PROLOGUE
The two ORDERS of ITAT chosen for the purpose:
1. Bennett Coleman & Co. Ltd, Mumbai vs Addl. Commissioner of I.T. (ITAT Mumbai) , I.T.A. No. 3013/Mum/2007, Dated: 30 September, 2011
https://indiankanoon.org/doc/193643744/
2. M/s. Jupiter Capital Pvt. Ltd. Vs ACIT (ITAT Banglore), ITA No.445/Bang/2018, 29 November, 2018
The point of issue, for discussion herein, is whether a reduction of ‘’equity share capital” by a company, for writing off, in the books of account, the accumulated losses of past years (in a previous year of relevance), is tantamount to a transfer by its shareholder (s) (the SH), entitling the SH to claim a loss assessable under the head of “Capital Gains”, in the previous year of such write-off.
In the Jupiter Capital case the view ITAT has taken is mutually in conflict with that handed down in Bennett Coleman case; hence the need has arisen, and the urge felt, for an independent critical study of the two Orders, in comparison.
2. FACTS AND CIRCUMSTANCES (FACTUAL MATRIX) AS PER ITAT’S ORDER (S) (:
2.1. Bennett Coleman case (BC’s case)
Per narration in Para. 3:
“3. …. During the course of assessment proceedings, the Assessing Officer noticed that assessee had claimed long term capital loss amounting to Rs.22,21,85,693/-. It is not in dispute that assessee made an investment of Rs.2484.02 lacs in equity shares of a group company viz., Times Guarantee Limited [for short TGL]. Under sec.100 of the Companies Act, 1956 TGL applied for reduction of equity share capital and approached the Hon’ble Bombay High Court for approval of the same. The Hon’ble High Court approved the petition of TGL and allowed reduction in its share capital by 50% by reducing the face value of each equity share from Rs.10/- to Rs.5/- .
Consequently, assessee’s investment in TGL got reduced from Rs.2484.02 lacs to Rs.1242.01 lacs. After applying the indexation a sum of Rs.22,21,85,693/-was claimed as long term capital loss. On a query as to how this loss was allowable, it was mainly contended that in view of the decision of the Hon’ble Supreme Court in the case of Kartikeya V. Sarabhai [228 ITR 163]- wherein it was held that reduction in face value of shares would amount to transfer- such loss was allowable. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. G. Narsimhan (Decd) And Ors. [236 ITR 327], wherein similar view was taken. “
2.2. Jupiter Capital case (JC’s case)
Per narration in Para. 4 (Extract from CIT (A)’s Order):
4. ……………………..
“6. Disallowance of Capital loss of Rs. 164,48,55,840/- :-
The brief facts of the case are that, the appellant claimed an amount of Rs. 1,64.48,55,840/- as Long Term Capital loss from sale of shares. THIS LOSS WAS STATED TO ACCRUE AGAINST THE REDUCTION IN SHARE CAPITAL OF M/S ASIANET NEWS PVT. LTD (ANNPL) EFFECTED UNDER A CAPITAL REDUCTION SCHEME. The AO disagreed with the assessee’s claim of Long Term Capital Loss, contending that, the reduction in shares of ANNPL, did not result in transfer of capital asset as envisaged u/s 2(47) of the I.T. Act. The AO came to this conclusion, in light of the finding that, even though the number of shares has reduced, the face value as well as the ITA No.445/Bang/2018 shareholding pattern remained the same. The assessee on the other hand. has argued that there was real transfer of asset.”
And, Per narration in Para. 9:
“9. The Assessee Company invested in total equity shares of 153340900 at face value (Rs. 10) on different dates, in its subsidiary company, Asianet News Network Private Limited. The total number of shares, of Asianet News Network was 153505750 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 Asianet News Network from 153340900 to 10,000 and consequently the share of the assessee was reduced proportionately from 153505750 to 9988. The face value of the shares remained the same at Rs. 10 even after the reduction. It is pertinent to note that the shareholding pattern or the percentage of the shares of the ITA No.445/Bang/2018 assessee did not reduce. i.e. prior to reduction the percentage of assessee’s share was 99.89% and even after reduction the percentage of assessee’s shares remained unchanged at 99.89%. THIS MEANS THAT THE ASSESSEE DID NOT RELINQUISH ITS VOTING POWER OR EXTINGUISH ITS RIGHTS IN THE SHARES AS THE SHAREHOLDING PATTERN REMAINED UNAFFECTED…….”
And, as stated in preceding Para 3. (of the ITAT Order), reliance has been placed by the assessee, on the judgment of the Apex Court rendered in the case of Kartikeya V. Sarabhai Vs. CIT – that is, same as in BC’case.
3. GIST OF THE ORDERS
3.1. In BC’s case the Order has been passed, unlike in JC’s case, by a Special Bench of three members, one being a Judicial Member and the other two being Accountant Members.
In the main Order signed by all the three Members, the point of issue has been decided in Revenue’s favour, as under:
“9. He further referred to the decision of Hon’ble Supreme Court in the case of CIT vs. Grace Collis & Ors. [248 ITR 323]. He carried us through the facts and the question raised before the Hon’ble Court and submitted that the court, after considering another decision of that court in the case of Vania Silk Mills Pvt. Ltd. vs. CIT [191 ITR 647], observed that THE DEFINITION OF TRANSFER CLEARLY CONTEMPLATES EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET DISTINCT AND INDEPENDENT OF SUCH EXTINGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF.”
“29. Therefore, IN THE LIGHT OF THE ABOVE DISCUSSION, we are of the opinion, that the loss arising on account of reduction in share capital cannot be subjected to provisions of sec.45 r.w.s. 48 and, accordingly, such loss is not allowable as capital loss. At best such loss can be described as notional loss and it is settled principle that no notional loss or income can be subjected to the provisions of the I.T.Act. We hold accordingly.”
Aside: For knowing about the whole of the discussion, it is suggested to go through the other preceding paragraphs (preceding paragraph 29).
3.2. One of the two Accountant Members, R.S. Syal has chosen to pass a separate Order. And, Extracts there from, as selected, are furnished below:
“36. I have gone through the order proposed by ld. colleagues on the special bench. I fully agree with and endorse the view taken on ground nos. 1 and 2 in such order.
37. Despite my best persuasion, I could not convince myself to concur with the conclusion and also the reasoning in the proposed order qua the other grounds involving one issue, for which this special bench has been constituted. As such I am constrained to write my separate order as follows.
38. The Hon’ble President of the Income Tax Appellate Tribunal has constituted this Special Bench to hear the appeal and to give opinion on the following question:-
“Whether on the facts and in the circumstances of the case, the CIT(A) was justified in declining (sic – declaring) long term capital loss of Rs.22,21,85,693 on account of reduction in paid up equity share capital?”
UQ
I. WHETHER REDUCTION OF CAPITAL IS `TRANSFER’ U/S 2(47)?
48.1…… to 48.13……..
Conclusion (:
“48.14. Reverting to the facts of the instant case it is seen that by way of Step-1 of the overall exercise, the reduction in the share capital of TGL took place in terms of section 100(1)(b) of the Companies Act by which the paid up value of equity shares of Rs.10 was reduced to paid up value of Rs.5. There was extinguishment of the rights of the assessee in the shares at that stage. Going by the judgment in the case of Mrs.Grace Collis And Others (supra) the transaction of reduction of capital fell within the domain of `extinguishment of any rights therein’ as per section 2(47)(ii) as such extinguishment of rights is otherwise than on account of transfer of shares. The same view follows when I examine the judgment of the Hon’ble Supreme Court in the case of G.Narasimhan (Decd.) (supra) in which case also there was a reduction in the face value of equity shares and the Hon’ble Supreme Court held it to be transfer u/s 2(47) attracting capital gain. I, THEREFORE, HOLD THAT `TRANSFER’ OF EQUITY SHARES TOOK PLACE ON THE REDUCTION OF THE SHARE CAPITAL BY TGL.”
(FONT supplied)
II CONSEQUENCES OF NIL FULL VALUE OF CONSIDERATION
49.1….. …to 49.17…….
Conclusion (:
49.18. My view can be supported from another angle also. The contention of the ld. DR is that since `full value of consideration’, which is an essential component of section 48 is Nil, the computation shall become impossible. If this interpretation is true for one component of sec. 48, then it shall also be true for the remaining three components as discussed in para 49.2 above. Proceeding with such interpretation, it would become essential that all the four components must be present in all circumstances in order to enable the computation of income under the head `Capital gains’. If this logic is upheld then illogical results will follow. IN SEVERAL CASES ONE CAN FIND THAT EITHER THERE IS NO COST OF IMPROVEMENT OF A CAPITAL ASSET OR NO EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH ITS TRANSFER. Going by this interpretation, then in all such cases, the computation provision u/s 48 shall fail because of the lack of the presence of such component(s) and all the transfers shall escape chargeability u/s 45. It is simple and plain that it is not and can never be the intention of the legislature. THE INTERPRETATION GIVEN BY THE HON’BLE SUPREME COURT TO SECTION 48 READ WITH SECTION 45 IN B.C. SRINIVASA SETTY (SUPRA) SHOULD BE UNDERSTOOD TO THE EXTENT OF IMPOSSIBILITY TO ENVISAGE OR CONCEIVE THE VALUE OF ANY OF THE COMPONENTS OF SECTION 48 SO AS TO MAKE IT UNWORKABLE AND NOT WHERE IT IS ASCERTAINABLE BUT IS NIL. IT CANNOT BE UNDERSTOOD TO MEAN THAT IF THE VALUE OF ANY OF THESE FOUR FACTORS IS NIL, THE COMPUTATION PROVISION SHALL FAIL AND AS SUCH SECTION 45 SHALL NOT APPLY.
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III. IS THERE ANY LOSS TO ASSESSEE ON REDUCTION OF CAPITAL?
50.1….to 50.8……….
50.9. ONCE A CAPITAL ASSET IS TRANSFERRED, THE NATURAL CONSEQUENCE WHICH FOLLOWS IS THAT THERE IS EITHER GAIN OR LOSS UNLESS FULL VALUE OF CONSIDERATION EQUALS THE COST OF ACQUISITION. AS THE REDUCTION OF CAPITAL HAS BEEN HELD TO RESULT INTO `TRANSFER’, THE EXCESS OF COST OF ACQUISITION OF SUCH SHARES OVER THE FULL VALUE OF CONSIDERATION WILL LEAD TO LOSS. For the foregoing reasons I am not inclined to accept this contention raised on behalf of the Revenue. Thus it is held that the reduction of capital by TGL has caused loss to the assessee in terms of sec. 45.
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IV. IS ASSESSEE DERIVING DOUBLE ADVANTAGE?
51.1. ….to 51.5…….
Conclusion
51.6. I, therefore, hold that the assessee cannot derive double advantage by firstly claiming deduction of Rs.12.42 crore at the stage of reduction of share capital and again assuming the cost of acquisition of the remaining shares at the full value of Rs.24.84 crore. The cost of acquisition of the remaining consolidated shares in TGL shall stand reduced u/s 55(2)(b)(v) to Rs.12.42 crore.
(FONT supplied)
52. Coming back to section 45(1)which is charging section for the income under the head `Capital gains’, it can be seen that the charge is attracted when any profit or gain arises from the transfer of a capital asset effected in the previous year subject to the fulfillment of other conditions. IT IS PATENT THAT ALL THE RELEVANT CONDITIONS FOR THE APPLICABILITY OF SECTION 45(1)ARE FULFILLED INASMUCH AS – THERE IS (A) “TRANSFER” (ON REDUCTION OF CAPITAL BY TGL – AS PER DISCUSSION IN PARAS 48.1 TO 48.14); (B) OF CAPITAL ASSET ( EQUITY SHARES WHICH HAVE BEEN CANCELLED BY TGL) ; (C) RESULTING INTO PROFITS OR GAINS (THAT IS FULL VALUE OF CONSIDERATION AT NIL AS REDUCED BY THE INDEXED COST OF ACQUISITION AT RS.22.21 CRORE – AS PER PARAS 50.1 TO 50.9).
53. IT CAN BE SEEN FROM THE ORDERS OF THE AUTHORITIES BELOW THAT THE ONLY REASON ASSIGNED BY THEM FOR NOT ALLOWING THE CAPITAL LOSS OF RS.22.21 CRORE IN THIS CASE IS THAT THE REDUCTION OF SHARE CAPITAL OF TGL DID NOT AMOUNT TO “TRANSFER OF THE CAPITAL ASSET”. THERE IS NO FINDING GIVEN BY THE AUTHORITIES THAT SECTION 45 IS NOT APPLICABLE FOR THE REASON THAT THE FULL VALUE OF CONSIDERATION IN THIS CASE IS NIL. In order to provide completeness to the issue, apart from examining as to whether or not there is any transfer on reduction, I have dealt with all other relevant aspects germane to the issue, which have been argued before the Bench.
54. I, therefore, hold that the learned CIT(A) was not justified in refusing to deny the long term capital loss amounting to Rs.22.21 crore. THE QUESTION BEFORE THE SPECIAL BENCH IS, THEREFORE, ANSWERED IN NEGATIVE AND IN FAVOUR OF THE ASSESSEE. CONSEQUENTLY TWO GROUNDS RAISED ON THIS ISSUE ARE ALLOWED.
55. IN THE RESULT, THE APPEAL IS ALLOWED.
UQ
4. OWN OBSERVATIONS and VIEWPOINTS (in brief):
4.1 Taking up, – on a last-in-first-out basis, for a limited purpose of clarifying the possible instant doubts of a grievous nature likely to arise in anyone’s mind, – THE above MARKED /HIGHLIGHTED PORTIONS, – particularly in Red – OF THE ORDER OF DISSENT is quite puzzling.
In that, the main Order having been passed under the signature of all the three members, the import or purport of the so marked portion of the dissenting Order, or the reason behind, is, to try and put it in the least offensive manner, not readily comprehensible or decipherable. One thought, rather feel for certain, that despite the dissenting observations under reference, it is the opinion of the majority which should be taken to be the binding decision, as of now, for at least some purposes- such as, for any two Member Bench in the process of haring and disposing of similar disputes.
Incidentally, perhaps, because of the self-same, seemingly un-intended confusion, that through a write-up authored by a CA, titled “Loss on Reduction of share capital is allowable”, as displayed on the website of CAclub an impression came to be given, but wrongly so, to the effect that the ITAT decision in BC has gone in favour of the assessee.
At the bottom therein, again in the same vein, there is a Note saying: The judgment has attained finality because the REVENUE did not appeal against the order of ITAT before the high court.
3.2. Now turning to the other Points intended to be importantly covered (:
Per ITAT Order in JC’s case (:
A gist of the conclusion reached may be summed up as under:
> Sec. 2(47) is an inclusive definition. That provides that, besides relinquishment of an asset, EXTINGUISHMENT OF ANY RIGHT THEREIN also amounts to a transfer of a capital asset. While, it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of a share capital but IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION THAT THERE HAS BEEN NO EXTINGUISHMENT OF ANY PART OF HIS RIGHT as a shareholder qua the company. It is not necessary that for a capital gain to arise there must be a sale of capital asset. Sale is only one of the modes of transfer envisaged by s. 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 s. 45 of the Act”.
Prima facie, – pending a further study of all other angles the matter under discussion entails, for instance the implications of company law amendments and or the new company of 2013, -the view thus taken in JC’s case requires an independent study, and an in-depth consideration, for more than one substantially valid reason:
I. A). (i) The decisionof the Special Bench in BC’s case is quite contrary, and diagonally opposite; which is in favour of the Revenue.
(ii) As indicated herein before, it appears that, the assessee, being the aggrieved party has, – presumably under competent professional advice – notwithstanding the stakes involved, chosen not to pursue but accept the unfavourable verdict of the ITAT.
Be that as it may, in one’s personal perspective, rather in own firm conviction, the Opinion of the ITAT in BC’s case deserves to be considered as well founded, having been based on seemingly right , or in any view better, line of reasoning adopted and sound logic behind .
To dilate:
B) . Section 2 (47) specially defines the term “transfer”, “in relation to a CAPITAL ASSET”.
The term “CAPITAL ASSET”, as separately defined in sec. 2 (14) means all those items specified in several clauses thereto; of which clause (a) is of relevance herein.
No doubt, the definition is wide enough to cover property in the form of shareholding in a company.
Nonetheless, that is not to be regarded as conclusive of the matter under discussion. For, there are certain other crucial aspects, which are required to be kept in sharp focus.
To elaborate:
As per clause (a) of sec 2 (14), “property of any kind held by an assessee , whether or not connected with his business or …” has to be treated as a capital asset ; that is, however subject to exclusion of those specified items in the latter part, following the words “but does not include”.
Indisputably, the words “property of any kind” is intended to cover within its ambit both tangible and intangible properties. As such, the basic characteristics of the property in a given case, -it could be validly urged – might have to be borne in mind; for deciding whether or not, in a given case, there has been a ‘transfer’ within its , besides commonly understood sense, statutory meaning as defined.
C). The capital asset under consideration in JC’s case, same as in BC’s case, is in the form of Ordinary (equity) shares held in a company.
Equity share is an intangible asset. Conceptually, it represents, and comprises, a bundle of inseparable rights; so inseparable that no single right is amenable to being separated and ‘transferred’ by any of the modes as envisaged by the law.
Say, as regards the right to dividend, shareholder has no right to demand; but becomes entitled to receive only if and when declared or distributed by the investee company.
Likewise, shareholder can exercise the imbedded right to vote or to bonus share, only if and when a related decision to call a meeting, or to issue bonus share is taken by the company.
And, it is only in the event of winding up / liquidation, that equity share holder, as a member, becomes entitled to claim for settlement by the company of his equitable interest in the net worth.
On the flip side, to put it differently, in one’s firm view, at any time before, in case of shares held, its holder will have no scope for successfully claiming any loss under the head of ‘capital gains’, unless and until he has ‘sold’ the shares for a (real X notional) consideration, so that the requirement of the opening words of sec 48 could be regarded to be truly satisfied.
In this context, a special mention is required to be made of the crucial fact that the holder of preference share has, in comparison, very limited rights. In short, there are quite significant differences in the respective rights of a equity and preference shareholder.
Similarly, for a comparison, also consider a tangible asset; say, an immovable property. Rights attached thereto- for example right to licence, lease, let /sub-let, etc., are peculiar; so also distinct, being separable and capable of being dealt with accordingly.
Now, in JC’s case the adverse view taken has been solely founded on the ground that there has been a “transfer”; for the reason that the concept of transfer, as defined, includes “extinguishment of ANY RIGHTS”.
The term “extinguishment of any rights therein”, however, should that be strictly construed, as is warranted, is prima facie intended to cover only an instance in which not all rights, but one or some rights in an asset are extinguished. Premised so, the above referred adverse view (see the highlighted portion of the Order reproduced herein before), to say the least, could not be regarded as well founded, or in any case, a better view.
II. In the first appeal to CIT (A), one of the Grounds reads:
“The appellant further prays that the Commissioner of Income tax (Appeals) pass necessary order to stay the collection of demand* till the disposal of this appeal, based on the powers confirmed on them.”
There is no precise clue as to what exactly that refers to; that is, how a demand came to be raised.
However, in the ITAT Order, in the context in which a reference has been made to the court’s approval of the scheme for reduction of the capital, it is mentioned that “The court also ordered for payment of Rs. 3,17,83,474 as consideration, which was duly received by the appellant company.”
The purport or import thereof is not clear; rather confusing; clarity seems to be wanting. Be that as it may, the factual position, with supporting accounting entries, would be called for; and required to be clarified, also substantiated, with due regard to the applicable Standards, in the possible further proceedings.
On the facts as narrated, however, the operating company having had no “accumulated profits”, the above referred payment has to be taken to have been made out of its ‘capital’. If so, it may have been open for shareholder to, at best, contend, – and do so with success,- that it is a “capital receipt”, not liable to be taxed.
III. It is noted that, –
a)the dispute pertains to the assessment year 2014-15; and
b)for computing the loss claimed, “Indexation” has been factored in.
On this aspect, the relevance or otherwise of the implications of the amendment of the applicable amended sections of the Act, as discussed and critically analysed in the Article published in – (2018] 91 taxmann.com 39 , in so far as those hold good, need to be made a conscious note of.
To be precise: The point of doubt of a grievous nature is, in principle, why and how indexation of cost of acquisition will be permissible in a case in which, admittedly, investee –company, such as herein, has huge losses accumulated over the years, and in the result, the intrinsic value of its shares happens to have been substantially depleted, and stands as lost capital investment.
IV. In BC’s case, as may be noted from the ITAT;’s Order, both parties have labored hard to address and impress upon the Bench why the case law, of which the leading SC Judgment in Srinivasa Setty’s case is one, ought not to be over sighted but its applicability or otherwise should be duly considered. For, in BC’s case, unlike in JC’s case, there was no payment received by shareholder on account / at the time of capital reduction resorted to by the company.
The intimately related points made (supra) – that is, in paragraph II herein above may be taken a special note of by anyone inspired to venture and embark on an independent study.
TAIL Note: Left open, as indicated herein before, if so decided, to be completed, in due course.
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