Supreme Court Rules on Share Capital Reduction Under Section 2(47) of Income Tax Act
Whether reduction in share capital is covered under “sale, exchange or relinquishment of the asset” used in Section 2(47) of the Income Tax Act, 1961.
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Supreme Court of India
Supreme Court of India in the Case of Principal Commissioner of Income Tax-4 & Anr. v. M/s Jupiter Capital Pvt. Ltd.
(Special Leave Petition No. 63 of 2025) dated 2.1.2025
Yes, a reduction in share capital is considered a “sale, exchange, or relinquishment of an asset” under Section 2(47) of the Income Tax Act, 1961. When a company reduces its share capital, shareholders lose a portion of their shares, which is treated as a transfer of a capital asset.
Even though the shareholder retains the same percentage holding after the reduction, the number of shares decreases. Since Section 2(47) includes relinquishment or extinguishment of rights as a transfer, the reduction of share capital falls within its scope.
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Fact of The case :
Assessee is a company engaged in the business of investing in shares, leasing, financing, and money lending. The assessee had invested in Asianet News Network Pvt. Ltd., an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having a face value of Rs 10/- each. Thereafter, the assessee purchased 38,06,758 shares from other parties, thereby increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company, i.e., 15,35,05,750.
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Capital Loss Claim Denied: No Transfer of Capital Asset in Share Capital Reduction – Bombay High Court
The said company incurred losses, as a result of which the net worth of the company was eroded. Subsequently, the company filed a petition before the Bombay High Court for a reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered a reduction in the share capital of the company from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at Rs. 10 even after the reduction in the share capital. The High Court also directed the company to pay Rs. 3,17,83,474/- to the assessee as a consideration.
During the year, the assessee claimed long-term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income Tax Act, 1961. The Assessing Officer took the view that although the number of shares was reduced by a reduction in the share capital of the company, the face value of each share as well as the shareholding pattern remained the
same.
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