Loss on Reduction of Capital without Consideration

ISSUE FOR CONSIDERATION

Under section 66 of the Companies Act, 2013, a company can reduce its share capital by inter alia cancelling any paid-up share capital which is lost or is not represented by available assets, or for payment of any paid-up share capital which is in excess of the wants of the company, after obtaining the approval of the National Company Law Tribunal (NCLT). The reduction of share capital may be effectuated either by cancelling some shares, or by reducing the paid-up value of all shares. When paid-up share capital which is lost or unrepresented by available assets is reduced, either by cancelling some shares or by reducing the paid-up value of all shares, no consideration is paid to the shareholders, as the share capital is set off against the accumulated losses (debit balance in the Profit & Loss Account).

While the Supreme Court has held that reduction of share capital is a transfer in the hands of the shareholder, in the cases of Kartikeya V. Sarabhai vs. CIT 228 ITR 163 and CIT vs. G Narasimhan 236 ITR 327, and there arose a liability to pay capital gains tax where a consideration was received on reduction of capital the issue has arisen before various benches of the Tribunal as to whether in cases