled in favor of the assessee.
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The High Court of Karnataka had observed that even after the reduction of the shares, the face values of the shares remained the same at Rs. 10. It further observed that “the AO’s view that the voting power has not changed as the percentage of the assessee’s share of 99.88% has remained unchanged is untenable because if the shares are transferred at face value, the redeemable value would be Rs. 99,880, whereas the value of 14,95,44,130 number of shares would have been Rs. 1,49,54,41,300.
The Karnataka HC had further observed that the ITAT had rightly relied on the case of Kartikeya V. Sarabhai v. The Commissioner of Income Tax: 1998 2 ITR 163 SC with regard to the meaning of transfer by holding that there was no transfer within the meaning of that expression contained in Section 2(47) of the Income Tax Act, 1961.
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The Supreme Court noted that Section 2(47) of the Income Tax Act, 1961, which is an inclusive definition, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. Despite a reduction in share capital, the taxpayer’s rights as a shareholder in the corporation were not extinguished.
The Apex Court concluded its judgement, stating that reducing the share capital of the subsidiary company and proportionately reducing the assessee’s shareholding falls under the definition of “sale, exchange, or relinquishment of the asset” in Section 2(47) of the Income Tax Act 1961.
The Supreme Court Bench of Justice J.B. Pardiwala and Justice R. Mahadevan, dismissed the revenue’s appeal.
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