Reduction in Shareholding Due to Fresh Allotment is Not a 'Transfer or Relinquishment of Right': ITAT Deletes ₹2.53 Cr Capital Gain Addition [Read Order]
The Tribunal held that a minority shareholder's passive reduction in percentage holding, caused by a company's fresh equity issue to a new investor, did not qualify as a "sale, exchange or relinquishment of right" on the part of the existing shareholder.
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) granted substantial relief by confirming the deletion of a Short-term Capital Gain addition of ₹2,53,20,000/- for the Assessment Year (AY) 2011-12 and held that reduction in shareholding due to fresh allotment was not a transfer or relinquishment of right.
Sunita Sanjeev Aeren (assessee) for whom the case originated from a search and seizure operation, where the Assessing Officer (AO) linked the assessee's shareholding in two companies, Shrey Properties Pvt.Ltd. and Snerea Properties Pvt.Ltd., to a high-value property in New Delhi.
The assessee was a minority shareholder, initially holding a 2.25% stake in each company. The core of the dispute was a corporate action where the two companies issued a fresh allotment of 30 lakh shares each to AEZ Infratech Pvt.Ltd. This fresh issuance effectively diluted the assessee’s percentage holding from 2.25% to 0.562%.
The AO argued that this proportionate reduction amounted to a 'de-facto transfer' of the assessee's ownership right in the underlying property, and consequently calculated the reduction in the value of her stake ₹3,37,50,000 to ₹84,30,000 as a taxable capital gain of ₹2,53,20,000 under Section 2(47) of the Income Tax Act, 1961.
Aggrieved by the addition, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the assessee had not sold any shares, and the change was solely due to the corporate decision of fresh allotment, which was outside the control of a minority shareholder.
The CIT(A) held that the reduction in percentage shareholding due to a fresh issue of shares cannot be construed as a relinquishment of a right and noted that three mandatory conditions for 'relinquishment' were unmet. The CIT(A) allowed the assessee’s appeal.
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The CIT(A) held that since the assessee was never offered the new shares and was merely a passive recipient of the dilution, the conditions for invoking Section 2(47) were not met. Aggrieved by the CIT(A)’s order, the revenue filed an appeal before the ITAT.
The two-member bench comprising Mahavir Singh (Vice President) and Krinwant Sahay, (Accountant Member), relied on the binding precedent set by the Delhi High Court in the related case of Snerea Properties Pvt.Ltd. Vs. ACIT.
The High Court had previously confirmed that where no part of the title or interest in the property was transferred by the assessee, the income incidence, if any, would fall only on the transacting parties (the transferor and transferee of the shares), and not on the company or the non-transacting shareholder.
The tribunal concluded that in the complete absence of any action by the assessee to sell her shares or relinquish a right, the addition of ₹2.53 crore as Short-term Capital Gain was unsustainable.
The tribunal upheld the deletion of the addition. The appeal filed by the Revenue was dismissed.
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