The Hon’ble Supreme Court recently ruled that capital reduction qualifies as the extinguishment or relinquishment of rights, thereby confirming eligibility for capital loss claims in the hands of the shareholder.
The shareholder had purchased shares of an Indian company that later incurred significant losses, leading the company to undergo capital reduction to offset these losses against its paid-up share capital. The Tax officer’s denial of the shareholder’s capital loss claim based on the premise that despite the reduction, the face value and percentage shareholding of the taxpayer remained unchanged and the shareholder received a sum as consideration for the reduction.
To reiterate, the underlying question was whether such a transaction constituted a “transfer” under Section 2(47) of the Income Tax Act, 1961 (ITA) since pursuant to the Capital reduction, both the face value and proportionate holding of the shareholder remained unchanged.
The Court observed that in this case, whilst the face value and percentage holding remained the same, the total number of shares have been reduced, and the shareholder was holding higher number of shares prior to reduction and less shares after reduction. Thus, it can be said that on account of the reduction in the number of shares held by such assessee in the company, the assessee has extinguished its right in its original holding of shares, and in lieu thereof, the assessee received lesser shares at INR 10 each along with an amount.
The Apex affirmed that even such capital reduction results in the “extinguishment or relinquishment of rights” which is a term of wide import and thereby qualifying as a “transfer” under the provisions of Section 2(47) of the ITA placing reliance on previous landmark decisions.
The Court averred that a court-approved capital reduction is a valid corporate action under the Companies Act, 2013 that effectively transfers rights from shareholders in exchange for consideration. This ruling has significant implications for taxpayers, as it would help them to claim long-term capital losses arising from capital reduction with similar underlying factual pattern.