2024 (1) TMI 1036 - AT - Income Tax

Revision u/s 263 - Computation of capital gain/loss - Claim of the set off of long term capital loss - reduction of the paid up equity share capital consequent to scheme of arrangement and restructuring - PCIT observed that there has been failure on the part of the ld. AO to work out the correct amount of capital gains and therefore, assessment order is erroneous and prejudicial to the interest of the Revenue Whether the ld. AO was correct in allowing long term capital loss on account of reduction of capital? - whether ld. AO was correct in allowing set off of the said amount of long term losses in computation of total income of the assessee company? - whether ld. PCIT was correct in law and facts in holding that assessment order passed by the ld. AO is erroneous and prejudicial to the interest of the Revenue? - whether the view taken by the ld. AO for possible view while allowing the claim of the set off of long term capital loss. HELD THAT - First of all the reduction of a capital has been provided u/s. 100(1) of the companies Act). It provides the manner in which reduction of capital can be effected. The sub-clause (c) of section also envisaged to pay for any paid up capital which is in excess with the wants of the company. Thus, there is a consideration envisaged in the reduction of capital. There could be a case where consideration is paid on the reduction of capital or consideration is not paid at all. Whether in such circumstances, can two views be taken in the reduction of capital, one where certain consideration is paid and in another where no consideration is paid. For example, if the share capital of the assessee was reduced from 288.13 Crore shares to 144.06 Crore share and if assessee would have received some amount, say Rs. 1 Crore, then as per the ld. PCIT, assessee would be entitled to compute long term capital loss of Rs. 2045,97,54,090/-, because there is some consideration received. If assessee has not received the consideration then, whole computation mechanism fails. We are unable to accept such reasoning or view taken by the Ld. PCIT. There cannot any divergent view that a capital asset is subject to tax if there is a transfer within the scope and meaning of Section 2(47) of the Act. Now, whether the reduction of face value of shares amounts to transfer or not, has been settled in the case of Kartikeya Sarabhai 1997 (9) TMI 2 - SUPREME COURT wherein the issue was whether reduction of face value of the shares will be subject to levy of capital gains, whether reduction of the face value result in extinguishment of assessee s right and is there any transfer within the meaning of Section 2(47). The case of the assessee in that case was, since reduction of face value did not result in extinguishment of assessee s right and therefore, there is no transfer and hence, is not exigible to capital gains tax. 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 reduction of the right of the capital asset would clearly amount to a transfer within the meaning of that expression in section 2(47) of the Income Tax Act, 1961. Thus, reduction of capital has been treated as a transfer within the meaning and expression of Section 2(47). If the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares it amounts to transfer of share within the meaning of 2(47) and therefore, computation of capital gains has to be made . Ergo, there could be no quarrel that reduction of equity shares under the scheme of arrangement and restructuring in terms of Section 100, amounts to extinguishment of rights in the shares and hence, it is a transfer within the ambit and scope of Section 2(47) of the Act. This fact has also not been disputed by the ld. CIT DR also that reduction of capital amounts to transfer in the present case. In this case there is no dispute about the cost, because assessee had incurred the cost for acquiring of the shares and therefore, there is no dispute regarding cost of acquisition. Here, the assessee did not receive any consideration due to reduction of capital which has resulted into a loss to the assessee. The issue is whether the price can be conceived or not? The price paid by the assessee for acquiring the asset has been reduced to half of the cost of an asset was waived off / extinguished. This precise issue had been answered by case of CIT vs. Jaykrishna Harivallabhdas 1997 (2) TMI 65 - GUJARAT HIGH COURT . In that case assessee has claimed loss on shares of particular companies under the head capital gains and the case of the assessee was that the company with respect to whose shares of loss had been claim had gone into voluntary liquidation and nothing was distributed by those companies to its members, therefore, the assessee received Nil consideration for his holdings in the companies. The claim of the assessee was that capital loss should have been computed under section 46(2) read with section 48. Thus, once a conclusion is reached that extinguishment of rights in shares is deemed to be transferred for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt. The said ratio of the Hon ble Gujarat High Court is clearly applicable on the facts of the present case also because there could be no distinction where assessee receives some negligible or insignificant consideration and where assessee had received Nil consideration. This judgment and the ratio clearly clinch the issue in favour of the assessee. Thus, in view of the ratio and principle laid down in the aforesaid judgments, we hold that firstly, in this case the reduction of capital is extinguishment of right on the shares and it amounts to transfer within the meaning and scope of section 2(47); secondly, the loss on reduction of shares is a capital loss and not notional loss; and lastly, even when assessee has not received any consideration on reduction of capital but its investment has reduced to loss resulting into capital loss and while computing the capital gain, capital loss has to be allowed or set-off against any other capital gain. Effect of majority judgment - Entire case of the Revenue is hinges upon the judgment of ITAT Special Bench in the case of Bennett Coleman Co. Ltd 2011 (9) TMI 1 - ITAT MUMBAI - In the facts of that case assessee was holding investments in equity shares of another company wherein the paid-up capital was reduced to Rs. 5/- from Rs. 10/- per share and subsequently, two equity shares of Rs 5/- each were consolidated into one equity share of Rs. 10/- each. The holders of the original shares received new shares. Thus, it was a case of substitution of shares which is not the facts in the present case. This distinction on the facts as a Special Bench have been dealt in the case of Carestream Health INC 2020 (2) TMI 325 - ITAT MUMBAI as majority judgement held that though the loss arising to the shareholder on account of reduction in share capital cannot be subject to the provision of Section 45 r.w.s. 48 and accordingly, the said loss is not allowable as a capital loss at best such loss can be described as notional loss, after relying to the decision of the Hon ble Supreme Court in the case of B.C. Srinivasa Shetty (supra). However, they noted that in that case assessee had not suffered any loss of reduction of share capital because share had not been canceled but only number of shares had been reduced which was replaced by another set of shares and assessee s percentage of shareholding of 74.9% immediately before reduction of share capital and after such reduction remain same. Such capital has been reduced not only in the case of the assessee but also for all the shareholders of TGM. As per the minority judgment, the Hon ble Accountant Member held that reduction of capital of a company by any more has the effect of reducing the liability of the company but its shareholder to the extent of the capital reduced and shareholders whose capital has been reduced is deprived of its right to receive that part of the share capital which has been so reduced and therefore, the consequence which follow of such reduction is loss. One very important proposition which was highlighted in the dissenting judgment that, line of distinction needs to be drawn between cases in which the cost of acquisition or for that matter any other component of section 48 is incapable of ascertainment and cases in which it is ascertained as zero. If the cost of a capital asset cannot be identified or conceived due to the nature of such capital asset, its transfer does not lead to any profits or gain arising under section 45(1) except where such capital asset is covered under section 55(2). Where the cost of acquisition is nil the transfer of the capital asset would attract the applicability of section 45. However, we are not relying upon the minority judgment but we have to bear in mind that this is a case under revisionary jurisdiction u/s. 263 wherein the ld. PCIT has cancelled the order of the ld. AO who has accepted the long term capital loss. The dissenting judgment goes to show that it is possible view and therefore, if a view has been taken by the AO in favour of the assessee, then it could not be held that order of AO is erroneous and therefore, can be set aside or cancelled. In any case we have already noted the judgment and the ratio in the case of CIT vs. Jaykrishna Harivallabhdas 1997 (2) TMI 65 - GUJARAT HIGH COURT wherein, similar proposition has been upheld that even if the sale consideration is Nil then also computation of capital gain can be made and accordingly, we are following the judgment of Hon ble Gujarat High Court upon the majority judgment given by ITAT Special Bench in the case of Bennett Coleman Co. Ltd. Accordingly, we hold that AO has rightly allowed the computation of long term capital loss to be set off against the capital gain shown by the assessee, consequently order of Ld. PCIT u/s 263 is set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Proceedings under Section 263 - Bad in Law
2. Computation of Income from Capital Gains
3. Cost of Acquisition of Remaining Shares

Summary:

1. Proceedings under Section 263 - Bad in Law:
The assessee contended that the Principal Commissioner of Income Tax (PCIT) erred in invoking Section 263, disregarding the specific inquiry on the computation of capital gains undertaken by the Assessing Officer (AO) during assessment proceedings. The assessee argued that the AO had consciously allowed the claim upon application of mind. The PCIT's order was challenged on the grounds that it was based on a different opinion and not on any suggestion from audit, making it bad in law and requiring quashing.

2. Computation of Income from Capital Gains:
The core issue was whether the AO was correct in allowing a long-term capital loss of Rs. 20,46,97,54,090/- due to the reduction of capital. The PCIT concluded that the Scheme of Arrangement and Reconstruction was not a case of reduction of capital and that the computation mechanism under Section 48 fails as there was no consideration received or accruing to the assessee. The PCIT ignored the Supreme Court's ruling in CIT v. D. P. Sandu Bros. Chembur P Ltd, which held that for Section 48 to apply, consideration should be capable of being determined.

3. Cost of Acquisition of Remaining Shares:
The PCIT failed to note the provisions of Section 55(2)(v)(b) and did not confirm that the cost of remaining shares would include the cost of the shares canceled on reduction. The PCIT's order was challenged on the grounds that it ignored the statutory provisions and judicial precedents supporting the assessee's claim.

Decision:
The Tribunal held that the reduction of capital is an extinguishment of rights in shares and amounts to a transfer within the meaning of Section 2(47). The loss on reduction of shares is a capital loss and not a notional loss. Even if no consideration was received on the reduction of capital, the investment's reduction to loss results in a capital loss, which should be allowed or set off against any other capital gain. The Tribunal relied on the Gujarat High Court's judgment in CIT vs. Jaykrishna Harivallabhdas, which held that even "nil" consideration should be treated as resulting in capital loss. The Tribunal set aside the PCIT's order under Section 263, holding that the AO had rightly allowed the computation of long-term capital loss to be set off against the capital gain shown by the assessee. The appeal of the assessee was allowed.