The Article has been drafted by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-Founder & Partner), Visakha Raghuram (Associate) and Akshita Varshney.
Case Background & Facts:
The Supreme Court (“SC”), on 02.01.2025, ruled in the case of Principal Commissioner of Income Tax-4 & Anr. v/s M/s Jupiter Capital Pvt. Ltd. (Appeal No. 63 of 2025), that capital loss of equity shares held in a subsidiary company pursuant to a scheme of capital reduction is admissible under the Income Tax Act, 1961. This ruling upheld decisions by the Bangalore Income-tax Appellate Tribunal and Karnataka High Court (HC), dismissing the petition filed by the Tax Authority against such admissibility. Supreme Court order thoroughly addresses the treatment of capital loss arising from the reduction of share capital, discussing whether such an event constitutes a “transfer” under Section 2(47) of the Income Tax Act, 1961.
Jupiter Capital Pvt. Ltd. (“Taxpayer”), a company engaged in the business of investing in shares, leasing, financing, and money lending, held a substantial equity stake of 99.98% in an Indian company by the name of Asianet News Network Pvt. Ltd. (“In Co”). This amounted to 153.34 million shares of the total share capital of 153.51 million shares, with a face value of ₹10 per share. Due to significant financial losses incurred by In Co, its net worth was substantially eroded. To address this, In Co filed a petition before the Bombay High Court for the reduction of its share capital under Section 66 of the Companies Act, 2013. The High Court approved the scheme, allowing the company to reduce its share capital to offset the accumulated losses against the paid-up equity share capital.
Under the approved scheme, the share capital of In Co was reduced from 153.51 million shares to just 10,000 shares. As a result, the Taxpayer’s shareholding was proportionally reduced from 153.34 million shares to 9,998 shares, while the face value per share remained unchanged at ₹10. Despite this reduction, the Taxpayer retained its proportional ownership of 99.98% in the company.
Additionally, the scheme provided for monetary consideration of ₹3.17 crore to be paid to the Taxpayer as part of the reduction in share capital.
Issue Raised:
Whether the reduction of share capital, leading to a decrease in the number of shares held by the assessee but retaining the face value of the shares and percentage shareholding, constitutes a “transfer” under Section 2(47) of the Income Tax Act, 1961.
Claim of Capital Loss & Assessing Officer’s Observations:
The Taxpayer claimed a long-term capital loss on account of the reduction in its shareholding. The Tax payer contended that loss arose from the extinguishment of a significant portion of its shares under the capital reduction scheme, stating that the reduction in share capital involved the extinguishment of rights in the capital asset, qualifying as a transfer under Section 2(47), thereby allowing the claim of a capital loss. However, the Assessing Officer (“AO”) disallowed the claim, asserting that the reduction in the number of shares did not constitute a “transfer” as defined under Section 2(47) of the Income Tax Act, 1961. The AO argued that:
- The face value of the shares remained unchanged at ₹10.
- The Taxpayer’s proportional ownership in the company (99.98%) remained the same, indicating no extinguishment of rights in the shares.
The aforementioned observations of the AO stem from the argument that the reduction in the number of shares did not amount to a transfer, in this particular matter, since the rights of the assessee as a shareholder, such as percentage holding and face value, remained unchanged, which does not constitute ‘transfer’ according to Section 2(47) of the Income Tax Act, under which the following situations/actions would constitute a ‘transfer’ in relation to capital asset,
- The sale, exchange, or giving up of ownership of a capital asset is considered a transfer.
- The loss or extinguishment of any rights in a capital asset qualifies as a transfer.
- The compulsory acquisition of a capital asset under legal authority is treated as a transfer.
- Converting a capital asset into business stock-in-trade or treating it as such is regarded as a transfer.
- The maturity or redemption of a zero-coupon bond is classified as a transfer.
- Allowing possession of immovable property in partial performance of a contract under Section 53A of the Transfer of Property Act, 1882, is deemed a transfer.
- Any arrangement, such as becoming a member of a cooperative society or entering into an agreement, that facilitates the transfer or enjoyment of immovable property is considered a transfer.
Appellate Proceedings in the Matter:
Commissioner of Income Tax (Appeals) (“CIT(A)”)
The disallowance by the AO was upheld by the CIT(A), who emphasized that there was no “effective transfer” of the Taxpayer’s capital asset under Section 2(47). The CIT(A) further argued that the case did not meet the parameters of “extinguishment of rights” since the shareholding pattern and face value of shares remained unchanged, while differentiating the situation from the one that unfolded in Kartikeya V. Sarabhai v. CIT (1997), wherein it was stated that “any extinguishment of rights would involve parting the sale of percentage of shares
to another party or divesting rights therein”, and was thus dissimilar to the facts of the present matter, as in this case there was no sale of percentage of shares but rather a relinquishment of the total number shares held by the Taxpayer, which still constituted 99.98% of the total shareholding, as mentioned before.
Income Tax Appellate Tribunal (“ITAT”)
On appeal, the ITAT reversed the findings of the AO and CIT(A), relying on the Supreme Court’s judgment in Kartikeya V. Sarabhai v. CIT (1997). The ITAT ruled that the reduction in the number of shares held by the Taxpayer amounted to an extinguishment of rights and qualified as a “transfer” under Section 2(47). The ITAT observed that the monetary consideration received by the Taxpayer further supported the claim for capital loss.
Karnataka High Court (“KHC”)
The KHC affirmed the ITAT’s decision, rejecting the Revenue’s contention and held that the extinguishment of the Taxpayer’s rights in the reduced shares satisfied the criteria of a “transfer,” and the capital loss claimed was allowable under the Income Tax Act, stating that, 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 shareholding prior to and after the reduction of share capital, and hence, in our considered opinion, the basis adopted by the CIT(A) to hold that this judgment of the Hon’ble Apex Court is not applicable in the present case is not proper. In our considered opinion, in the facts of the present case, this judgment of the Hon’ble Apex Court is squarely applicable, and by respectfully following this judgment of the Hon’ble Apex Court, we hold that the assessee’s claim for capital loss on account of the reduction in share capital in In Co is allowable.
Supreme Court (“SC”)
The Revenue’s petition challenging the High Court’s judgment was dismissed by the Supreme Court. The Court upheld the principles established in Kartikeya V. Sarabhai v. Commissioner of Income Tax (1997) 7 SCC 524, held and reiterated that the reduction of share capital, resulting in the extinguishment of rights, constitutes a “transfer” under Section 2(47) of the Income Tax Act, 1961. The Court emphasized:
- Extinguishment of rights in a capital asset, even without a change in proportional ownership, qualifies as a transfer.
- The receipt of monetary consideration in exchange for the reduced shareholding substantiates the claim of capital loss.
Key Takeaways:
- The SC’s ruling reinforces that capital reduction resulting in the extinguishment of rights qualifies as a “transfer” under the Income Tax Act, 1961.
- Shareholders are entitled to claim a capital loss for the reduction in the number of shares, irrespective of whether their proportional ownership in the company remains unaffected post-reduction.
- This judgment provides clarity and consistency with prior judicial precedents, reducing ambiguity in similar cases involving capital reduction schemes.