2020 (2) TMI 325 - AT - Income Tax

Disallowance of capital loss on account of capital reduction scheme - case of the assessee is that reduction of capital had resulted in Extinguishment of rights in shares and we find that the definition of transfer u/s 2(47) includes extinguishment of any rights in a capital asset - HELD THAT - Assessee had incurred capital loss only due to claim of indexation benefit and not otherwise. The benefit of indexation is provided by the statute and hence there cannot be any malafide intention that could be attributed on the assessee in claiming the long term capital loss in the subject mentioned transaction. AO had held that there is no transfer pursuant to reduction of capital. But it is a fact that the assessee had indeed received a sale consideration of ₹ 39.99 crores towards reduction of capital . This sale consideration was not sought to be taxed by the ld AO under any other head of income. This goes to prove that the ld AO had indeed accepted this to be sale consideration received on reduction of capital under the head capital gains only as admittedly the same was received only for the capital asset i.e shares. Hence the existence of a capital asset is proved beyond doubt. The capital gains is also capable of getting computed in the instant case as the cost of acquisition of shares of CHIPL and sale consideration received thereon are available. Then how the ld AO is justified to hold that the subject mentioned transaction does not tantamount to transfer u/s 2(47) of the Act. This is the short dispute before us. We find lot of force in the argument advanced by the ld AR in this regard that merely because the transaction resulted in loss due to indexation, the ld AO had ignored the same. Had it been profit or surplus even after indexation, the ld AR argued that the ld AO could have very well taxed it as capital gains. Thus - (a) capital reduction was effected by cancellation/ extinguishment of certain number of shares; (b) a consideration was received pursuant to such capital reduction; (c) the share of the assessee in the investee company remained the same even after the capital reduction. Loss arising to the assessee for cancellation of its shares in CHIPL pursuant to reduction of capital should be allowed as long term capital loss eligible to be carried forward to subsequent years. Accordingly, the grounds raised by the assessee in this regard are allowed.

Summary

Issues Involved:

1. Whether the disallowance of capital loss on account of a capital reduction scheme was justified.
2. Whether the transaction amounted to a "transfer" under section 2(47) of the Income Tax Act.
3. Applicability of judicial precedents to the case.
4. Validity of initiation of penalty proceedings under section 271(1)(c) of the Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Capital Loss:
The primary issue was whether the disallowance of capital loss amounting to ?3,64,84,092/- due to a capital reduction scheme was justified. The assessee, a US tax resident company, held shares in its wholly-owned Indian subsidiary. During the assessment year 2011-12, the subsidiary reduced its share capital, resulting in the cancellation of some shares and payment of consideration to the assessee. The assessee claimed a long-term capital loss due to this reduction, which was disallowed by the Assessing Officer (AO) on the grounds that there was no "transfer" of capital assets under section 2(47) of the Act.

2. Transfer Under Section 2(47):
The AO contended that since the assessee continued to hold 100% shares in the subsidiary before and after the capital reduction, there was no transfer of assets. The assessee argued that the reduction of share capital resulted in the extinguishment of rights in the shares, which qualifies as a "transfer" under section 2(47) of the Act. The assessee cited several judicial precedents, including the Supreme Court's decisions in Kartikeya V Sarabhai vs CIT, CIT vs G Narasimhan, and CIT vs Mrs. Grace Collis, to support this claim.

3. Judicial Precedents and Tribunal's Analysis:
The Dispute Resolution Panel (DRP) upheld the AO's decision, relying on the Special Bench decision of the Mumbai Tribunal in Bennett Coleman & Co. Ltd. However, the Tribunal found that the facts of the assessee's case were distinguishable from those in Bennett Coleman. In the assessee's case, a consideration was received for the reduction of capital, unlike in Bennett Coleman. The Tribunal also referred to the Supreme Court's decision in Grace Collis, which clarified that extinguishment of rights in a capital asset amounts to a transfer. The Tribunal concluded that the reduction of capital in the assessee's case amounted to a transfer under section 2(47) of the Act.

4. Penalty Proceedings Under Section 271(1)(c):
The Tribunal noted that the issue of initiation of penalty proceedings under section 271(1)(c) of the Act was premature for adjudication at this stage.

Conclusion:
The Tribunal held that the loss arising from the cancellation of shares due to the capital reduction should be allowed as a long-term capital loss eligible to be carried forward to subsequent years. The appeal of the assessee was allowed, and the grounds regarding the capital loss were accepted. The issue of penalty proceedings was deemed premature for adjudication.

Summary:
The Tribunal allowed the appeal of the assessee, holding that the capital loss arising from the cancellation of shares due to the capital reduction scheme should be allowed as a long-term capital loss. The Tribunal distinguished the facts of the case from the Special Bench decision in Bennett Coleman and relied on the Supreme Court's decisions to conclude that the reduction of capital amounted to a transfer under section 2(47) of the Act. The issue of penalty proceedings under section 271(1)(c) was deemed premature for adjudication.