Income Tax Act| Reduction In Share Capital Of Subsidiary Company Leading To Reduction Of Assessee’s Shareholding Constitutes Transfer: SC
The Supreme Court has held that the reduction in the share capital of the subsidiary company leading to a proportionate reduction in the shareholding of an assessee is covered under “sale, exchange or relinquishment of the asset” as per Section 2(47) of the Income Tax Act.
The Court dismissed a Special Leave Petition filed by the Principal Commissioner of the Income Tax and upheld the decision of the Karnataka High Court which affirmed the Income Tax Appellate Tribunal’s (ITAT) Order. The ITAT had held that the Assessee's claim for a capital loss on account of the reduction in the share capital in the company was allowable.
The Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed, “Section 2(47) of the Income Tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer 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 as a shareholder qua the company.”
Advocate Raj Bahadur Yadav represented the Petitioners.
The Respondent company, Jupiter Capital Pvt. Ltd., held a 99.88% stake in Asianet News Network Pvt. Ltd.. Following substantial losses incurred by Asianet, its net worth was eroded, prompting a Petition for share capital reduction filed with the Bombay High Court.
The High Court ordered the reduction of share capital, proportionately reducing Jupiter Capital's holdings while retaining the face value. The Respondent received consideration for the reduction.
The Assessee claimed a capital loss based on this reduction, which was not allowed by the Assessing Officer (AO), due to the absence of a transfer under Section 2(47) of the Income Tax Act, 1961 (the Act). This view was upheld by the Commissioner of Income Tax (Appeals), but the ITAT reversed the decision, which was affirmed by the High Court.
The Supreme Court explained that when as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital.
“Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of section 2(47) of the Income Tax Act, 1961,” it explained.
The Court referred to its decision in Kartikeya V. Sarabhai v. Commissioner of Income Tax (1997), wherein it was held that “any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.”
Consequently, the Court held, “The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income Tax Act, 1961.”
Accordingly, the Supreme Court dismissed the Petition.
Cause Title: Principal Commissioner Of Income Tax-4 & Anr. v. M/S. Jupiter Capital Pvt. Ltd. (Neutral Citation: 2025 INSC 38)
