Reduction of share capital [Sec. 2(22)(d)] - Income Tax - Ready Reckoner - Income Tax

SEC 2(22)(d) : REDUCTION OF SHARE CAPITAL Dividend includes any distribution to its shareholders by a company on reduction of its capital to the extent to which the company possesses accumulated profits, whether capitalized or not. Notes: Reduction of share capital by a company and paying off the balance to the shareholders would result in extinguishment of rights in the shares held by the shareholder and would amount to transfer. The amount received by a shareholder on the reduction of capital is subject to capital gains. The Supreme Court held that the amount distributed by the company on reduction of its share capital has two components, namely: i.Distribution attributable to accumulated profits and ii.Distribution attributable to the capital. The Supreme Court held that the amount received on reduction of capital as reduced by the amount deemed as dividend is the sale proceeds for computing capital gains on reduction of share capital. Therefore, the sale price of shares reduced shall be as under: FMV of assets received on reduction Add: Money received Less: Amount deemed as dividend under section 2(22)(d) Sale price of shares reduced NOTE:- This section is applicable in case of Equity Shareholders.