Summary: In PCIT vs. Jupiter Capital Pvt. Ltd. (2025), the Supreme Court ruled that share capital reduction qualifies as a transfer under Section 2(47) of the Income Tax Act, 1961, allowing the claim of long-term capital loss. Jupiter Capital’s shareholding in Asianet News Network Pvt. Ltd. was reduced from 15.33 crore shares to 9,988 shares following a court-approved capital reduction scheme. Despite retaining its proportional shareholding, the company claimed a capital loss due to the reduction in the total number of shares. Tax authorities argued there was no transfer, as the face value of shares remained unchanged and proportional ownership persisted. However, the Court, aligning with precedents like Kartikeya Sarabhai vs. CIT and CIT vs. Vania Silk Mills, highlighted that the extinguishment of rights constitutes a transfer, even if face value or proportional holding remains constant. It noted that reducing share count represents an extinguishment of rights, thus qualifying as a transfer under the IT Act. The ruling contrasts with cases like Bennett Coleman & Co. Ltd. vs. ACIT, which held that share substitution against no consideration doesn’t qualify as a transfer. The Court reaffirmed that consideration receipt isn’t a precondition for capital gain computation, citing CIT vs. Jaykrishna Harivallabhdas. This landmark decision underscores the broader interpretation of “transfer” in the context of share capital reduction and its implications for capital gains and losses. It also opens discussions on similar cases where share reduction without consideration might lead to differing outcomes.
Facts of the case
- Jupiter Capital Private Limited is engaged in the business of investing in shares, leasing, financing and money lending. It held 15.33 Cr shares (approx.) of INR 10 each (i.e. 99.88%) in Asianet News Network Pvt Ltd (‘Company’).
- The Company filed a petition before the Bombay High Court for reduction of its share capital to set off its losses against the paid-up equity share capital.
- The reduction of its share capital from 15.35 Cr shares to 10,000 shares was approved by the Bombay High Court.
- Consequently, the shares of Jupiter Capital were also reduced proportionately from 15.33 Cr shares to 9,988 shares without any reduction in its face value (INR 10 per share). The High Court also directed the Company to pay INR 3.17 Cr as consideration to Jupiter Capital for such capital reduction.
- Accordingly, Jupiter Capital claimed long term capital loss against such reduction of capital.
- The AO disallowed the long-term capital loss contending that Jupiter Capital has not sold off any shares or has not parted with the shares as it still holds the proportionate percentage which it initially held and is still shown as an investment.
Arguments by the tax authorities
The AO and the CIT(A) contended that that there was no effective transfer resulting in Long Term Capital Loss since the face value of the shares reduced remained unchanged and the proportionate shareholding also remained constant even after implementation of the share-reduction scheme accordingly as per combined reading of section 2(47) with section 45 of the IT Act, such reduction of capital is not considered transfer and accordingly the long term capital loss should be disallowed.
Judgement
The Mumbai Bench of the ITAT, High Court and Supreme Court reversed the order of the CIT(A) citing that while Jupiter Capital continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right even when the face value per share remained the same.
As per section 2(47) of the IT Act, transfer, in relation to a capital asset, includes,
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein
Since the total number of shares were reduced, it can be said that on account of such reduction in the number of shares, Jupiter Capital had extinguished its right (Full Judgment: 39934_2024_15_15_58197_Judgement_02-Jan-2025.pdf)
Certain key case laws cited:
Kartikeya V. Sarabhai vs CIT (SC, 1997): Reduction in the face value of the share, the value of the vote of the assessee in the event of there being a fall would stand considerably reduced and accordingly, reduction of the right in the capital asset would clearly amount to a transfer.
CIT vs Vania Silk Mills (P.) Ltd (SC, 1991): “Extinguishment of any right therein” is of wide import.
Anarkali Sarabhai vs CIT (SC,1997): The genesis of reduction or redemption of capital both involved a return of capital by the company and accordingly considered relinquishment. Accordingly, redemption of preference shares amounted to ‘sale, exchange or relinquishment of asset’
CIT vs Jaykrishna Harivallabhdas (Guj HC, 1998): Receipt of consideration in lieu of extinguishment of rights is not a condition precedent for the computation of capital gains.
Food for thought
In the case of Bennett Coleman & Co. Ltd. vs ACIT (Mumbai ITAT, 2011), where there was reduction in the face value of the equity share against no consideration, it was held that, the substitution of earlier shares by new shares did not amount to transfer since the assessee shall have a right u/s 55(v), to substitute the cost of acquisition with reference to the original shareholding and in that case it may amount to double benefit later on while computing capital gain which is not permissible under the law. Further, it followed the ruling of B.C. Srinivasa Shetty, stating, unless and until some consideration is received, the transfer of such asset would not attract the provisions of sec.45.
In the case of Tata Sons Ltd. (Mumbai ITAT, 2024), where the assessee’s shareholding was reduced to half against nil consideration, it was held that, such loss is not notional loss and even where there is nil consideration, capital loss is allowed.
It will be interesting to see cases where the court opines that reduction of capital shall not be considered transfer and accordingly disallowance of capital loss will follow for the shareholders.
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