The Supreme Court of India, in Jupiter Capital (P.) Ltd. v. Principal Commissioner of Income-tax (2025 INSC 38), examined whether reduction of share capital of a subsidiary company resulting in proportionate reduction in the shareholding of the assessee constitutes a “transfer” within the meaning of Section 2(47) of the Income-tax Act, 1961, thereby giving rise to capital gains or capital loss under Section 45.

The assessee, a company engaged in investment and financing activities, held 99.88% shareholding in Asianet News Network Pvt. Ltd. Due to continuous losses, the subsidiary company approached the Bombay High Court for reduction of its share capital to set off accumulated losses. Pursuant to the court-approved scheme, the share capital was reduced from 15,35,05,750 shares to 10,000 shares, resulting in reduction of the assessee’s holding from 15,33,40,900 shares to 9,988 shares. The face value of shares remained unchanged at ₹10, and the assessee received consideration of ₹3,17,83,474.

The assessee claimed long-term capital loss on account of extinguishment of rights in respect of the reduced number of shares. The Assessing Officer denied the claim on the ground that there was no transfer, as the percentage of shareholding and face value of shares remained unchanged. The CIT(A) upheld the disallowance. However, the ITAT allowed the claim by applying the Supreme Court judgment in Kartikeya V. Sarabhai v. CIT.

The Karnataka High Court affirmed the ITAT’s order, holding that reduction in the number of shares resulted in extinguishment of rights notwithstanding that the percentage of shareholding remained the same. The Revenue carried the matter to the Supreme Court.

Dismissing the Revenue’s appeal, the Supreme Court held that Section 2(47) is an inclusive definition and specifically covers extinguishment of any rights in a capital asset. The Court reiterated that sale is only one of the modes of transfer and that reduction of share capital resulting in proportional reduction of rights of a shareholder amounts to a transfer. The Court relied on and reaffirmed the principles laid down in Kartikeya V. Sarabhai v. CIT (1997) 7 SCC 524 and Anarkali Sarabhai v. CIT (1997) 3 SCC 238.

The Court further held that receipt of consideration is not a condition precedent for computation of capital gains or loss and that extinguishment of rights itself triggers Section 45. It was concluded that the assessee had suffered extinguishment of rights in respect of a substantial number of shares and was therefore entitled to claim capital loss.

Accordingly, the Supreme Court dismissed the Special Leave Petition filed by the Revenue and upheld the allowability of capital loss arising from reduction of share capital.

Source- https://api.sci.gov.in/supremecourt/2024/39934/39934_2024_15_15_58197_Judgement_02-Jan-2025.pdf

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