Case Law Details
ITO Vs Sunita Sanjeev Aeren (ITAT Delhi)
Mere Reduction in Shareholding Due to Fresh Issue of Shares Cannot Trigger Capital Gains: ITAT Delhi
Delhi ITAT has once again clarified the long-debated question of whether a reduction in percentage shareholding- caused solely by a fresh issue of shares to a third party-can be treated as a “transfer” giving rise to capital gains in the hands of an existing shareholder. In a significant ruling the Tribunal dismissed the Revenue’s appeal & held that no taxable capital gain arises when a shareholder has neither transferred shares nor relinquished any right for consideration.
Background
The assessee was subject to a search operation u/s 132, along with the AEC Group. During the search, authorities seized a MoU valuing a prestigious property at ₹150 crore. This property was jointly owned by two companies-Shrey Properties Pvt. Ltd. & Snerea Properties Pvt. Ltd.-in which the assessee held 2.25% equity each.
During FY 2010–11, both companies issued 30 lakh fresh shares each to AEZ Infratech Pvt. Ltd. (now ADTV Communications Pvt. Ltd.). A portion of these shares was subsequently transferred to Om Shivay Real Estate Pvt. Ltd.
AO viewed this expansion of share capital as a de facto transfer of ownership & control of the underlying immovable property, & consequently treated the assessee’s reduced stake (from 2.25% to 0.562%) as a relinquishment of rights, leading to taxable capital gains of ₹2.53 crore.
AO argued that:
- The fresh allotment diluted the assessee’s effective ownership in the property.
- This dilution amounted to relinquishment u/s 2(47).
- Such relinquishment resulted in a notional but taxable capital gain.
AO computed the supposed loss in value by comparing the assessee’s pre- & post-allotment proportional interest in the valued property.
Assessee argued that:
1. No transfer of shares had taken place-she continued to hold exactly the same number of shares.
2. Share allotment is solely a Board decision, over which a minority shareholder has no control.
3. A decrease in percentage holding due to fresh capital infusion is not a transfer by any stretch of law.
4. She had neither received nor surrendered any rights for consideration.
5. The issue stood directly covered by the judgment of the Delhi High Court in Snerea Properties Pvt. Ltd. v. ACIT (2025), which concerned the exact same transaction group.
CIT(A) deleted the addition after detailed reasoning:
- No shares were sold by the assessee.
- The reduction in percentage holding occurred only due to fresh issue of shares to a new investor.
- For a relinquishment u/s 2(47), three conditions must be met:
- Existence of a right;
- Relinquishment of that right in favour of someone;
- Receipt of consideration.
Assessee met none of these. She was not offered shares; hence she could not have relinquished any right. With no consideration received, the basic ingredients of a “transfer” were absent.
Tribunal upheld the CIT(A)’s order & reaffirmed that:
- Shareholders who do not transfer their shares cannot be taxed merely because the company issues additional shares.
- Any economic benefit or deemed income arising from undervalued allotments accrues, if at all, to the transferor & the transferee, not to passive existing shareholders.
- The assessee continued to hold her title & interest, & thus no transfer of property-direct or indirect-had occurred.
This ruling reinforces a critical principle in tax jurisprudence:
A mere dilution of percentage shareholding due to the company’s fresh share allotment does not constitute a transfer, relinquishment, or taxable capital gain in the hands of unaffected shareholders.
The decision provides welcome clarity to minority shareholders in closely held companies, especially in situations involving capital restructuring, strategic investor induction, or share allotments that alter proportional holding but do not involve any voluntary act by the shareholder.
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