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2025 (1) TMI 579 - SC - Income TaxReduction of share capital - Disallowance of capital loss claimed by holding that there is extinguishment of rights of 153340900 shares - as argued no such extinguishment of rights is made out by the assessee as required u/s 2(47) and there is no reduction in the face value of share - whether reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47)? - HELD THAT - This Court in the case of Anarkali Sarabhai 1997 (1) TMI 5 - SUPREME COURT observed that the reduction of share capital or redemption of shares is an exception to the rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer under Section 2(47) of the Income Tax Act, 1961. Thus, we are of the view that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression sale, exchange or relinquishment of the asset used in Section 2(47) the Income Tax Act, 1961. Decided in favour of assessee.
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1. ISSUES PRESENTED and CONSIDERED The core legal question in this case is:
2. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework revolves around Section 2(47) of the Income Tax Act, 1961, which defines "transfer" in relation to a capital asset. The section includes the extinguishment of any rights in the asset as a form of transfer. The case of Kartikeya V. Sarabhai v. CIT is pivotal, where the Supreme Court held that the reduction of share capital amounts to a transfer. Court's Interpretation and Reasoning The Supreme Court reiterated that the definition of "transfer" under Section 2(47) is inclusive and covers the extinguishment of rights. The Court emphasized that even if the shareholder continues to hold shares after the capital reduction, there is an extinguishment of rights proportional to the reduction in share capital. Key Evidence and Findings The High Court of Bombay had ordered a reduction in share capital, reducing the assessee's shares from 15,33,40,900 to 9,988, while the face value remained Rs. 10. The assessee received Rs. 3,17,83,474 as consideration. The ITAT found this reduction constituted an extinguishment of rights, thus a transfer under Section 2(47). Application of Law to Facts The Supreme Court applied the principles from Kartikeya V. Sarabhai, determining that the reduction in share capital and the consequent reduction in the number of shares held by the assessee amounted to a transfer. The extinguishment of rights in the shares was deemed sufficient for the transaction to qualify as a transfer. Treatment of Competing Arguments The Revenue argued that since the face value and percentage of shareholding remained unchanged, there was no transfer. However, the Court dismissed this, noting that the extinguishment of rights in the capital asset (shares) constitutes a transfer, irrespective of the unchanged face value or shareholding percentage. Conclusions The Supreme Court concluded that the reduction in share capital and the resultant reduction in shares held by the assessee amounted to a transfer under Section 2(47) of the Income Tax Act, 1961, allowing the assessee's claim for a capital loss. 3. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning "Relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset." The Court emphasized that "Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act." Core Principles Established
Final Determinations on Each Issue The Supreme Court upheld the ITAT's decision, affirming that the reduction in share capital and the corresponding reduction in shares held by the assessee constituted a transfer, allowing the claim for capital loss. The petition by the Revenue was dismissed.
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