Supreme Court Rules on Share Capital Reduction Under Section 2(47) of Income Tax Act

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.