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A Transfer Without Consideration: ITAT’s Landmark Verdict on Capital Loss

Introduction

In the case of M/s Tata Sons Limited v. Commissioner of Income Tax-2[i], the Income Tax Appellate Tribunal, Mumbai (‘ITAT’) ruled in favour of the assessee and against the Commissioner of Income Tax-2 (‘Respondent’). The case centered around whether the assessing officer (‘AO’) was correct in allowing a long-term capital loss (‘LTCL’) of Rs. 2047 crore due to the reduction of capital and if the Respondent’s order to cancel the assessment and disallow the loss was correct.

Brief Facts

  • The assessee, serving as the holding entity for the Tata conglomerate, held 2,88,13,17,286 shares in Tata Teleservices Limited (‘TTSL’) during the fiscal year 2008-09.

  • A judicially sanctioned ‘Scheme of Arrangement and Re-structuring’ under ss. 100 to 103 of the Companies Act, 1956, between TTSL and its shareholders resulted in halving the assessee’s shareholding to 1,44,06,58,643 shares through the cancellation of equity shares.

  • In its income tax return for the financial year 2008-09 and assessment year 2009-10, the assessee claimed a LTCL of Rs. 2047 crores due to a reduction in shareholding which was allowed by the AO after due examination.

  • The Respondent, however, issued a notice under s. 263 of the Income-tax Act, 1961 (‘IT Act’) considering the AO’s order as erroneous and prejudicial to the Revenue’s interest, arguing that no consideration was received or accrued to the assessee as a result of the share reduction, thus rendering the computation provisions ineffective. The Respondent contended that since no consideration was received, the computation of capital gains falls under s. 48 of the IT Act.

Held

  • The ITAT allowed the appeal of the assessee and interpreted the scheme of arrangement and the reduction of capital as amounting to a ‘transfer’ of shares within the meaning of s. 2(47) of the IT Act, notwithstanding the physical cancellation of the shares.

  • This decision hinged on the notion that the shareholder’s economic interest underwent a significant alteration due to the reduction in shareholding. It elucidated that even in the absence of a physical share transfer, a ‘transfer’ for tax purposes could be deemed to have occurred if there was a change in the economic interests of the shareholders.

  • Consequently, the ITAT determined that the reduction of shares resulted in an extinguishment of rights and constituted a transfer, thereby allowing the LTCL to be set off against other capital gains.

Analysis

The ITAT’s decision sets a significant precedent in corporate restructuring and taxation, expanding the definition of ‘transfer’ under the IT Act to include changes in economic interests resulting from share cancellations. This interpretation allows for the recognition of LTCL even when shareholding reductions occur without direct compensation.

The judgment clarifies the importance of considering the legal fiction of transfer under s. 2(47) of the IT Act and the applicability of computation provisions even in cases of nil consideration. By equating the economic impact of share cancellations to physical transfers for tax purposes, the ITAT provides a crucial reference for future cases, potentially influencing the tax treatment of similar corporate arrangements.

In addition to vindicating the Petitioner’s position, the ITAT’s ruling offers valuable guidance for companies and tax practitioners navigating LTCL claims amid corporate restructuring and share cancellations, ensuring consistency in the application of tax laws.



End Note:

[i] [2024] 158 taxmann.com 601 (Mumbai – Trib.), dated 23.01.2024



Authored by Adhijeet Neogy, Intern at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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