Whether Long Term Capital Loss allowed in case of Share Capital Reduction?

Recently, Hon’ble the Supreme Court reiterated that reduction in share capital is covered under Section 2(47) of the Income Tax Act, 1961 and the assessee is eligible to claim losses.

Facts of the Case:

• Jupiter Capital Private Limited is engaged in the business of investing in shares, leasing, financing and money lending.
• The assessee had made an investment in Asianet News Network Private Ltd., an Indian company engaged in the business of telecasting news through secondary purchase constituting 99.88% of the total number of paid-up shares.
• Asianet News Network Private Limited incurred losses, as a result of which the net worth got eroded. Subsequently, Asianet News Network Private Limited filed a petition before the Bombay High Court for a reduction of its share capital to set off the loss against the paid-up equity share capital.
• Pursuant to this:
  • No. of paid-up equity shares got substantially reduced on a proportionate basis.
  • Consideration for such reduction of shares was paid.
  • Face value of Asianet News Network Private Limited shares remains unchanged.
• Pursuant to this, the assessee claimed long term capital loss accrued on the reduction in share capital.
• 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.

CIT(A) decision:

CIT(A) did not accept the assessee’s appeal:

• There was no effective transfer which is resulting in Long Term Capital Loss as a shareholding pattern and the ownership % remains the same.

ITAT decision

ITAT reversed CIT(A) decision based on:

• Decision of this Court in Kartikeya V. Sarabhai (supra) is squarely applicable to the facts of the present case.
• On account of the reduction in number of shares held, the assessee has extinguished its right of certain shares and in lieu thereof, the assessee received the remaining shares along with consideration.
• As per this judgment of the Hon’ble Apex Court rendered in the case of Kartikeya V. Sarabhai Vs. CIT (supra), there is no reference to the percentage of the shareholding prior to reduction of share capital and after reduction of share capital and hence, in our considered opinion, the basis adopted by the CIT(A) to hold that this judgment of Hon’ble Apex Court is, not applicable in the present case is not proper and in our considered opinion, this is not proper.

High Court Decision

Hon’ble High Court upheld the order passed by ITAT.

Supreme Court Decision:

• Whether the reduction of capital amounts to transfer is no longer res integra in view of the decision of this Court in Kartikeya V. Sarabhai (supra).
• Though the appellant continues to remain a shareholder of the company even with the reduction of share capital but it is not possible to accept the contention that there has been no extinguishment of any part of his right as a shareholder qua the company.
• In the present case, though face value remains the same, it can be said that on account of the reduction in the number of shares held by the assessee in the company, the assessee has extinguished its right of certain shares, and in lieu thereof, the assessee received remaining shares along with consideration. 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 of the Income Tax Act, 1961.
• receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains as envisaged under Section 48 of the Income Tax Act, 1961.
• 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) the Income Tax Act, 1961.