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January 2019

Section 2(47) – Reduction of share capital, even where there is no change in the face value of the share or the shareholding pattern, results in extinguishment of right in the shares amounting to transfer of shares.

By Jagdish D. Shah / Jagdish T. Punjabi
Chartered Accountants
Reading Time 3 mins

8.  Jupiter Capital Pvt. Ltd. vs. Assistant Commissioner of Income Tax (Bangalore) Members:  Sunil Kumar Yadav (J. M.) and Arun Kumar Garodia (A. M.) ITA No.:445/Bang/2018 A.Y.: 2014-15. Dated: 29th November, 2018 Counsel for Assessee / Revenue:  S. Parthasarathi / D. Sudhakara Rao

 

Section 2(47) – Reduction of share capital, even where there is no change in the face value of the share or the shareholding pattern,  results in extinguishment of right in the shares amounting to transfer of shares.

 

FACTS

The assessee had invested in 15,33,40,900 equity shares at face value of Rs. 10 on different dates in its subsidiary company, Asianet News Network Private Limited (‘ANNPL’). The total number of shares of ANNPL was 15,35,05,750 out of which the assessee’s share was 99.89%. As a result of the Order of High Court of Bombay, there was a reduction in share capital of ANNPL to 10,000 nos., and consequently the share of the assessee was reduced proportionately to 9,988 nos. The Court also ordered for payment of Rs. 3.18 crore as a consideration for reduction in share capital. The face value of the shares remained the same at Rs. 10 after the reduction. 

 

The assessee claimed Rs. 164.49 crore as Long Term Capital loss. According to the assesse, this loss had accrued on account of reduction in share capital of ANNPL. According to the AO, the reduction in shares of ANNPL did not result in transfer of capital asset as envisaged u/s. 2(47). The AO came to this conclusion, in light of the finding that, even though the number of shares had reduced, the face value of Rs. 10 as well as the percentage of assessee’s share at 99.89% remained at the same level as it was before the reduction of share capital. He didn’t agree with the assessee that there was real transfer of asset, as the scheme resulted in extinguishment/relinquishment of part of the assessee’s rights in the shares of ANNPL and therefore, the transaction fell within the purview of section 2(47).  The AO held that the decision of the Supreme court in the case of Kartikeya V. Sarabhai vs. CIT  (228 ITR 163) relied on by the assessee cannot be applied as the facts of the case are contrary to the case as there was no reduction in the face value of the shares in the case of the assessee.  On appeal, the CIT(A) agreed with the AO and upheld her order.

 

HELD

The Tribunal noted that in the case of the assessee, on account of reduction in number of shares in ANNPL, the assessee extinguished its right of 15,33,40,900 shares and in lieu thereof, it received 9,988 shares at Rs. 10/- each along with an amount of Rs. 3.18 crore.  According to the tribunal, the basis adopted by the CIT(A) to hold that the judgment of the Supreme Court in the case of Kartikeya V. Sarabhai was not applicable in the present case was not proper as the Supreme court had not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital.  According to the tribunal, the judgment of the Apex Court was squarely applicable to the case of the assessee, therefore, following the same the Tribunal held that the assessee’s claim for capital loss on account of reduction in share capital in ANNPL was allowable.

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