Introduction
The Hon’ble Supreme Court of India, in its judgment in Principal Commissioner of Income Tax-4, Bengaluru v. M/s Jupiter Capital Private Limited [i], has provided significant clarity on the interpretation of ‘transfer’ under s. 2(47) of the Income-tax Act, 1961 (‘IT Act’). This landmark decision confirms that a reduction of share capital resulting in the extinguishment of rights constitutes a ‘transfer’ under s. 2(47) of the IT Act, making it subject to capital gains tax.
The Supreme Court, by affirming the decision of the Karnataka High Court and the Income Tax Appellate Tribunal (‘ITAT’), settles the issue of whether a reduction in shareholding due to a court-approved capital reduction scheme constitutes a transfer of capital asset, thereby qualifying for capital loss under s. 45 of the IT Act. This ruling is a significant addition to the jurisprudence on capital gains tax and the interpretation of ‘extinguishment of rights’ under s.2(47), harmonizing it with the principles laid down in Kartikeya V. Sarabhai v. CIT[ii] and Anarkali Sarabhai v. CIT[iii].
Facts of the Case
The dispute arose from a capital reduction scheme implemented by Asianet News Network Pvt. Ltd. (‘ANNPL’), a company in which the respondent, M/s. Jupiter Capital Pvt. Ltd. (‘JCPL’), held a substantial shareholding. JCPL, an investment and financing company, had acquired 15,33,40,900 shares, representing 99.88% of ANNPL’s total share capital, through a combination of direct investments and purchases from third parties. Despite its significant investment, ANNPL faced severe financial distress, resulting in the erosion of its net worth. In response, ANNPL sought approval from the Bombay High Court under s. 66 of the Companies Act, 2013 (‘CA2013’), for a scheme of capital reduction to restructure its financial position.
The court-approved scheme reduced ANNPL’s total share capital from 15,35,05,750 shares to a mere 10,000 shares, significantly impacting JCPL’s holding, which was proportionately reduced from 15,33,40,900 shares to 9,988 shares. Despite the proportionality of ownership remaining constant at 99.88%, the reduction extinguished a significant portion of JCPL’s shareholding. In exchange for this reduction, ANNPL paid Rs.3,17,83,474 to JCPL, representing a partial return of capital.
Following this transaction, JCPL claimed a long-term capital loss of Rs.164,48,55,840 under s. 45 of the IT Act on the ground that the reduction and cancellation of its shares constituted a ‘transfer’ under s.2(47), resulting in the extinguishment of rights in a capital asset. However, the Assessing Officer (‘AO’) disallowed the claim, asserting that no ‘transfer’ had occurred because JCPL retained the same proportionate shareholding (99.88%) and the face value per share remained unchanged at Rs.10. The AO argued that mere reduction in the number of shares without a corresponding change in ownership rights could not constitute a ‘transfer’, and thus, no capital loss was allowable.
The Commissioner of Income Tax (Appeals) [‘CIT(A)’] upheld the AO’s disallowance, reasoning that extinguishment under s.2(47) requires a loss of proprietary rights, which was not evident since the petitioner’s ownership percentage remained unaffected. However, on further appeal, the ITAT reversed the findings, holding that the extinguishment of rights inherent in the reduced number of shares constitutes a ‘transfer’ under s.2(47), even if the proportional ownership remains the same. The Karnataka High Court, concurring with the ITAT, held that the capital reduction resulted in a quantifiable loss of rights and voting power, thereby validating the capital loss under s.45 of the IT Act.
The matter reached the Supreme Court upon a Special Leave Petition (SLP) filed by the Principal Commissioner of Income-tax (‘PCIT’), challenging the High Court’s interpretation of ‘transfer’ under s.2(47) and the eligibility of capital loss claims arising from share capital reduction schemes.
Decision of the Supreme Court
The Supreme Court upheld the decisions of the ITAT and the Karnataka High Court, conclusively holding that the reduction of share capital and consequent extinguishment of shares constitutes a ‘transfer’ under s.2(47) of the IT Act.
Applicability of ‘Transfer’ under s.2(47) of the IT Act
The Court relied extensively on Kartikeya V. Sarabhai (Supra) and Anarkali Sarabhai (Supra), emphasizing that under s.2(47)(ii), extinguishment of any rights in a capital asset constitutes a ‘transfer’, regardless of whether the shareholder retains some proportionate rights post-reduction. The Court clarified that a reduction in shareholding from 15,33,40,900 shares to 9,988 shares, accompanied by a monetary consideration, effectively extinguished a substantial part of Jupiter Capital’s rights.
Irrelevance of Proportionate Shareholding or Face Value
Rejecting the PCIT’s argument that there was no transfer since Jupiter Capital’s percentage holding (99.88%) and face value per share remained unchanged, the Court held that the number of shares represents distinct rights, including voting power and entitlement to dividends and liquidation proceeds. Thus, the reduction of 15,33,40,900 shares to 9,988 shares constituted an extinguishment of rights, satisfying the definition of ‘transfer’ under s.2(47).
Recognition of Capital Loss
The Court ruled that the consideration of Rs.3,17,83,474 received on capital reduction was part of the ‘transfer’ transaction, making the capital loss computed by Jupiter Capital allowable under s.45. It further held that under s.48, capital gains or losses must be computed even if the transfer results in a loss rather than a gain.
Conformity with the CA2013
The Supreme Court also recognized that under s.66 of the CA2013, a court-approved capital reduction is a valid corporate action that effectively transfers rights from shareholders in exchange for consideration, further aligning the transaction with the meaning of ‘transfer’ under s.2(47).
Simplified Concepts
a. Extinguishment of Rights
When a company reduces shares, shareholder rights over the extinguished portion are lost.
b. Inclusive Definition
S. 2(47) of the IT Act lists examples of transfers but is not exhaustive, covering diverse situations like relinquishment and extinguishment.
c. Capital Gains Tax
Tax levied on gains (or losses) from transferring a capital asset.
d. Share Capital Reduction
A corporate action to restructure finances by reducing the number of shares or returning capital to shareholders.
Our Analysis
This ruling is a watershed moment in capital gains tax jurisprudence, providing clarity on the definition of ‘transfer’ under s.2(47) of the IT Act, particularly concerning share capital reductions. The Supreme Court’s approach underscores that the ‘extinguishment of rights’ is not contingent on changes in shareholding percentage or face value but is rather determined by the actual loss of a quantifiable bundle of rights. This interpretation is aligned with established jurisprudence from Kartikeya v. Sarabhai (Supra), which emphasized that ‘extinguishment’ need not involve an exchange of property but only the surrender or destruction of rights.
The Court’s rejection of the PCIT’s reliance on proportionality of shareholding or face value retention is crucial, as it affirms that each share represents an independent capital asset carrying distinct rights, including voting power, dividend entitlement, and residual claims on liquidation.
The judgment also bridges the CA2013 with the IT Act, affirming that a court-approved capital reduction constitutes a valid ‘transfer’ under s.2(47). This harmonization of corporate and tax laws is significant for future disputes involving corporate reorganizations, mergers, and buy-backs, providing certainty to corporate taxpayers and investors.
From a policy perspective, this judgment offers much-needed tax certainty for companies engaging in restructuring or capital optimization. It prevents the PCIT from denying legitimate capital losses arising from capital reduction schemes, thus aligning tax outcomes with commercial realities. Additionally, it clarifies that the extinguishment of rights, even in intra-group restructurings, constitutes a taxable event, ensuring tax compliance without allowing form-over-substance arguments.
End Notes
[i] SLP No. 63 of 2025.
[ii] (1997) 7 SCC 524.
[iii] [(1982) 138 ITR 437 (Guj)].
Authored by Divya Pandey, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.