Supreme Court Clarifies Capital Loss on Share Reduction: Jupiter Capital Case (2025)

Date of the Judgment: January 2, 2025
Citation: 2025 INSC 38
Judges: Justice J.B. Pardiwala and Justice R. Mahadevan
Can a reduction in share capital lead to a capital loss for tax purposes? The Supreme Court of India recently addressed this question in a case involving Jupiter Capital Pvt. Ltd. The court clarified that a reduction in the number of shares held by an investor, even if the face value remains the same, can indeed result in a capital loss under the Income Tax Act, 1961. This judgment reaffirms the principle that the extinguishment of rights associated with shares constitutes a transfer of a capital asset. The judgment was delivered by a bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan.

Case Background

M/s. Jupiter Capital Pvt. Ltd., the respondent, is a company that invests in shares, leases, finances, and lends money. They had invested in Asianet News Network Pvt. Ltd. (ANNPL), a news telecasting company. Initially, Jupiter Capital purchased 14,95,44,130 shares of ANNPL, each with a face value of Rs. 10. Later, they acquired an additional 38,06,758 shares, bringing their total holding to 15,33,40,900 shares, which was 99.88% of ANNPL’s total shares.

ANNPL incurred losses, which eroded its net worth. To offset these losses, ANNPL petitioned the Bombay High Court to reduce its share capital. The High Court approved the reduction of share capital from 15,35,05,750 shares to 10,000 shares. Consequently, Jupiter Capital’s shareholding was reduced from 15,33,40,900 shares to 9,988 shares. The face value of each share remained at Rs. 10. The High Court also ordered ANNPL to pay Rs. 3,17,83,474 to Jupiter Capital as consideration.

Jupiter Capital claimed a long-term capital loss due to this reduction in share capital. However, the Assessing Officer (AO) disagreed. The AO argued that the reduction in shares did not constitute a transfer of a capital asset under Section 2(47) of the Income Tax Act, 1961. The AO noted that while the number of shares decreased, the face value and shareholding percentage remained the same. The AO stated that there was no extinguishment of rights of the shareholders as the assessee still held the proportionate percentage which it initially held.

Timeline

Course of Proceedings

The Assessing Officer (AO) initially rejected Jupiter Capital’s claim for capital loss. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that there was no effective transfer of shares resulting in a capital loss. The CIT(A) distinguished the facts from the Supreme Court’s decision in Kartikeya V. Sarabhai v. Commissioner of Income Tax [(1997) 7 SCC 524], arguing that any extinguishment of rights would involve parting with the sale of percentage of shares to another party or divesting rights therein.

However, the Income Tax Appellate Tribunal (ITAT) reversed the CIT(A)’s order, allowing Jupiter Capital’s appeal. The ITAT found that the Supreme Court’s decision in Kartikeya V. Sarabhai was applicable to this case. The ITAT noted that although the face value of the shares remained the same, the number of shares held by Jupiter Capital was significantly reduced, leading to an extinguishment of rights. The ITAT also noted that Jupiter Capital received Rs. 3,17,83,474 in addition to the reduced number of shares.

The Revenue then appealed to the High Court of Karnataka, which dismissed the appeal and affirmed the ITAT’s order. The High Court agreed with the ITAT that the reduction in the number of shares constituted a transfer under Section 2(47) of the Income Tax Act, 1961, and that the case was similar to Kartikeya V. Sarabhai. The High Court noted that the value of the shares was significantly reduced, even though the face value remained the same.

Legal Framework

The core legal issue revolves around the interpretation of “transfer” under Section 2(47) of the Income Tax Act, 1961. This section defines “transfer” in relation to a capital asset and includes:

• (i) the sale, exchange or relinquishment of the asset; or
• (ii) the extinguishment of any rights therein; or
• (iii) the compulsory acquisition thereof under any law; or
• (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock -in-trade or a business carried on by him, such conversion or treatment; or
• (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53 -A of the Transfer of Property Act, 1882 (4 of 1882); or
• (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Section 45 of the Income Tax Act, 1961, states that any profits or gains from the transfer of a capital asset are chargeable to income tax under the head “Capital gains.”

The Supreme Court also considered Section 66 of the Companies Act, 2013, which allows a company to reduce its share capital. The court noted that one way to reduce share capital is by reducing the face value of shares.

Arguments

Arguments by the Revenue:

• The Revenue contended that the reduction in shares did not result in a “transfer” under Section 2(47) of the Income Tax Act, 1961.
• They argued that while the number of shares decreased, the face value of each share and the shareholding percentage remained the same.
• The Revenue submitted that there was no extinguishment of rights of the shareholder, as the assessee still held the same proportionate percentage of shares.
• The Revenue argued that the decision in Kartikeya V. Sarabhai was not applicable because in that case, there was a reduction in the face value of the shares, whereas, in the present case, there was only a reduction in the number of shares.

Arguments by the Assessee (Jupiter Capital):

• Jupiter Capital argued that the reduction in the number of shares constituted a “transfer” under Section 2(47) of the Income Tax Act, 1961, as it led to the extinguishment of rights associated with the shares.
• They contended that the reduction in the number of shares resulted in a capital loss, which should be allowed for tax purposes.
• Jupiter Capital relied on the Supreme Court’s decision in Kartikeya V. Sarabhai, arguing that it was squarely applicable to the present case.
• They submitted that the reduction in the number of shares led to a significant reduction in the value of their investment, despite the face value of each share remaining the same.

Innovativeness of the Argument: The assessee successfully argued that the reduction in the number of shares, even with the same face value, resulted in an extinguishment of rights, which was a novel argument in the context of the case.

Issues Framed by the Supreme Court

The Supreme Court considered the following substantial question of law:

1. Whether on the facts and circumstances of the case, the Tribunal is right in law in setting aside the disallowance of capital loss claimed by the assessee of Rs.164,48,55,840/- by holding that there is extinguishment of rights of 153340900 shares when no such extinguishment of rights is made out by the assessee as required under section 2(47) of the Act and there is no reduction in the face value of share.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Cases:

• Kartikeya V. Sarabhai v. Commissioner of Income Tax [(1997) 7 SCC 524] (Supreme Court of India): The court held that the extinguishment of rights in a capital asset amounts to a transfer under Section 2(47) of the Income Tax Act, 1961. This case established that a reduction in the face value of shares results in a transfer.
• Anarkali Sarabhai v. CIT [(1982) 138 ITR 437 (Guj)] (Gujarat High Court): This case, followed by the Supreme Court in Anarkali Sarabhai v. CIT [(1997) 3 SCC 238], held that the difference between the face value received by a shareholder and the price paid for preference shares was subject to capital gains tax.
• Anarkali Sarabhai v. CIT [(1997) 3 SCC 238] (Supreme Court of India): The Supreme Court upheld the Gujarat High Court’s decision, stating that the redemption of preference shares is a sale and falls within the definition of “transfer” under Section 2(47) of the Income Tax Act, 1961.
• Commissioner of Income Tax v. Vania Silk Mills (P.) Ltd. [(1977) 107 ITR 300 (Guj)] (Gujarat High Court): The court clarified that the expression “extinguishment of any right therein” is of wide import and covers every possible transaction which results in the destruction of any of the rights in a capital asset.
• Commissioner of Income-Tax v. Jaykrishna Harivallabhdas [(1998) 231 ITR 108] (Gujarat High Court): The court clarified that the receipt of consideration is not a condition precedent for the computation of capital gains.
• Sath Gwaldas Mathuradas Mohata Trust v. CIT [(1987) 165 ITR 620 (Bom)] (Bombay High Court): The court held that the amount received on redemption of preference shares was liable to tax under the head “capital gains”.

Legal Provisions:

• Section 2(47) of the Income Tax Act, 1961: Defines “transfer” in relation to a capital asset.
• Section 45 of the Income Tax Act, 1961: States that any profits or gains from the transfer of a capital asset are chargeable to income tax under the head “Capital gains.”
• Section 66 of the Companies Act, 2013: Allows a company to reduce its share capital.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 2(47) of the Income Tax Act, 1961, and the principle that the extinguishment of any right in a capital asset amounts to a transfer. The court emphasized that even though the face value of the shares remained the same, the reduction in the number of shares held by the assessee led to a proportionate reduction in the rights associated with those shares. The court also relied on previous judgments which established that the reduction of share capital is a form of transfer.

Logical Reasoning:

The court considered the argument that the face value of the shares remained the same but rejected it. The court reasoned that the reduction in the number of shares led to a proportionate reduction in the rights associated with those shares, which amounts to a transfer under Section 2(47) of the Income Tax Act, 1961. The court also considered the fact that the assessee received a sum of Rs. 3,17,83,474 as consideration, which further supported the argument that the reduction in shares was a transfer.

The Supreme Court stated, “Section 2(47) which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset.” The court further added, “While, it is no doubt true that the appellant continues to remain a share holder of the company even with the reduction of share capital but it is not possible to accept the contention that there has been no extinguishment of any part of his right as a shareholder qua the company.” The court also observed, “When as a result of the reducing of the face value of the shares, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital.”

There were no dissenting opinions in this case. The bench of Justice J.B. Pardiwala and Justice R. Mahadevan unanimously agreed on the decision.

The court’s decision has significant implications for future cases involving share capital reduction. It clarifies that the reduction in the number of shares, even without a change in face value, can lead to a capital loss. This decision will impact how companies and investors treat share capital reductions for tax purposes.

The court did not introduce any new doctrines or legal principles but reinforced the existing interpretation of Section 2(47) of the Income Tax Act, 1961.

Key Takeaways

• ✓ Reduction in the number of shares, even if the face value remains the same, can result in a capital loss under the Income Tax Act, 1961.
• ✓ The extinguishment of rights associated with shares is considered a transfer of a capital asset.
• ✓ Companies and investors should consider the tax implications of share capital reductions.
• ✓ The decision reinforces the principle that the term “transfer” under Section 2(47) is inclusive and covers various forms of transactions.

This judgment clarifies that a reduction in share capital, even if the face value remains the same, can lead to a capital loss for tax purposes. This decision will have a significant impact on how companies and investors treat share capital reductions.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the reduction in the number of shares held by an assessee, even if the face value of the shares remains the same, amounts to a transfer under Section 2(47) of the Income Tax Act, 1961, due to the extinguishment of rights associated with those shares. This decision reinforces the existing position of law by reiterating the principle established in Kartikeya V. Sarabhai v. Commissioner of Income Tax [(1997) 7 SCC 524], that the extinguishment of rights in a capital asset amounts to a transfer. This judgment clarifies that the definition of “transfer” under Section 2(47) is inclusive and covers various forms of transactions, including the reduction of share capital.

Conclusion

The Supreme Court dismissed the Revenue’s petition, affirming the High Court’s decision that a reduction in share capital, even when the face value of shares remains unchanged, constitutes a transfer under Section 2(47) of the Income Tax Act, 1961. This ruling allows Jupiter Capital to claim a capital loss, reinforcing the principle that the extinguishment of rights associated with a capital asset is a form of transfer. This decision provides clarity on the tax implications of share capital reductions and reinforces the inclusive nature of the definition of “transfer” under the Income Tax Act, 1961.