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TMI Blog2020 (2) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... dent of United States of America (USA). It made investments to the extent of 64769142 equity shares of face value of Rs. 10 each of Carestream Health India Private Limited (CHIPL), its wholly owned Indian Subsidiary. During the Asst Year 2011-12, CHIPL undertook a capital reduction of its share capital pursuant to a scheme approved by the Hon'ble Bombay High Court. Under the capital reduction scheme, 29133280 share (out of total holding of 6,47,69,142 shares) held by the assessee were cancelled and total consideration amounting to Rs. 39,99,99,934/- was received by assessee towards such cancellation / capital reduction. This consideration sum of Rs. 39,99,99,934/- worked out to Rs. 13.73 for every share cancelled by CHIPL. This was also supported by an independent share valuation report. As per the provisions of section 2(22)(d) of the Act, out of the total consideration of Rs. 39,99,99,934/- , the consideration to the extent of accumulated profits of CHIPL i.e Rs. 10,33,11,000/- was considered as deemed dividend in the hands of assessee. Accordingly, Dividend Distribution Tax on such deemed dividend @ 16.609% amounting to Rs. 1,71,58,924/- (10,33,11,000 * 16.609%) was paid by CHIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be received or receivable on transfer of such a capital asset. Hence the fundamental issue that would need to be analysed is whether reduction of share capital can be regarded as a 'transfer' of a capital asset to trigger the capital gains tax provisions. b) As per the provisions of the Act, 'transfer' in relation to capital asset is defined u/s 2(47) of the Act as under:- "transfer' in relation to capital asset includes - (i) the sale, exchange or relinquishiment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) ..................... (iv) ...................... (v) ......................... (vi) .........................." The assessee submitted that the 'asset' under consideration is the 'shares' of CHIPL which had extinguished due to the capital reduction scheme. The ld AO had erroneously considered the 'percentage of holding' of CHI in CHIPL as the 'asset' for the purposes of section 2(47) of the Act which is contrary to the provisions and scheme of the Act. c) The assessee submitted that when the share capital is reduced, the right of the shareholder to the dividend on his share capital and the right to share in the distribution of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital reduction. Pursuant to this direction of the ld DRP, the ld AO passed the final assessment order on 23.12.2015 disallowing the long term capital loss of Rs. 3,64,84,092/- claimed by the assessee in the return of income. Aggrieved, the assessee is in appeal before us. 7. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements relied upon by both the parties at the time of hearing before us. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated herein for the sake of brevity. At the outset, we find that the assessee had incurred capital loss only due to claim of indexation benefit and not otherwise. The benefit of indexation is provided by the statute and hence there cannot be any malafide intention that could be attributed on the assessee in claiming the long term capital loss in the subject mentioned transaction. We find that the ld AO had held that there is no transfer pursuant to reduction of capital. But it is a fact that the assessee had indeed received a sale consideration of Rs. 39.99 crores towards reduction of capital . This sale consideration was not soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that the Special Bench of Mumbai Tribunal supra also placed reliance on the decision of Hon'ble Supreme Court in the case of CIT vs Rasiklal Maneklal (HUF) reported in 177 ITR 198 (SC). But we find that this decision of Hon'ble Supreme Court was duly considered in yet another decision of Hon'ble Supreme Court in the case of CIT vs Grace Collis reported in 248 ITR 323 (SC). The relevant question in dispute before the Hon'ble Supreme Court was as under:- "3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 49(2) of the I.T.Act, 1961 applied to the sale of the shares of the assessees in Collis Line Pvt Ltd., which were obtained by the assessees on the amalgamation of Ambassador Steamship Pvt. Ltd. with Collis Line Pvt Ltd?" The facts of that case are briefly narrated as under:- The assessee was a shareholder of Ambassador Steamship Pvt. Ltd. The said company, viz. Ambassador Steamship Pvt. Ltd. ('the amalgamating company') was amalgamated with Collis Line Pvt. Ltd. ('the amalgamated company'), pursuant to which the shareholders in the amalgamating company were issued 14 equity shares of Rs. 100 each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read, the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer. 16. This being so, the rights of the assessees in the capital asset, being their shares in the amalgamating company, stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company. There was, therefore, a transfer of the shares in the amalgamating company with the meaning of section 2(47). It was, therefore, a transaction to which section 47(vii) applied and, consequently, the cost to the assessees of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of section 49(2), that is to say, the cost was deemed to be the cost of the acquisition by the assessees of their shares in the amalgamating company." 7.2. We find that the case of the assessee is that reduction of capital had resulted in 'Extinguishment of rights in shares' and we find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 500 per share, and secondly, when the face value was reduced from Rs. 500 per share to Rs. 50 per share. The Assessing Officer in that case held that a sum of Rs. 450 per share, which was received by the assessee in 1966 was subject to capital gains. However, the assessee contended that such reduction of the face value did not result in "transfer" as per the provisions of section 2(47). In this regard, the Hon'ble Supreme Court held as under: "10. Section 2(47) which is an inclusive definition, inter alia, provides that retinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While, it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of a share capital, 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. It is not necessary that for a capital gain to arise there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47). Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in effect the company buys back the preference shares from the shareholders. Further, referring to the provisions of the Companies Act, it held that the reduction of preference shares by a company was a sale and would squarely come within the phrase 'sale, exchange or relinquishment1 of an asset under section 2(47). It was also held that the definition of word 'transfer' under section 2(47) was not an exhaustive definition and that sub-section (1) of clause (47) of section 2 implies that parting with any capital asset for gain would be taxable under section 45 of the Act. In this connection, it was noted that when preference shares are redeemed by the company, the shareholder has to abandon or surrender the shares in order to get the amount of money in lieu thereof. 14. In our opinion, the aforesaid decision of this Court in Anarkali Sarabhai's case (supra) is applicable in the instant case. The only difference in the present case and Anarkali Sarabhai's case (supra) is that whereas in Anarkali Sarabhai's case (supra), preference shares were redeemed in entirety, in the present case there has been a reduction in the share capital inasmuch as the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this judgment, the property and money received by the assessee from the company on the reduction in the face value of his shares is a capital receipt subject to section 45. 11. However, in the case of Kartikeya V. Sarabhai (supra) this Court did not consider the provisions of section 2(22)(d) in the context of capital gains arising on a reduction of the share capital. Under section 2(22)(d) any distribution to its shareholders by a company on the reduction of its capital is deemed to be a distribution of dividend to the extent that the company possesses accumulated profits - whether such profits have been capitalised or not. Therefore, any distribution which is made by a company on a reduction of its share capital which can be correlated with the company's accumulated profits (whether capitalised or not), will be dividend in the hands of the assessee. Therefore, it will have to be treated as income of the assessee and taxed accordingly. 12. It is only when any distribution is made which is over and above the accumulated profits of the company (capitalised or otherwise) that the question of a capital receipt in the hands of a shareholder, arises. The original cost to tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench was concerned with a case of substitution of one kind of share with another kind of share, which has been received by the assessee because of its rights to the original shares on the reduction of capital. The assessee got the new shares on the strength of its rights with the old shares and, therefore, same would not amount to transfer. For this purpose, reference has been made to section 55(2)(v) of the Act. According to the Special Bench, the assessee therein will take the cost of acquisition of the original shares as the cost of substituted shares, when capital gains are to be computed for the new shares. It is submitted that in the present case, section 55(2)(v) has no application. The cost of acquisition of 2,91,33,280 shares shall be of no relevance in the assessee's case at any later stage. In para 23 at page 13 of the decision of the Special Bench, it has been observed that though under the concept of joint stock company, the joint stock company is having independent legal entity but for all practical purposes, the company is always owned by the shareholders. The effective share of assessee in the assets of the company would remain the same immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. AR placed on record a copy of Co-ordinate Bench decision of Bangalore Tribunal in the case of Jupiter Capital Pvt. Ltd. vs. Assistant Commissioner of Income Tax in ITA No.445/Bang/2018 dated 29/11/2018 wherein it was held that reduction in capital amounts to "transfer" and is subject to capital gains. The facts of the case before the Bangalore Tribunal are that the assessee held 15,33,40,900 equity shares of a face value of Rs. 10 each in its 99.89% subsidiary company. The subsidiary company obtained an order from the Hon'ble Bombay High Court for reduction in share capital from 15,33,40,900 to 10,000 and consequently the share of the assessee was reduced proportionately from 15,35,05,750 (99.89%) to 9,988 (99.89%). The face value of the shares remained the same at Rs. 10 even after the reduction. As a result of the above, the assessee claimed a capital loss of Rs. 164.49 crores (computed as the difference between the consideration of Rs. 3.18 crores received and the indexed cost of acquisition of Rs. 167.66 crores), which was disallowed by the Assessing Officer as well as the CIT(A) on the ground that reduction of capital does not amount to "transfer" as well the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envisaged by s. 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under s. 45 of the Act. When, as a result of the reducing of the face value of the share, 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. Whereas the appellant had a right to dividend on a capital of Rs. 500 per share that stood reduced to his receiving dividend on Rs. 50 per share. Similarly, if the liquidation was to take place whereas he originally had a right to Rs. 500 per share, now his right stood reduced to receiving Rs. 50 per share only. Even though the appellant continues to remain a shareholder his right as a holder of those shares clearly stands reduced with the reduction in the share capital." 6. From this Para of this judgment of Hon'ble Apex Court, it is seen that it is held by Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd by respectfully following this judgment of Hon'ble Apex Court, we hold that the assessee's claim for capital loss on account of reduction in share capital in ANNPL is allowable." 7.13. We find that the facts in dispute before us are identical to the facts before the Bangalore Tribunal. TO SUM UP:- 7.14. In the assessee's case (a) capital reduction was effected by cancellation/ extinguishment of certain number of shares; (b) a consideration was received pursuant to such capital reduction; (c) the share of the assessee in the investee company remained the same even after the capital reduction. 7.15. In view of our aforesaid elaborate observations, we hold that the loss arising to the assessee for cancellation of its shares in CHIPL pursuant to reduction of capital in the sum of Rs. 3,64,84,092/- should be allowed as longterm capital loss eligible to be carried forward to subsequent years. Accordingly, the grounds raised by the assessee in this regard are allowed. 8. The ground No.5 raised by the assessee is with regard to initiation of penalty proceedings u/s.271(1)(c) of the Act, it would be premature for adjudication at this stage. 9. In the result, the appeal o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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