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TMI Blog2024 (1) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 minorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Computation of Income from Capital Gains a) The CIT erred in concluding that the Scheme of Arrangement and Reconstruction was not a case of Reduction of Capital. b) The CIT erred in concluding that the computation mechanism under section 48 fails by holding that to compute capital gains there must be an element of consideration received or accruing to the assessee. The CIT erred in ignoring that the Supreme Court in CIT v D. P. Sandu Bros. Chembur P Ltd 273 ITR 1 has held that, for S 48 to apply, consideration should be capable of being determined. 3) Cost of Acquisition of remaining shares. The CIT erred in failing to note the provisions of S 55(2)(v)(b) and in not confirming that the cost of remaining shares would include the cost of the shares cancelled on Reduction. 2. The assessee has also raised an additional ground which is reproduced as under:- The Order passed under Section 263 of the Income Tax Act, 1961 (the Act) dated 28 March, 2016 by the Principal Commissioner of Income Tax -2 (PCIT) is bad-in-law and illegal and therefore, should be quashed, since having given an opportunity of being heard to the appellant, the PCIT ought not to have express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88,13,17,286 equity shares in TTSL was reduced to half, i.e., 144,06,58,643, that is, equity shares were cancelled as a result of reduction of capital pursuant to the scheme of arrangement u/s. 100 and 391 of the then Companies Act, 1956. The said scheme was approved by the Hon ble Delhi High Court vide judgment and order dated 07/11/2008 and this resulted in cancellation of interalia certain shares of TTLS as specified in the scheme. The scheme of arrangement and restructuring has been placed before us during the course of the hearing. The relevant portion of the said scheme duly approved by the Hon ble High Court reads as under:- 4.1.2 The paid up equity share capital of TTSL be reduced by way of reduction in the number of equity shares of Rs 10/- each from 634,71,52,316 shares to 317,35,76,158 shares resulting in the total reduction of the paid up equity share capital of TTSL from. Rs. 6347,15,23,160/- comprising of 634,71,52,316 equity shares of Rs. 10 each to 317,35,76,158 equity shares of Rs. 10 each to Rs. 3173,57,61,580/-. However, due to the above reduction, when the shareholding of a shareholder holding odd number of shares results in fraction of a share, then it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee s claim for allowability of long term capital loss of Rs. 2046.97 Crores. It has been stated that in response to the specific query raised in the notices by the ld. AO assessee has given the details, the computation of income and working of its capital gain providing necessary details before the ld. AO and also how the claim of the assessee for long term capital losses is allowable in view of the decision of the Hon ble Supreme Court in the case of Kartikeya Sarabhai reported in 228 ITR 163 (SC); CIT vs. G. Narasimhan reported in 236 ITR 327 and also the judgement of Hon ble Supreme Court in the case of D.P. Sandhu Brothers Chembur Pvt. Ltd. reported in 273 ITR 1(SC). It was specifically pointed out that reduction of capital, i.e., loss of shares tantamount to transfer u/s. 2(47) of the Act and it was held that computation provision can only be passed only if it was not possible to conceive of any element of cost. After the assessee s reply, ld. AO again issued a show-cause notice dated 13/01/2012 which was on the basis of assessee s contention that long term capital loss arose by virtue of cancellation of Rs. 144.06 Crores shares of TTSL was correct however, he asked for f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT vs Mohanbhai Pamabhai 1971(9) TMI - wherein the High Court has held that section 45 is the charging section and it undoubtedly provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the heading 'Capital Gains . But, section 48 shows that the transfer that is contemplated by Section 45 is a transfer, if consideration is received by the assessee or accrues to the assessee. (v) The Assessing Officer has failed to consider the decision of Mumbai ITAT Bench, in the case of Bennett Coleman and Co. Ltd. Vs. Addl.CIT 2011(9) TMI-ITAT, Mumbai, Special Branch, wherein the ITAT had considered the judgments given by the Supreme Court in the case of Kartikeya V Sarabhai and CIT vs G. Naralmhan for computation of capital gain on reduction of capital and held that if the earlier shares have been replaced or substituted by new shares then the same would not amount to transfer at all. It would be merely a case of substitution of one kind of share with another kind of share which has been received by the assessee because of the rights of the original shares on the reduction of capital. The transfer of a capital asset, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the paid up equity share capital of TSSL be reduced in the number of equity shares of Rs 10/- each from 634,71,52,316 shares to 317,35,76,158 shares resulting in total reduction of the paid up equity share capital of TTSL from 6347,15,23,160/- comprising of 634,17,52,316 equity shares of Rs 10/- each to 317,35,76,158 equity shares of Rs 10/- each to Rs 3173,57,61,580. Therefore an amount Rs. 3173,57,61,580 would be reduced from the accumulated debit balance in profit loss account and unabsorbed depreciation of TTSL from the (of Rs 1967,7161645 tem available balance in Share premium Account) mentioned in clause 4.11 in the following manner. Amount available from extinguishment of Share Capital Rs 3173,57,61,580/- Less: Write off against book loss Rs.1586,78,80,790/- Less Write off against unabsorbed depreciation Rs 1586,78,80,790/- Balance available Nil 6.1 Thus amount Rs 3173,57,61,580 available from extinguishment of share capital has been utilized by TTSL for write off of book loss and unab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset there must be an element of consideration for such extinguishment to compute capital gains. But in case the capital asset has been effaced, how there can be rights in it? Once rights cannot be there, there cannot be extinguishment of rights? And further, how there can be consideration on extinguishment of rights? In case of effaced capital asset the consideration received or accrued will be nil (non existing consideration) and not 'zero'. The AO has committed a mistake because in the case of assessee there cannot be two views on the issue of computation of LTCL. There is only one view one can hold in given facts and circumstances of the case and it is that no consideration is received or receivable Since consideration is neither received nor receivable as the balance sheet of TTSL is shrunk by reduction of book loss and unabsorbed depreciation on asset side and share capital on the liability side, the assessee cannot expect any consideration on accrual basis on effacement of shares. Therefore, computation provisions u/s 48 of the Act 6.2 The AO in the case of Tata Power Ltd AY 2009-10 disallowed the loss arising in respect to shares of TTSL for AY 2009-10 but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue, the Assessing Officer has raised query and asked for the details which were duly replied and explained before the ld. AO alongwith the details of computation of long term capital gain and also explaining the law in light of various Hon ble Supreme Court judgments stating that in the case of reduction of the capital, amounts to transfer and not only that the claim of capital loss is also allowed. Once, the AO after considering these facts and the proposition of law laid down by the various statements of the Hon ble Supreme Court has accepted the long term capital loss, then ld. PCIT cannot take a different view holding that view of the ld. AO is incorrect. He referred to various judgments on this proposition that if AO has taken one view which is possible view in law then CIT cannot revise or cancel the assessment order within the scope of section 263. 15. Mr. Mistry further submitted that, ld. PCIT has clearly erred and failed to consider that it is possible in law for schemes of reduction of capital, similar to the scheme in the present case, to provide for payment of consideration to the holders of the shares. He has also filed a table giving three examples of cases wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 5 Later consolidation of two shares into one. Therefore it is Reorganization and consolidation 8 Consideration Nil 3,17,83,474 Nil Nil 9 Date of Decision NA 29/11/2018 20/1/2010 31-09-2011 16. He further submitted that, from the bare perusal of the order of the ld. PCIT it could be seen that, firstly, in the impugned order it is the agreed position that transfer of capital assets being 144.06 crores shares of TTSL has taken place in the hands of the appellant by virtue of the Scheme; secondly, the CIT in the impugned order has set out and based his decision on an entirely incorrect legal principle that the provisions of section 48 fail and therefore no capital loss can be determined in a case where no consideration is received/ accrues to the transferor of the capital asset. No basis has been set out for this erroneous conclusion/assertion of the ld. PCIT. Further, this is contrary to well-settled law laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng has been reduced from 288,13,17,286 shares to 144,06,58,643 equity shares. It is clearly a capital loss to the assessee and it cannot be held that the loss is not allowable. He submitted that, there can be no dispute that- (a) the reduction of capital effected under the Scheme resulted in 144,06,58,653 equity shares of TTSL held by the assessee being cancelled; (b) such cancellation and extinguishment of the aforementioned shares would clearly amount to a transfer as defined in section 2(47) of the Act. Section 2(47)(ii) clearly applies to the cancellation of shares under the Scheme and in the alternative, it is possible to contend that section 2(47)(1) may also be applicable. Even in the impugned order, the Ld. PCIT accepts /proceeds on the basis that the transfer of a capital asset/(s) has taken place: (c) the provisions of section 45 of the Act are clearly attracted as the said number of shares of TTSL being capital assets of the assessee have been transferred. (d) the provisions of section 48 of the Act are also clearly attracted which prescribe the mode of computation of any income/loss which arises under the head capital gains by deducting from the full value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Order of the Hon. High Court of Delhi dated 07-11-2008 approving the Scheme specifically provided that the Scheme was one of reduction of capital of TTSL. 20. In so far as the conclusion of ld. PCIT that the computation mechanism u/s. 48 fails, he submitted that the correct principle as laid down by the courts is that the capital gain computation provisions may be held not to apply if and only if any part thereof cannot conceivably be attracted. In the case of the assessee, although no consideration has been received by or has accrued to the assessee, it is certainly possible to conceive of consideration being received or receivable in such cases and that consideration here is zero . The Gujarat High Court in the matter of CIT Vs Jaykrishna Harivallabhdas (1997) 231 ITR 108 has held that a capital loss is sustained by an assessee, when shares of a company which had gone into voluntary liquidation are extinguished and no consideration is received by the assessee. In such a case, a capital loss should have been computed u/s 46(2) r.w.s. 48 of the Act despite the fact that zero or no consideration is received or receivable. 21. Further, when there is a reduction by way of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls. Here it cannot be said that it is not conceivable an only consideration here is Nil . 23. In so far as ground No.3, the ld. PCIT erred in failing to take note of the provisions of Section 55(2)(v)(b) and in not confirming that the cost of remaining shares would include the cost of the shares cancelled on reduction. He submitted that; firstly, the said section 55(2)(b)(v) provides for the cost of shares of a company which became the property on happening of the events mentioned therein to mean the cost of acquisition of the shares from which such asset is derived. The said provision does not include the cancellation of shares held consequent to reduction of the capital. Hence, on the interpretation of the ld. PCIT the cost of the cancelled shares if not allowed in the year of cancellation, will never be allowed; secondly, it is indisputable that shares of TTSL which it owned were acquired at a cost. The said shares have now been cancelled and extinguished. It has undoubtedly suffered a loss. The view set out above is also upheld by the Mumbai Tribunal in the case of Carestream (supra). 24. On the other hand, ld. CIT DR submitted that here in this case ld. AO has not exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10/- paid up of each share to Rs. 5/- paid up of each share. As a second step such shares (Rs. 5/- per share) were again consolidated into Rs. 10 paid up share and number of shares were reduced to 89,93,149. The Ld. Counsel had argued that basically the original shares got extinguished and, in fact, new shares have been issued by TGL. If the argument is that earlier shares have been replaced or substituted by new shares then the same would not amount to transfer at all. In that case, it would be merely a case of substitution of one kind of share with another kind of share which has been received by the assessee because of its rights to the original shares on the reduction of capital. This position was clarified by the Hon'ble Supreme Court in the case of CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198/ 43 Taxman 259. In that case, the assessee was holding 90 shares in one S. company of face value of Rs. 100/- each. Pursuant to the scheme of amalgamation sanctioned by the High Court, the holders of the shares in S. company were to be allotted one share of Rs. 125/-each of NS Company for two shares in S. company and S. Company was to be dissolved. The assessee in that case wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset is liable to be taxed u/s. 45. In the above mentioned case 90 non-cumulative preference shares, of the face value of Rs. 1000/-, were purchased at a price of Rs. 420/- per share from a company called Sarabhai Limited. In 1965, a sum of Rs. 500/- per preference shares was paid to the assessee upon reduction of share capital and the face value of preference shares was reduced to Rs. 50/- per share and further payment of Rs. 450/- per share was made to the assessee. The ITO was of the opinion that the sum of Rs. 450/- per share which was received now was liable to be taxed under the head 'capital gain'. However, assessee contended that since no transfer had taken place in terms of sec.2 (47), no tax could be imposed. When the matter travelled to Hon'ble Supreme Court it was held that definition of transfer u/s. 2 (47) was inclusive and would include relinquishment of an asset or extinguishment of any right therein. It was further observed that even preference shareholders have right to vote on resolutions which would effect the right of preference shareholder u/s. 87(2)(a), 87(2)(b) and 87(2)( c). Therefore the rights of preference shareholders are curtailed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f acquisition of the capital asset and the cost of any improvement thereto. The amounts specified in clauses (i) and (ii) are to be deducted from the consideration received or accruing as a result of the transfer of the capital asset for the purpose of determining the profits or gains chargeable to tax. It is, therefore, clear that the transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. The transaction in order to attract the charge of tax as capital gains must, therefore, clearly be such that consideration is received by the assessee or accrues to the assessee as a result of the transfer of the capital asset. Where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the firm towards contribution of capital, would constitute transfer and whether such transfer would attract capital gain tax? The court held that such contribution of capital asset of a partner into the firm would definitely constitute a transfer because in that case the partner's interest in such asset is reduced from exclusive interest to a shared interest. In respect of taxability of this transfer, three arguments were made before the Hon'ble court which are being extracted from page 515 of the report of the above judgment in the case of Sunil Siddharthbhai (supra) as under: 1. There must be a transfer of a capital asset either under the general law or within the definition in clause (47) of section 2 of the Income-tax Act. 2. Consideration must be received or must accrue as a result of the transfer and the consideration must be capable of being determined in monetary terms in order that the computation of capital gains may be made as required by section 48. 3. Profits or gains must arise from the transfer and must be embedded in the consideration. Since the point raised in the first argument is not material regarding the issue involved before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal asset to the partnership firm as his contribution to its capital can fall within the terms of s.48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s.45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. The third contention of learned counsel for the assessee is that no profit or gain can be said to arise to a partner when he brings his personal asset into a partnership firm as his contribution to its capital. It is urged that the capital gains chargeable under s.45 are real capital gains computed on the ordinary principles of commercial accounting and that the capital gains must be embedded in the capital asset. In Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 I.T.R. 651, the appellant held by way of investment some ordinary shares in a limited company. An offer was made by the company to her by which she was entitled to apply for an equal number of new ordinary shares at a premium with an option of either taking the shares or renouncing them in favour of others. The appellant renounced her rights to all the shares and realis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. Now in the case before us the assessee has not received any consideration for reduction of share capital. What has happened is that ultimately the number of shares held by the assessee has been reduced to 50% and nothing has moved from the side of the company to the assessee. The Ld. Counsel of the assessee submits that the decision of the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) is not applicable because, in the case before us, it was possible to ascertain the consideration by envisaging the same as zero. In this regard he relied on the decision of the Hon'ble Bombay High Court in the case of Cadell Wvg. Mill (P.) Ltd. (supra) and, in particular, referred to the observations at pages 284 and 285 of the report wherein it was observed that whole of the value of the capital asset transferred could not be brought to tax because that would amount to taxing the value of asset and not profit as contemplated in sec.45. In this case the issue involved was whether the compensation received on surrender of statutory tenancy rights is chargeable as casual income u/s. 10(3) or it should be charged u/s. 45. The court, after examining the issue in detail, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai (supra)- are applicable, if the consideration cannot be ascertained, then provisions of sec.45 would not apply. No doubt Learned counsel forcefully submitted that the legislature has listed out all transactions which are not regarded as transfer such as gifts etc, (sec.47-iii) and per contra any other transfer even without specific or zero consideration should be considered for taxation U/s 45 but we find no force in it. The situation regarding non ascertainment of any of the element of sec.48 came to light only after the pronouncement of the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). Perhaps legislature intended to exempt only gifts from subject matter of capital gains and that is why clause (iii) to sec.47 must have been put in the statute. In any case, the decision of the Hon'ble Bombay High Court in the case of The Bombay Burmah Trading Corpn. Ltd. (supra) is directly on the issue wherein third question referred before the Court reads as under: 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that where in a case of compulsory acquisition by Government without compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, instead of assets becoming Rs. 50/-, it increases to Rs. 200/-, because of profit, and in turn this company issued bonus shares, even then the profit would remain in the books of the company and mere allotment of such bonus shares cannot be subjected to tax. This position was accepted even by the Ld. Counsel of the assessee. Therefore, when the profits of the company which have been distributed to the shareholders by way of bonus shares cannot be assessed, on the same principle losses of the company which have been adjusted by reducing the capital cannot be allowed. 24. . 25. 26. The Ld. Counsel of the assessee had also relied on the following decisions of the Tribunal- (a) Zyma Laboratories Ltd.'s case (supra) (b) Polychem Ltd.'s case (supra ) (c) Ginners Presser Ltd.'s case (supra) But in all these cases the principle laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was neither cited, nor considered and, therefore, these decisions are distinguishable and in any case, not binding on the Special Bench. In fact such profit or loss arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounce them in favour of some other person and make up the loss which she would suffer on her original shares. The board of directors of the Native Stock and Shares Association Ltd. had passed a resolution that the transactions in these shares were to be cum-right up to and including 1st June, 1956, and were to be ex-rights from 4th June, 1956, onwards. The intervening days, 2nd and 3rd June, being official holidays, there were to be no transactions on those days. The market quotation of the old Tata ordinary shares was Rs. 253 per share on 1st June, 1956, and fell to Rs. 198.75nP. On 4th June, 1956. There was, thus, a fall in the market quotation of old shares of Rs. 54.26P. per share. It was claimed by the appellant that, as a result of this depreciation in the price of her old ordinary shares, she suffered a capital loss in those shares to the extent of Rs. 37,630, and she was entitled to set off this loss against the capital gain of Rs. 45,262.50P. which she realised on selling her right to take the new ordinary shares. In the alternative, the case was put forward on the basis that the right to receive these new ordinary shares was a right which was embedded in her old ordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence between the value of the capital asset and the cash in her hands after she had renounced her right and realised the cash value in respect of it, and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realised any cash in respect of the right by renouncing it in favour of some other person. As we have indicated above, the value of the capital asset, after renouncement, would be 710 multiplied by Rs. 198.75P. Plus the sum of Rs. 45,262.50P while the value of the asset, immediately before the renouncement, would be 710 multiplied by Rs. 253, there being no cash value at that time of the right to be taken into account. Thus, the capital gain or loss would be worked out at Rs. 45,262.50P. after deducting from it the sum worked out at 710 multiplied by the difference between Rs. 253 and Rs. 198.75P. This last amount comes to a little more than the sum of Rs. 37,630 which the appellant claimed should be deducted from Rs. 45,262.50P. in computing her capital gain. The claim made by the appellant was thus clearly justified because the net capital gain by her in the transaction, which consisted of issue of new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company on the date of issuance of rights shares, then such reduction in the value of new shares has to be reckoned because assets remained the same. Similarly, in the case before us the value of asset of a company immediately before and after reduction of share capital remained the same and therefore by reducing the amount and number of shares the assessee's proportionate share in such assets remained the same. In the case before us also the value of assets even after reduction of capital remained the same and, therefore, loss, if any, at best can be called notional loss which cannot be allowed as observed by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai (supra) at pages 521 522 which we have reproduced earlier. .. It was noticed that perhaps during the earlier hearing of this case, reliance has been placed by the department on the decision of the Ahmedabad Bench of the Tribunal in the case of Ajay C. Mehta v. Dy.CIT [2008] 305 ITR (AT) 155/ 114 ITD 628. In that case also assessee had claimed short term capital loss. The assessee had applied for 2,00,000 warrants and paid Rs. 2.70 per warrant as upfront payment. Later on, assessee exercised the opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y by virtue of Article 141 of Constitution of India then law laid down by High Court is equally binding on Courts/Tribunals they being subordinate to High Court by virtue of powers conferred by Articles 215, 226 and 227 of Constitution of India and by judicial precedents. Therefore, in our view, the decision of Hon'ble Bombay High Court is binding and has to be applied. 27. 28. We also find force in the submissions of the Ld. DR that as per sec.55(v) the cost the cost of acquisition of shares even after conversion etc. has to be taken with reference to the cost of original shares. Therefore, after reduction of share capital the cost of acquisition of the remaining shares would be reckoned with references to the original cost. Though at this stage assessee has not obtained any benefit because loss has been computed with reference to the actual cost, but, in future, if assessee decides to sell its shareholding in TGL then assessee has the right, U/s 55(v), to substitute the cost of acquisition with reference to the original shareholding and in that case it may amount to double benefit later on which is not permissible under the law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 10/- each from 634,71,52,316 shares was reduced to 317,35,76,158 shares. The said reduction of capital was effected as part of the scheme provided u/s. 100 to 103 of the Companies Act, 1956. As per the scheme, no consideration was payable to the shareholders in respect of the shares which were to be cancelled. Consequently, the shareholding of the assessee was also reduced to half, i.e., 144,06,58,643 from 288,13,17,286 equity shares. The relevant portion of the scheme has already been incorporated above. Now, such a reduction of capital has been claimed as long term capital loss by the assessee in the computation of capital gain and has been set off against other long term capital gain as per the working incorporated in para 6 of the order. The entire case of the ld. PCIT hinges upon the fact that, since no consideration has been received or accrued to the assessee by way of reduction of capital and therefore, computation mechanism provided u/s. 48 fails and consequently, long term capital loss cannot be worked out. According to him, Section 48 provides mode of computation of capital gains which is computed by deducting from the full value of consideration received or accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 30. 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend 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). 31. In the case of DCIT vs. BPL Sanyo Finance Ltd. reported in 312 ITR 63 (KAR), the Hon ble Karnataka High Court dealing with the case where loss on account of forfeiture of share application money, amounts to short term capital loss or not. The Hon ble High Court held that consequent to assessee s default in not paying the balance of money on allotment, its right in the shares stood extinguished on its forfeiture and the loss suffered by the assessee, i.e., non-recovery of share application money is consequent to the forfeiture of its right in the shares and the same is to be understood to be within the scope and ambit of transfer and therefore, the Tribunal was justified in holding that it would amount to short-term capital l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act is an 'inclusive' definition and, therefore, extends to events and transactions which may not otherwise be 'transfer' according to its ordinary, popular and natural sense. 13. For the aforesaid reasons, we are of the considered opinion that the questions posed have to be answered in favour of the assessee and against the Revenue. The appeal accordingly stands disposed of. 32. In case of CIT vs. Mrs. Grace Collis And Others reported in 248 ITR 323, Hon ble Supreme Court had observed and held as under:- 15. We have given careful thought to the definition of 'transfer' in section 2(47) and to the decision of this Court in Vania Silk Mills (P.) Ltd.'s case (supra). In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression 'extinguishment of any rights therein' to such extinguishment on account of transfers or to the view that the expression 'extinguishment of any rights therein' cannot be extended to mean the extinguishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in 192 ITR 382. Thereafter, on the issue of cost of acquisition, the Hon ble Supreme Court referred to the decision of CIT vs. B. C. Srinivasa Setty (supra) and observed as under:- 8. In 1981 this Court in B.C. Srinivasa Setty's case (supra) held that all transactions encompassed by section 45 must fall within the computation provisions of section 48. If the computation as provided under section 48 could not be applied to a particular transaction, it must be regarded as never intended by section 45 to be the subject of the charge . In that case, the Court was considering whether a firm was liable to pay capital gains on the sale of its goodwill to another firm. The Court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. Pathak J. as his Lordship then was, speaking for the Court said : What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xample, assessee acquired 100 shares for Rs. 1000/- in a company and after reduction of capital of the company, assessee s share was reduced to 50 shares from 100 and share value reduced to Rs. 500/- from Rs. 1000/-. What if for reduction of 50 shares instead of getting Rs. 10/- per share had assessee received Rs. 1/- per share on reduction, can still be said there was no consideration received or consideration is inconceivable; and if assessee has received Zero consideration, then can it be held that there is no conceivable consideration at all or Zero is not a consideration. This precise issue had been answered by the Hon ble Gujarat High Court in the case of CIT vs. Jaykrishna Harivallabhdas reported in 231 ITR 108. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rplus [capital asset for the purpose of section 46(2)] is to be treated as transfer and as and when such extinguishment takes place, treating such extinguishment as transfer, the net result of such transfer has to be worked out or computed as per section 48. If the result of such computation under the head Capital gains is a positive balance, it is to be added in the total income chargeable to tax augmenting the same. If the balance is negative, it has to be treated under the Chapter titled, Set off and carry forward losses in accordance with the provisions to the extent the same are permissible. Section 48 provides for the mode of computing income under the head Capital gain . The mode of computation shorn of all technicalities and other complexities is to deduct from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the asset. It does not envisage that in all cases such computation must result in surplus or gains. Section 4 of the Act makes the income computed in accordance with the provisions of the Act subject to tax. Section 46(2) which has also been held to be the charging section fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital comes to an end, any disbursement made to a shareholder either by way of cash or asset has to be treated in the hands of the recipient shareholder as the full value of consideration on deemed transfer of his capital asset, as a result of extinguishment of all rights has to be deemed to be resulting in capital gain or loss, as the case may be, as per the result of computation made under section 48 of the Act. Though the value of the asset has to be taken at its market value as on the date of actual receipt as a result of joint reading of section 46(2) and section 55(2)(b)(iii) of the Act which provides for determination of cost of acquisition in the hands of the recipient for determination of capital gains in his hands whenever he transfers such asset after its receipt by him. The contention that this provision should apply to actual receipts only also cannot be accepted for yet another reason, because acceptance of that would lead to an incongruous and anomalous result as will be seen presently. The acceptance of this view would mean whereas even in a case where a sum is received, howsoever negligible or insignificant it may be, it would result in the computation of capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 38. 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. 39. The entire case of the Revenue is hinges upon the judgment of ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The ratio of B. C. Srinivasa Setty would have no role to play, in other words, the charge under section 45 shall be attracted in all in which the cost of acquisition or full value of consideration is conceivable or ascertainable but is nil. On the reduction of capital, TGL did not pay anything to the assessee. Thus, the assessee received nil consideration it was not a case in which the full value of consideration is incapable of ascertainment. The full value of consideration was fully ascertained and identified as nil and was liable to be taken into consideration for the purposes of computing loss under section 45 at Rs. 22.21 crores. However, the ratio of the majority judgement can be interpreted against the assessee as it clearly held that reduction of shares where no consideration is received computation of capital gain and loss cannot be made, even though facts were different in that case. 41. However, we are not relying upon the minori ..... X X X X Extracts X X X X X X X X Extracts X X X X
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