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TMI Blog2020 (2) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,71,58,924/- (10,33,11,000 * 16.609%) was paid by CHIPL. Since the aforesaid sum of ₹ 10,33,11,000/- suffered Dividend Distribution Tax u/s 115-O of the Act, the assessee claimed the same as exempt u/s 10(34) of the Act in the return of income. The balance consideration of ₹ 29,66,88,934/- was appropriated towards sale consideration of the shares and capital loss was accordingly determined by the assessee as prescribed in Rule 115A to ₹ 3,64,84,092/- and return was filed claiming such long term capital loss. Accordingly, the assessee had claimed long term capital loss of ₹ 3,64,84,092/- upon cancellation of the shares held by it in CHIPL pursuant to reduction of capital in the return of income for the year under consideration. 4. The ld AO held that there was no transfer within the meaning of section 2(47) of the Act in the instant case. He observed that the assessee was holding 100% shares of its subsidiary company and during the year, it had reduced its capital. The assessee company had 100% shares in the subsidiary company and after the scheme of reduction of capital also, the assessee was holding 100% of the shares. This clearly estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shareholder to the dividend on 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 in the capital asset would clearly amount to a transfer within the meaning of that expression in section 2(47) of the Act. d) The assessee further submitted that the scheme of capital reduction requires prior approval of the Hon ble High Court. Before granting approval for such reduction of capital, the Court had to be satisfied that the consent of the creditors to the reduction of capital is obtained, or the claims or debts of the creditors have been satisfied, discharged or secured. This specific act of the Court signifies that since there is a variation / extinguishment of shareholders rights in the company, prior approval of the Court is required and hence the proposed capital reduction is a transfer . e) The assessee also placed reliance on the following judgements to support its proposition that reduction of capital amounts to transfer chargeable to tax as capital gains :- (i) Kartikeya V Sarabhai and Anr vs CIT reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. 7.1. We find that the ld DRP had place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y') was amalgamated with Collis Line Pvt. Ltd. ('the amalgamated company'), pursuant to which the shareholders in the amalgamating company were issued 14 equity shares of ₹ 100 each in the amalgamated company for each share held in the amalgamating company. As a result, the assessee was allotted 45,318 equity shares of ₹ 100 each in the amalgamated company. The assessee transferred these shares in February 1976 for a consideration of ₹ 48.73 lakhs (i.e. at ₹ 107.50 per share). The Assessing Officer held that the aforesaid transfer is subject to capital gains in the hands of the assessee. The said capital gain was computed after applying the provisions of section 49(2) read with section 47(vii), whereby the cost of the shares of the amalgamating company was considered as the cost of the shares of the amalgamated company that the assessee surrendered in exchange under a scheme of arrangement. Since the assessee had not furnished to the Assessing Officer, information as to the cost at which they had acquired the shares of the amalgamating company, the Assessing Officer noted that under the scheme of amalgamation, the assessee had received 14 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be the cost of the acquisition by the assessees of their shares in the amalgamating company. 7.2. We find that the 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) of the Act includes extinguishment of any rights in a capital asset. 7.3. We find that the ld DR vehemently argued that the percentage of shareholding remains the same because reduction of shares had happened for all shareholders. We find that the ld DR relied on para 24 of the judgement of Special Bench of Mumbai Tribunal in 133 ITD 1 supra to support his proposition. In this regard, we hold that the percentage of shareholding has got no bearing for chargeability of capital gains under the Act. We further find that the provisions of section 55(2)(v) of the Act were applied in the Mumbai Special Bench decision also in para 28 thereon. We find that in the case before us, the provisions of section 55(2)(v) of the Act will have no application at all and if the assessee is not given the benefit, it will never get it and none of the clauses of section 55(2)(v) of the Act would be applicable to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of his right as a shareholder qua the company. It is not necessary that for a capital gain to arise there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47). Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45. 11. 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. Whereas the appellant had a right to dividend on a capital of ₹ 500 per share, that stood reduced to his receiving dividend on ₹ 50 per share. Similarly, if the liquidation was to take place whereas he originally had a right to ₹ 500 per share, now his right stood reduced to receiving ₹ 50 per share only. Even though the appellant continues to remain a shareholder, his right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of this Court in Anarkali Sarabhai's case (supra) is applicable in the instant case. The only difference in the present case and Anarkali Sarabhai's case (supra) is that whereas in Anarkali Sarabhai's case (supra), preference shares were redeemed in entirety, in the present case there has been a reduction in the share capital inasmuch as the company had redeemed its preference share of ₹ 500 to the extent of ₹ 450 per share. The liability of the company in respect of the preference share which was previously to the extent of ₹ 500 now stood reduced to ₹ 50 per share. 7.5. We find that the ld AR also placed reliance on yet another decision of Hon ble Supreme Court in the case of CIT vs G Narasimhan reported in 236 ITR 327 (SC) in support of his propositions. In that case, the assessee held 70 equity shares in Kasthuri Estates (P.) Ltd. having a face value of ₹ 1000 per share. During the relevant year, the said company passed a resolution to reduce its capital resulting in reduction in face value from ₹ 1,000 to ₹ 210 per share. As a result of this reduction, there was a pro-rata distribution of some properties of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d profits (whether capitalised or not), will be dividend in the hands of the assessee. Therefore, it will have to be treated as income of the assessee and taxed accordingly. 12. It is only when any distribution is made which is over and above the accumulated profits of the company (capitalised or otherwise) that the question of a capital receipt in the hands of a shareholder, arises. The original cost to that shareholder of the acquisition of that right in the share which stands extinguished as a result of reduction in the share capital will have to be deducted from the capital receipt so determined. Only when the capital receipt is in excess of the original cost of the acquisition of that interest which stand extinguished, will any capital gains arise. . 14. Thus, the amount distributed by a company on reduction of its share capital has two components - distribution attributable to accumulated profits and distribution attributable to capital (except capitalised profits). Therefore, in the present case, to the extent of the accumulated profits in the hands of Kasthuri Estates (P.) Ltd., whether such accumulated profits are capitalised or not, the retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,91,33,280 shares shall be of no relevance in the assessee's case at any later stage. In para 23 at page 13 of the decision of the Special Bench, it has been observed that though under the concept of joint stock company, the joint stock company is having independent legal entity but for all practical purposes, the company is always owned by the shareholders. The effective share of assessee in the assets of the company would remain the same immediately before and after reduction of such capital. It has thus been observed that the loss suffered by the company would belong to the company and that cannot be allowed to be set off in the hands of the assessee. 7.9. The law is now well settled by the decision of the Hon ble Supreme Court in the case of Vodafone International Holdings B.V reported in 341 ITR 1 wherein it was held that the company and its shareholders are two distinct legal persons and a holding company does not own the assets of the subsidiary company. Hence, it could be safely concluded that the decision relied upon by the ld. DR on the Special Bench of Mumbai Tribunal in 133 ITD 1 are factually distinguishable and does not come to the rescue of the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .89%) to 9,988 (99.89%). The face value of the shares remained the same at ₹ 10 even after the reduction. As a result of the above, the assessee claimed a capital loss of ₹ 164.49 crores (computed as the difference between the consideration of ₹ 3.18 crores received and the indexed cost of acquisition of ₹ 167.66 crores), which was disallowed by the Assessing Officer as well as the CIT(A) on the ground that reduction of capital does not amount to transfer as well the provisions of section 2(47) of the Act, relying on the decision of the ITAT Special Bench in the case of Bennett Coleman (supra). The assessee filed an appeal with the Bangalore Tribunal against the order of the CIT(A). In this regard, the Tribunal held as under:- 5. We find that in Para 7.2 of the order of CIT(A), it is noted by CIT(A) that distinguishing factors for which the judgment of Hon'ble Apex Court rendered in the case of Kartikeya V. Sarabhai vs. CIT (supra) is not applicable are noted in Para 6.6 of his order. In Para 6.6oftheorderofCIT(A), it is noted by CIT(A) that as per scheme of reduction of share capital approved by Hon'ble Bombay High Court, although tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal of ₹ 500 per share that stood reduced to his receiving dividend on ₹ 50 per share. Similarly, if the liquidation was to take place whereas he originally had a right to ₹ 500 per share, now his right stood reduced to receiving ₹ 50 per share only. Even though the appellant continues to remain a shareholder his right as a holder of those shares clearly stands reduced with the reduction in the share capital. 6. From this Para of this judgment of Hon'ble Apex Court, it is seen that it is held by Hon'ble Apex Court in this case that section 2(47) is containing an inclusive definition and inter alia, it provides that relinquishment of an asset or extinguishment of any right there in amounts to a transfer of a capital asset. The Hon'ble Apex Court has also noted that it is no doubt true that the assessee continues to remain a shareholder of the company even after the reduction of a share capital but it is not possible to accept the contention that there has been no extinguishment of any part of his right as a shareholder qua the company. In that case, the assessee has purchased 90 non-cumulative preference shares, each of the face value of&# ..... X X X X Extracts X X X X X X X X Extracts X X X X
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