Supreme Court (‘SC’) in the case of Jupiter Capital Pvt Ltd[1] (‘Assessee’) has held that the capital reduction amounts to ‘transfer’, consequently allows the Assessee to claim Long Term Capital Loss (‘LTCL’) incurred on account of capital reduction.
Assessee is engaged in the business of investing in shares, leasing, financing and money lending. Assessee had invested 99.88% of the shareholding of Asianet News Network Pvt. Ltd (‘Asianet’), which is engaged in the business of telecasting news.
Over the years, Asianet had incurred losses, resulting in erosion of its net worth. A scheme of capital reduction for reduction of its share capital against set off of accumulated losses, was filed before the Bombay HC.
Upon Bombay HC approving the aforesaid scheme, the share of the assessee were reduced to 9,988 shares from 15,33,40,900 shares. The High Court also directed Asianet to pay INR 3,17,83,474 to Assessee as a consideration. Pursuant to the capital reduction (set off of losses against paid up equity capital) a claim of LTCL was made by the Assessee.
During the assessment proceedings, the tax officer rejected such claim by holding that reduction did not result in the transfer as per section 2(47) of the Income Tax Act, 1961 (‘Act’). Further, opined that although the number of shares got reduced, yet face value as well as shareholding pattern remained the same. Consequently, disallowed the claim of LTCL.
CIT(A) upheld the order passed by tax officer. ITAT reversed the order passed by CIT(A) and on appeals before HC by revenue, HC dismissed the appeal filed by the revenue and upheld the order passed by ITAT.
On appeal before SC, it was held that reduction of share capital shall be covered within “sale, exchange or relinquishment of the asset” in Section 2(47) the Act and hence the Assessee was entitled to claim LTCL:
Following are the key observations relied upon at the time of passing the above judgements:
- Section 2(47) is an inclusive definition which provides for relinquishment of an asset or extinguishment of any right there in. While, it is no doubt true that 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 shareholder qua the company. It is not necessary that for a capital gain to arise there must be sale of a capital asset. Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under Section 45 of the Act.
- In the case of Vania Silk Mills[2], it was observed that the expression “extinguishment of any right therein” covered every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation of all or any of the bundle of rights. Assessee had extinguished its right of 15,33,40,900 shares, and in lieu thereof, received 9988 shares at Rs. 10 each along with an amount of INR 3,17,83,474.
- A Division Bench of the Gujarat High Court in the case of Jaykrishna Harivallabhdas[3] further clarified that 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.
- In the case of Kartikeya V. Sarabhai[4], SC had observed that reduction of right in a capital asset would amount to ‘transfer’ under section 2(47) of the Act. Further, in the case of Anarkali Sarabhai[5], SC had held that that the reduction of share capital involves purchase of its own shares by the company, hence would amount to ‘transfer’ under section 2(47) of the IT Act.
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[1] Principal Commissioner of Income Tax vs Jupiter Capital Pvt Ltd (SC) [Special leave petition no. 63 of 2025]
[2] Commissioner of Income Tax v. Vania Silk Mills (P.) Ltd. reported in (1977) 107 ITR 300 (Guj)
[3] Commissioner of Income-Tax v. Jaykrishna Harivallabhdas (1998) 231 ITR 108 (Guj)
[4] Kartikeya V. Sarabhai v. Commissioner of Income Tax (1997) 7 SCC 524 (SC)
[5] Anarkali Sarabhai v. CIT (1997) 3 SCC 238 (SC)
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