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Tax Publishers Reduction of share capital under section 100 - 104 of the Companies Act, 1956 - is there a transfer and the assessee entitled to claim Capital loss which can be offset against Capital gains? *Facts:* Assessee was the majority stakeholder of Tata Tele Services Company Ltd. (TTSL). In a court approved scheme of capital reduction the equity capital of the company stood wiped out by 50% by writing off accumulated losses and unabsorbed depreciation in the books of TTSL. Paid up Share capital of TTSL was Rs. 6347 crores (634,71,52,316 shares of Rs. 10 each). Post the capital reduction of 50% their share capital will read as Rs. 3173 crores (317,35,76,158 shares of Rs. 10 each). Assessee accordingly for their invested portion claimed a Long term capital loss of Rs. 2046 crores which was set off against other Long term capital gains. This was queried in a scrutiny assessment and accepted by the AO. Subsequently the PCIT reopened the case under section 263 citing that since no consideration was received by the assessee in the capital reduction scheme and hence the capital loss was only a notional one and since the computation section fails in the absence of a consideration though having a cost of acquisition to the extent of lost/reduced capital the assessment was erroneous and prejudicial to the interests of the revenue. On further appeal to ITAT by the assessee - Held in favour of the assessee that to give a reading that if there was even a Re. 1 consideration then the long term capital loss was claimable on a capital reduction and if it was NIL was not claimable was an erroneous reading by the PCIT. The facts of BC Srinivasa shetty case (1981) 128 ITR 294 (SC) : 1981 TaxPub(DT) 0902 (SC) cannot be applied here as the premise in that case was; where there is an impossibility to compute then the computation section fails, here it is a case of not impossibility but a definite number which definitely is not a notional loss. The assessee has lost that much of amount/monies invested. The reading of Grace Collis case (2001) 248 ITR 323 (SC) : 2001 TaxPub(DT) 1188 (SC) would need to be applied here where it was held that extinguishment and transfer need not be hand in hand for computation or taxability, it can be only extinguishment resulting in a transfer per se or existence of the asset along with extinguishment was not required by law under section 2(47). So by reducing the share capital there was an extinguishment triggering the meaning of transfer under section 2(47) even unilaterally. The decision of Kartikeya Sarabhai (1997) 228 ITR 163 (SC) : 1997 TaxPub(DT) 1341 (SC) will need to be applied here. The contrary special bench verdict of Bennett Coleman and Co. Ltd. v. Addl.CIT 2011(9) TMI-ITAT was dissented and the long term capital loss stood allowed. The decision of PCIT to reopen was thus based on a one plausible view contrary to the views of the AO hence the order under section 263 was uncalled for as well. *Applied:* CIT v. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 (Guj-HC) : 1998 TaxPub(DT) 0410 (Guj-HC). "9. In other words, an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head 'capital gains' as opposed to assets in the acquisition of which no cost at all can be conceived." ..... "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 capital gains or loss, as the case may be, but in a case where nothing is disbursed on liquidation of a company the extinction of rights, would result in total loss with no consequence. That is to say on receipt of some cost, however insignificant it may be, the entire gamut of computing capital gains for the purpose of computing under the head "Capital gains" is to be gone into, computing income under the head "Capital gains", and loss will be treated under the provisions of Act, but where there is nil receipt of the capital, the entire extinguishment of rights has to be written off, without treating under the Act as a loss resulting from computation of capital gains. The suggested interpretation leads to such incongruous result and ought to be avoided, if it does not militate in any manner against object of the provision and unless it is not reasonably possible to reach that conclusion. As discussed above, once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer 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, so as to treat the subjects without discrimination. Where there does not appear to be ground for such different treatment the Legislature cannot be presumed to have made deeming provision to bring about such anomalous result". 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. *Ed. Note:* The decision makes an excellent reading but for the fact for a transfer to apply there has to be two parties, this dimension was not seen possibly or was indirectly read as though one party being Tata sons and the other being TTSL. It will be interesting to see how far will this decision unsettle many other verdicts on this domain. *Case:* Tata Sons Ltd. v. CIT 2024 TaxPub(DT) 445 (Mum-Trib)

Tax Publishers

Reduction of share capital under section 100 - 104 of the Companies Act, 1956 - is there a transfer and the assessee entitled to claim Capital loss which can be offset against Capital gains?

Facts:

Assessee was the majority stakeholder of Tata Tele Services Company Ltd. (TTSL). In a court approved scheme of capital reduction the equity capital of the company stood wiped out by 50% by writing off accumulated losses and unabsorbed depreciation in the books of TTSL. Paid up Share capital of TTSL was Rs. 6347 crores (634,71,52,316 shares of Rs. 10 each). Post the capital reduction of 50% their share capital will read as Rs. 3173 crores (317,35,76,158 shares of Rs. 10 each). Assessee accordingly for their invested portion claimed a Long term capital loss of Rs. 2046 crores which was set off against other Long term capital gains. This was queried in a scrutiny assessment and accepted by the AO. Subsequently the PCIT reopened the case under section 263 citing that since no consideration was received by the assessee in the capital reduction scheme and hence the capital loss was only a notional one and since the computation section fails in the absence of a consideration though having a cost of acquisition to the extent of lost/reduced capital the assessment was erroneous and prejudicial to the interests of the revenue. On further appeal to ITAT by the assessee -

Held in favour of the assessee that to give a reading that if there was even a Re. 1 consideration then the long term capital loss was claimable on a capital reduction and if it was NIL was not claimable was an erroneous reading by the PCIT. The facts of BC Srinivasa shetty case (1981) 128 ITR 294 (SC) : 1981 TaxPub(DT) 0902 (SC) cannot be applied here as the premise in that case was; where there is an impossibility to compute then the computation section fails, here it is a case of not impossibility but a definite number which definitely is not a notional loss. The assessee has lost that much of amount/monies invested. The reading of Grace Collis case (2001) 248 ITR 323 (SC) : 2001 TaxPub(DT) 1188 (SC) would need to be applied here where it was held that extinguishment and transfer need not be hand in hand for computation or taxability, it can be only extinguishment resulting in a transfer per se or existence of the asset along with extinguishment was not required by law under section 2(47). So by reducing the share capital there was an extinguishment triggering the meaning of transfer under section 2(47) even unilaterally. The decision of Kartikeya Sarabhai (1997) 228 ITR 163 (SC) : 1997 TaxPub(DT) 1341 (SC) will need to be applied here. The contrary special bench verdict of Bennett Coleman and Co. Ltd. v. Addl.CIT 2011(9) TMI-ITAT was dissented and the long term capital loss stood allowed. The decision of PCIT to reopen was thus based on a one plausible view contrary to the views of the AO hence the order under section 263 was uncalled for as well.

Applied: CIT v. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 (Guj-HC) : 1998 TaxPub(DT) 0410 (Guj-HC).

"9. In other words, an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head 'capital gains' as opposed to assets in the acquisition of which no cost at all can be conceived."

.....

"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 capital gains or loss, as the case may be, but in a case where nothing is disbursed on liquidation of a company the extinction of rights, would result in total loss with no consequence. That is to say on receipt of some cost, however insignificant it may be, the entire gamut of computing capital gains for the purpose of computing under the head "Capital gains" is to be gone into, computing income under the head "Capital gains", and loss will be treated under the provisions of Act, but where there is nil receipt of the capital, the entire extinguishment of rights has to be written off, without treating under the Act as a loss resulting from computation of capital gains. The suggested interpretation leads to such incongruous result and ought to be avoided, if it does not militate in any manner against object of the provision and unless it is not reasonably possible to reach that conclusion. As discussed above, once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer 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, so as to treat the subjects without discrimination. Where there does not appear to be ground for such different treatment the Legislature cannot be presumed to have made deeming provision to bring about such anomalous result".

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.

Ed. Note: The decision makes an excellent reading but for the fact for a transfer to apply there has to be two parties, this dimension was not seen possibly or was indirectly read as though one party being Tata sons and the other being TTSL. It will be interesting to see how far will this decision unsettle many other verdicts on this domain.

Case: Tata Sons Ltd. v. CIT 2024 TaxPub(DT) 445 (Mum-Trib)