The Supreme Court has held that 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.
The Bench of Justice J.B. Pardiwala and Justice R. Mahadevan has observed that the reduction of share capital or redemption of shares is an exception to the rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares.
In other words, the Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer under Section 2(47) of the Income Tax Act, 1961.
The respondent-assessee is a company engaged in the business of investing in shares, leasing, financing and money lending. The assessee had made an investment in Asianet News Network Pvt. Ltd., an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having face value of Rs 10/- each. Theassessee purchased 38,06,758 shares from other parties, by increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company.
The company incurred losses, as a result of which the net worth of the company got eroded.
Subsequently, the company filed a petition before the Bombay High Court for 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 from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at Rs. 10 even after the reduction in the share capital. The High Court also directed the company for payment of Rs. 3,17,83,474/- to the assessee as a consideration.
The assessee claimed long term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income Tax Act, 1961. The Assessing Officer took the view 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.
The CIT(A) held that any extinguishment of rights would involve parting the sale of a percentage of shares to another party or divesting rights. The ITAT reversed the order passed by the CIT(A) and allowed the appeal filed by the assessee
The department appealed against the judgement and order passed by the High Court of Karnataka at Bengaluru by which the judgement and order passed by the ITAT came to be affirmed.
The court while dismissing the appeal of the department held that Whenasaresultofthereducingofthefacevalueoftheshare,theshare 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.
Case Details
Case Title: PCIT Versus M/S. Jupiter Capital Pvt. Ltd.
Case No.: Special Leave Petition No. 63 Of 2025
Date: 2/01/2025
