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TMI Blog2025 (1) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded 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. - J. B. Pardiwala And R. Mahadevan , JJ. ORDER 1. Delay condoned. 2. This petition is at the instance of the Revenue, seeking leave to appeal against the judgement and order dated 20.02.2023 passed by the High Court of Karnataka at Bengaluru in Income Tax Appeal (ITA) No. 299 of 2019 by which the appeal filed by the Revenue against the judgement and order passed by the ITAT Bengaluru came to be dismissed and thereby the judgement and order passed by the ITAT came to be affirmed. 3. The appeal was admitted by the High Court on the following substantial question of law : Whether on the facts and circumstances of the case, the Tribunal is right in law in setting aside the disallowance of capital loss claimed by the assessee of Rs.164,48,55,840/- by holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares and not extinguishing the rights of the shareholders. For the reason that the word extinguished is mentioned in the Petition or the Court Order, it does not amount to translate the meaning of the word extinguishment of rights as per section 2(47) of the Act. xxx xxx xxx Extinguishment of Rights would mean that the assessee has parted with those shares or sold off those shares to a second party. Here, the assessee has not sold off any shares or has not parted with the shares as the it still holds the proportionate percentage which he initially held is still shown as an investment. 7. In appeal the CIT(A) vide order dated 14.12.2017 while distinguishing the facts of the present case from those involved in the decision of this Court in Kartikeya V. Sarabhai v. Commissioner of Income Tax reported in (1997) 7 SCC 524 held that any extinguishment of rights would involve parting the sale of percentage of shares to another party or divesting rights therein. The relevant observations made by the CIT(A) are reproduced as follows: 6.6(ii) The factual position of and the applicability of the judicial decisions in the present case, clearly reveals that the Assessee's claim of capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has extinguished its right of 153340900 shares and in lieu thereof, the assessee received 9988 shares at Rs. 10/- each along with an amount of Rs. 3,17,83,474/. As per this judgment of Hon'ble Apex Court rendered in the case of Kartikeya V. Sarabhai Vs. CIT (supra), there is no reference to the percentage of share holding prior to reduction of share capital and after reduction of share capital and hence, in our considered opinion, the basis adopted by the CIT(A) to hold that this judgment of Hon'ble Apex Court is, not applicable in the present case is not proper and in our considered opinion, this is not proper. In our considered opinion, in the facts of present case, this judgment of Hon'ble Apex Court is squarely applicable and by respectfully following this judgment of Hon'ble Apex Court, we hold that the assessee's claim for capital loss on account of reduction in share capital in ANNPL is allowable. We hold accordingly. 9. The Revenue went in appeal before the High Court. The High Court while dismissing the appeal filed by the Revenue and affirming the order passed by the ITAT observed in para 8 as under: Undisputed facts are, pursuant to the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation. For the purposes of sub-clauses (v) and (vi), immovable property shall have the same meaning as in clause (d) of Section 269-UA; 10. Section 45 of the Act reads as follows: 45. Capital gains. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54-B, 54-D, 54-E, 54-F and 54-G, be chargeable to income tax under the head Capital gains and shall be deemed to be the income of the previous year in which the transfer took place. 11. Section 2(47) which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While, it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of 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. It is not necessary that for a capital gain to arise there m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preference share is redeemed by a company, what the shareholder does in effect is to sell the share to the company. The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. It was observed that in effect the company buys back the preference shares from the shareholders. Further, referring to the provisions of the Companies Act, it held that the reduction of preference shares by a company was a sale and would squarely come within the phrase sale, exchange or relinquishment of an asset under Section 2(47) of the Act. It was also held that the definition of the word transfer under Section 2(47) of the Act was not an exhaustive definition and that sub-section (I) of clause (47) of Section 2 implies that parting with any capital asset for gain would be taxable under Section 45 of the Act. In this connection, it was noted that when preference shares are redeemed by the company, the shareholder has to abandon or surrender the shares, in order to get the amount of money in lieu thereof. 15. In our opinion, the aforesaid decision of this Court in Anarkali case [(1997) 3 SCC 238 : (1997) 224 ITR 422] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reduction of share capital. However, as the total number of shares have been reduced from 15,35,05,750 to 10,000 and out of this the assessee was holding 15,33,40,900 shares prior to reduction and 9988 shares after reduction, it can be said that on account of reduction in the number of shares held by the assessee in the company, the assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the assessee received 9988 shares at Rs. 10 each along with an amount of Rs. 3,17,83,474. This Court in the case of Kartikeya V. Sarabhai (supra) has not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital. 15. This Court in the case of Kartikeya V. Sarabhai (supra) observed that reduction of right in a capital asset would amount to transfer under Section 2(47) of the Act, 1961. Sale is only one of the modes of transfer envisaged by Section 2(47) of the Income Tax Act, 1961. Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Anarkali Sarabhai v. CIT reported in (1997) 3 SCC 238 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. The relevant observations are reproduced hereinbelow: 21. The Bombay High Court in Sath Gwaldas Mathuradas Mohata Trust v. CIT [(1987) 165 ITR 620 (Bom)] dealt with the question which has now arisen in this case. There the question was whether the amount received by the assessee on redemption of preference shares was liable to tax under the head capital gains . After referring to the meaning given to transfer by Section 2(47) of the Income Tax Act, the Court held: Here, a regular sale itself has taken place. That is the ordinary concept of transfer. The company paid the price for the redemption of the shares out of its fund to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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