2023 (2) TMI 1380 - HC - Income Tax

Reduction of share capital - disallowance of capital loss claimed by holding that there is extinguishment of rights of 153340900 shares - whether no such extinguishment of rights is made out by the assessee as required u/s 2(47) and there is no reduction in face value of share? - HELD THAT - Undisputed facts are, pursuant to the order passed by the High Court of Bombay, number of shares has been reduced to 9988. As significant to note that the face value of the share has remained same at Rs. 10/- even after the reduction. AO s view that the voting power has not changed as the percentage of assessee s share of 99.88% has remained unchanged is untenable because if the shares are transferred at face value, the redeemable value would be Rs. 99,880/- whereas the value of 14,95,44,130 number of shares would have been Rs. 1,49,54,41,300/-. ITAT has rightly followed authority in Karthikeya V.Sarabhai 1997 (9) TMI 2 - SUPREME COURT with regard to meaning of transfer by holding that there was no transfer within the meaning of that expression contained in Section 2(47) - Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is:

Whether the Tribunal was correct in law to set aside the disallowance of capital loss claimed by the assessee, amounting to Rs. 164,48,55,840/-, by holding that there was an extinguishment of rights of 153,340,900 shares when no such extinguishment was made out by the assessee as required under Section 2(47) of the Income Tax Act, and there was no reduction in the face value of the shares.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The relevant legal framework involves Section 2(47) of the Income Tax Act, which defines the term "transfer" concerning capital assets. The precedents discussed include Vania Silk Mills (P) Ltd. vs. Commissioner of Income Tax and Commissioner of Income-tax Vs. Grace Collis, which provide judicial interpretations of what constitutes a transfer.

Court's Interpretation and Reasoning

The court examined the facts that the number of shares held by the assessee was reduced from 14,95,44,130 to 9988 without a change in the face value of Rs. 10 per share. The Tribunal's interpretation that there was no transfer of shares within the meaning of Section 2(47) was upheld. The court reasoned that the reduction in the number of shares, while maintaining the face value, led to a change in the redeemable value, which justified the claim of capital loss.

Key Evidence and Findings

The key findings were that the reduction in the number of shares was ordered by the High Court of Bombay, and the face value of the shares remained the same. The assessee's shareholding percentage remained at 99.88%, and the voting power was unaffected. The Tribunal found that the reduction in shares constituted an extinguishment of rights, thereby justifying the capital loss claim.

Application of Law to Facts

The court applied the legal principles from the cited precedents to the facts of the case. It concluded that the reduction in the number of shares without a change in face value resulted in a significant loss in the redeemable value, thus constituting a transfer under the Income Tax Act.

Treatment of Competing Arguments

The Revenue argued that there was no effective transfer of shares and that the transaction did not result in relinquishment of rights, as the assessee retained the same percentage of shares. The court rejected this argument, emphasizing the difference between the number of shares and the voting power, and accepted the assessee's position that the reduction in shares led to a capital loss.

Conclusions

The court concluded that the Tribunal was correct in setting aside the disallowance of the capital loss claimed by the assessee. The reduction in the number of shares constituted an extinguishment of rights, justifying the capital loss under the Income Tax Act.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"The AO's view that the voting power has not changed as the percentage of assessee's share of 99.88% has remained unchanged is untenable because if the shares are transferred at face value, the redeemable value would be Rs. 99,880/- whereas the value of 14,95,44,130 number of shares would have been Rs. 1,49,54,41,300/-."

Core Principles Established

The judgment establishes that a reduction in the number of shares, even without a change in face value, can lead to an extinguishment of rights and justify a capital loss claim if it results in a significant change in the redeemable value of the shares.

Final Determinations on Each Issue

The appeal was dismissed, and the question of law was answered in favor of the assessee and against the Revenue, affirming the Tribunal's decision to allow the capital loss claimed by the assessee.