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TMI Blog2024 (1) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... e, based upon a different opinion formed by him. c) The CIT failed to confirm, though raised by the appellant, that the proceedings u/s 263 were not based on a suggestion from audit and hence the Order is bad in law and requires to be quashed. 2) Computation of Income from Capital Gains a) The CIT erred in concluding that the Scheme of Arrangement and Reconstruction was not a case of Reduction of Capital. b) The CIT erred in concluding that the computation mechanism under section 48 fails by holding that to compute capital gains there must be an element of consideration received or accruing to the assessee. The CIT erred in ignoring that the Supreme Court in CIT v D. P. Sandu Bros. Chembur P Ltd 273 ITR 1 has held that, for S 48 to apply, consideration should be capable of being determined. 3) Cost of Acquisition of remaining shares. The CIT erred in failing to note the provisions of S 55(2)(v)(b) and in not confirming that the cost of remaining shares would include the cost of the shares cancelled on Reduction." 2. The assessee has also raised an additional ground which is reproduced as under:- "The Order passed under Section 263 of the Income Tax Act, 1961 (the Act) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital was 04-12- 2008; (e) in terms of this particular Scheme, no consideration was payable to the shareholders in respect of the shares which were to be cancelled. 5. Thus, as a result, assessee's shareholding of 288,13,17,286 equity shares in TTSL was reduced to half, i.e., 144,06,58,643, that is, equity shares were cancelled as a result of reduction of capital pursuant to the scheme of arrangement u/s. 100 and 391 of the then Companies Act, 1956. The said scheme was approved by the Hon'ble Delhi High Court vide judgment and order dated 07/11/2008 and this resulted in cancellation of interalia certain shares of TTLS as specified in the scheme. The scheme of arrangement and restructuring has been placed before us during the course of the hearing. The relevant portion of the said scheme duly approved by the Hon'ble High Court reads as under:- 4.1.2 The paid up equity share capital of TTSL be reduced by way of reduction in the number of equity shares of Rs 10/- each from 634,71,52,316 shares to 317,35,76,158 shares resulting in the total reduction of the paid up equity share capital of TTSL from. Rs. 6347,15,23,160/- comprising of 634,71,52,316 equity shares of Rs. 10 eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue in connection with the assessee's claim for allowability of long term capital loss of Rs. 2046.97 Crores. It has been stated that in response to the specific query raised in the notices by the ld. AO assessee has given the details, the computation of income and working of its capital gain providing necessary details before the ld. AO and also how the claim of the assessee for long term capital losses is allowable in view of the decision of the Hon'ble Supreme Court in the case of Kartikeya Sarabhai reported in 228 ITR 163 (SC); CIT vs. G. Narasimhan reported in 236 ITR 327 and also the judgement of Hon'ble Supreme Court in the case of D.P. Sandhu Brothers Chembur Pvt. Ltd. reported in 273 ITR 1(SC). It was specifically pointed out that reduction of capital, i.e., loss of shares tantamount to transfer u/s. 2(47) of the Act and it was held that computation provision can only be passed only if it was not possible to conceive of any element of cost. After the assessee's reply, ld. AO again issued a show-cause notice dated 13/01/2012 which was on the basis of assessee's contention that long term capital loss arose by virtue of cancellation of Rs. 144.06 Crores shares of TTSL w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT vs Mohanbhai Pamabhai 1971(9) TMI - wherein the High Court has held that section 45 is the charging section and it undoubtedly provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the heading 'Capital Gains". But, section 48 shows that the transfer that is contemplated by Section 45 is a transfer, if consideration is received by the assessee or accrues to the assessee. (v) The Assessing Officer has failed to consider the decision of Mumbai ITAT Bench, in the case of Bennett Coleman and Co. Ltd. Vs. Addl.CIT 2011(9) TMI-ITAT, Mumbai, Special Branch, wherein the ITAT had considered the judgments given by the Supreme Court in the case of Kartikeya V Sarabhai and CIT vs G. Naralmhan for computation of capital gain on reduction of capital and held that if the earlier shares have been replaced or substituted by new shares then the same would not amount to transfer at all. It would be merely a case of substitution of one kind of share with another kind of share which has been received by the assessee because of the rights of the original shares on the reduction of capital. The transfer of a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the paid up equity share capital of TSSL be reduced in the number of equity shares of Rs 10/- each from 634,71,52,316 shares to 317,35,76,158 shares resulting in total reduction of the paid up equity share capital of TTSL from 6347,15,23,160/- comprising of 634,17,52,316 equity shares of Rs 10/- each to 317,35,76,158 equity shares of Rs 10/- each to Rs 3173,57,61,580. Therefore an amount Rs. 3173,57,61,580 would be reduced from the accumulated debit balance in profit & loss account and unabsorbed depreciation of TTSL from the (of Rs 1967,7161645 tem available balance in Share premium Account) mentioned in clause 4.11 in the following manner. Amount available from extinguishment of Share Capital Rs 3173,57,61,580/- Less: Write off against book loss Rs.1586,78,80,790/- Less Write off against unabsorbed depreciation Rs 1586,78,80,790/- Balance available Nil 6.1 Thus amount Rs 3173,57,61,580 available from extinguishment of share capital has been utilized by TTSL for write off of book loss and unabsorbed depreciation to the extent of Rs 3173,57,61,580/-. Section 48 provides for the mode of computation of capital gains by enacting that the Income chargeable to tax as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in it? Once rights cannot be there, there cannot be extinguishment of rights? And further, how there can be consideration on extinguishment of rights? In case of effaced capital asset the consideration received or accrued will be nil (non existing consideration) and not 'zero'. The AO has committed a mistake because in the case of assessee there cannot be two views on the issue of computation of LTCL. There is only one view one can hold in given facts and circumstances of the case and it is that no consideration is received or receivable Since consideration is neither received nor receivable as the balance sheet of TTSL is shrunk by reduction of book loss and unabsorbed depreciation on asset side and share capital on the liability side, the assessee cannot expect any consideration on accrual basis on effacement of shares. Therefore, computation provisions u/s 48 of the Act 6.2 The AO in the case of Tata Power Ltd AY 2009-10 disallowed the loss arising in respect to shares of TTSL for AY 2009-10 but the AO did not consider the same Issue in the case TATA Sons Ltd. It is a mistake the AO has committed in the case of the assessee, which has resulted in loss to revenue. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also explaining the law in light of various Hon'ble Supreme Court judgments stating that in the case of reduction of the capital, amounts to transfer and not only that the claim of capital loss is also allowed. Once, the AO after considering these facts and the proposition of law laid down by the various statements of the Hon'ble Supreme Court has accepted the long term capital loss, then ld. PCIT cannot take a different view holding that view of the ld. AO is incorrect. He referred to various judgments on this proposition that if AO has taken one view which is possible view in law then CIT cannot revise or cancel the assessment order within the scope of section 263. 15. Mr. Mistry further submitted that, ld. PCIT has clearly erred and failed to consider that it is possible in law for schemes of reduction of capital, similar to the scheme in the present case, to provide for payment of consideration to the holders of the shares. He has also filed a table giving three examples of cases where reduction of capital had taken place by cancellation of shares and one of them was M/s. Jupiter Capital Private Limited, wherein consideration payable to the holder of the shares was cancelle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 294 and D. P Sandu Brothers Chembur Pvt. Ltd. 273 ITR 1 (SC), wherein the correct principle laid down by the courts is that the capital gain computation provisions may be held not to apply, if and only if, any part thereof cannot conceivably be attracted. The correct principle is that if it is impossible to conceive of consideration as a result of the transfer (here the reduction in the capital under the Scheme), then perhaps, it could be urged that the provisions of section 48 of the Act do not apply. However, in the instant case, although no consideration has been received by or has accrued to the appellant, it is certainly possible to conceive of consideration being received or receivable in such cases. 17. Mr. Mistry further submitted that there is a vast difference between a case where no consideration, i.e., cost or any other element is conceivable in a transaction, as opposed to a case where zero or nil consideration is received in a given case. He further submitted that in respect of ld. PCIT's observation that scheme is not a reduction in capital but an extinguishment / effacement has no significance, because there is no such distinction that exists in law in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the asset so transferred. (e) On a plain reading of the provisions, it is indisputable that a capital loss of Rs 2046.97 crores has arisen as a result of the transfer of the said shares in TTSL and consequently, allowability of the said capital loss is certainly a possible view and accordingly, the provisions of section 263 of the Act could not be invoked by the ld. PCIT, (f) That the view of the ld. PCIT that, since in the present case, no consideration was received by the assessee on the reduction of capital under the Scheme, the provisions of sections 45 to 48 could not be applied - cannot be termed to be a correct, irrefutable or definitive view, and the same is not supported by any statutory provision or principle of law or binding judicial precedent. Accordingly, there is no jurisdiction empowering the CIT to invoke section 263 of the Act. In fact, the decision of the Gujarat High Court in the matter of CIT Vs. Jaykrishna Harivallabhdas (1997) 231 ITR 108 (Guj)] holds in favour of the assessee's contention that the capital loss must be computed in cases such as the present one even where no consideration has been received on the transfer of a capital asset. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l loss is allowable whether or not any consideration is received /receivable by the shareholder is supported in the matter of Jupiter Capital Pvt. Ltd Vs. ACIT (Bangalore ITAT) (ITA No. 445/Bang/2018) and Ginners & Pressers Ltd. Vs. ITO (Mumbai Tribunal) (ITA No 398/Mum/2007). 21. In so far as reliance placed by the ld. PCIT on the decision of the ITAT Special Bench in the case of Bennett Coleman & Co. Ltd. reported in (2011) 12 ITR(T) 97, Mr. Mistry submitted that same is not applicable in the following reasons:- a) the present case is one where section 263 of the Act has been invoked. The provision cannot be applied where a possible view is taken by the AO In the special bench decision of Bennett Coleman there was dissenting order and hence, clearly two views are possible and therefore the same has no application in the present case. (b) the facts in the Bennett Coleman case was that the assessee was holding investments in equity shares of another company wherein the paid-up capital was reduced to Rs. 5/- from Rs. 10/- per share and subsequently, two equity shares of Rs 5/- each were consolidated into one equity share of Rs. 10/- each. The holders of the original shares rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various places. The judgments which have been relied upon by the assessee before the PCIT and by the ld. Sr. Counsel are not applicable in the facts of the case, because none of the case pertains to loss on reduction of capital. Even if it tantamount to transfer u/s. 2(47), then also the computation mechanism fails because there is no cost. Section 48 provides that transfer as contemplated u/s. 45 applies only if consideration received by the assessee or accrues to the assessee. Here in this case, ld. AO has failed to consider that assessee did not receive nor it showed accrual of any such consideration in its books of accounts. The transfer of a capital asset, in order to attract the capital gain, must be a transfer as a result of which consideration is received by the assessee accrued to the assessee and if there is no consideration received by the assessee or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 is inapplicable and it is not possible to compute profits or gains arising from the transfer of the capital asset. This precise issue and law has been well settled way back by the decision of the Hon'ble Supreme Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court held that there was neither an 'exchange' nor a 'relinquishment' in this transaction. The Hon'ble Supreme Court observed as under: "An "exchange" involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. A "relinquishment" takes place when the owner withdraws himself from the property and abandons his rights thereto. It presumes that the property continues to exist after the relinquishment. Where, upon amalgamation, the company in which the assessee holds shares stand dissolved, there is no "relinquishment" by the assessee." The apex court had also observed that in case of exchange that one person transfers a property to another person in exchange of another property, the property continues to be in existence. In that case, shares of S. company had ceased to be in existence and therefore the transaction did not involve any transfer. Similarly in the case before us if argument of assessee is accepted then the older shares with different ISIN number ceases to exist and new shares with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is reduction of shares and upon payment by company to compensate the value equivalent to reduction, apart from the effect on shareholders' rights to vote etc., a transfer can be said to have taken place. However, the question is whether the same can still attract sec.45? The answer is given by the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra). In this case the issue was whether there is a transfer if a particular partner retired from the firm and his share in the partnership was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liability and prior charges. The ITO was of the opinion that the amount received by the assessee to the extent which included his proportionate share in the value of the goodwill is liable to be taxed as capital gain. When the matter travelled to the High Court their lordships observed, at pages 404 & 405, as under: But, even if we are wrong in taking this view and the correct view is that when a partner retires from the partnership his interest in the partnership assets is extinguished and there was, therefore, in the present case, "transfer" of interest of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a transfer had taken place, unless and until some consideration is received, the transfer of such asset would not attract the provisions of sec.45. The Revenue has challenged this position in appeal before the Hon'ble Supreme Court and the court dismissed the appeal of the Revenue in Addl. CIT v. Mohanbhai & Pamabhai [1987] 165 ITR 166 (SC) in view of the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. Decision of Hon'ble Gujarat High Court was not approved by the Hon'ble Supreme Court, while adjudicating the case of B.C. Srinivasa Setty (supra) on another point i.e. whether building of goodwill in a business which did not cost anything could still be regarded as capital asset for the purpose of charging the same under the head 'capital gains'. However, as far as proposition that a transfer cannot be subjected to provisions of sec.45 in the absence of consideration still remains valid. It may not be out of place to refer to the commentary on Income Tax Law, Fifth Edition, Volume- 2 page 2772, by Chaturvedi & Pithisaria wherein it has been observed as under: "Transfers not chargeable.-It is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital by way of transfer of personal capital assets into the firm would constitute transfer. In respect of the 2nd and 3rd arguments the Hon'ble Supreme Court observed at pages 520 to 522 as under: "On the basis of that proposition learned counsel for the assessee has urged that s.45 is not attracted in the present case because to compute the profits or gains under s.48 the value of the consideration received by the assessee or accruing to him as a result of the transfer of the capital asset must be capable of ascertainment in monetary terms. The consideration for the transfer of the personal assets is the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of a share in the net partnership assets as on the date of the dissolution or retirement after a deduction of liabilities and prior charges. The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is notional value only, intended to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue of the new shares the value of her old shares depreciated and that as a result of the depreciation she suffered a capital loss in the old shares which she was entitled to set off against the capital gain of Rs. 45,262.50. In the alternative she claimed that the right to receive the new shares was a right which was embedded in her old shares and consequently when she realised the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. This Court upheld the claim of the appellant that she was entitled to deduct from the sum of Rs. 45,262.50 the loss suffered by way of depreciation in the old shares. The Court proceeded on the basis that in working out capital gain or loss, the principles which had to be applied are those which are a part of commercial practice or which an ordinary man of business would resort to when making computation for his business purposes. It will be noticed that this principle was applied by the Court in a case where a capital gain was sought to be taxed under the Income Tax Act. That profits or gains under the Income Tax Act must be un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 45. The court observed that whole value of the compensation could not be charged u/s. 56 because same was chargeable u/s. 45 and the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was applied. It was also noted that, in fact, sec.55 (2)(a) itself was amended by Finance Act, 1994 w.e.f. 1-04-1995 and the cost of acquisition of tenancy rights was to be taken at nil, therefore, this provision could not be applied retrospectively. Thus, it is clear that the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was followed in principle wherein it has been held that if computation provision of sec.48 fails, then such transaction cannot be brought to tax u/s. 45. The court specifically declined to entertain the argument that cost of tenancy right should be taken at zero because that would amount to charging of capital value of the asset and not capital gain. In the case of reduction of capital nothing moves from the coffers of the company and, therefore, it is a simple case of no consideration which cannot be substituted to zero. It is pertinent to note that after the decision of Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble court vide para which reads as under: "4. So far as the third question is concerned, the same is covered by the ratio of the decision of the Supreme Court in B.C. Srinivasa Setty [1981] 128 ITR 294. The answer to the question is, therefore, self-evident. Questions Nos. l, 2 and 3 are not preferable questions of law." Thus, from the above it is clear that when no consideration is received, no loss can be allowed in view of the principles laid down by the Hon'ble Supreme Court in the case of B. C. Srinivasa Setty (supra) which was followed in above decision. In fact, assessee has not suffered any loss on reduction of share capital which we shall see little later. 22. .................................................................................... 23. As pointed out by Ld. DR, assessee's percentage of share holding, immediately before reduction of share capital and immediately after such reduction, remained the same. Therefore, assessee was holding 74.9% shares of TGL immediately before the reduction of capital and also immediately after the reduction of capital. Such capital has been reduced not only in the case of assessee by TGL but the same has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding on the Special Bench. In fact such profit or loss arising out of issue of bonus shares or reduction of capital is only a notional profit or notional loss and this concept has been approved by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia (supra) and further confirmed by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai (supra). In the case of MissDhun Dadabhoy Kapadia (supra) the facts noted by the Hon'ble apex court are as under: The appellant was holding 710 ordinary shares of the Tata Iron and Steel Company Ltd. (hereinafter referred to as "the company"), which she had inherited some tine prior to 1st January, 1954, as an investment. It was admitted that she was not a dealer in shares. Under a special resolution passed at an extraordinary general meeting of the company oil 12th March, 1956, the appellant, as holder of 710 ordinary shares, became entitled to purchase new ordinary shares issued in the ratio of one new ordinary share for one existing ordinary share as held on 26th April, 1956. In pursuance of this resolution, an offer was made to the appellant by the company by its circular letter dated 15th May, 1956, that she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares was a right which was embedded in her old ordinary shares, and, consequently, when she realised the sum of Rs. 45,262,50P by selling her right, the capital gain should be computed after deducting from this amount realised the value of the embedded right which became liquidated. The value of that right, according to the appellant, should be calculated in accordance with the principles of accountancy, as laid down by various authors on the subject to be applied in such Situations. Even if this principle be accepted, the amount taxable as capital gain in her hands would have to be reduced by at least a sum of Rs. 37,630, if not more. The contention of the assessee was rejected by the income tax authorities as well as by the Tribunal and the High Court confirmed the decision of the Tribunal. When the matter travelled to Hon'ble Supreme Court, the apex court observed as under: "In order to answer the question referred to the High Court, it appears to us that the nature of the transaction, which resulted in this receipt of Rs. 45,262.50P. by the appellant, must be analysed and properly understood. The amount, it is the agreed case of the parties, was a capital gain. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the transaction, which consisted of issue of new shares together with her renouncement of the right to receive new shares and make some money thereby, could only be properly computed in the manner indicated by us above. In the alternative, the use can be examined in another aspect. At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the right to obtain 710 new shares. When she sold this right to obtain 710 new shares and realised the sum of Rs. 45,262.50P., she capitalised that right and converted it into money. The value of the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment. Later on, assessee exercised the option only in respect of 40,000 warrants and the right with respect to 1,50,000 warrants was extinguished, which was claimed as short term capital loss. This claim of loss was rejected by the Tribunal because no consideration was received by following the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). In any case, in addition to the above detailed discussion, the issue is squarely covered by the decision of the Hon'ble Bombay High Court in the case of The Bombay Burmah Trading Corpn. Ltd. (supra) wherein it is clearly held that if no compensation is received, then capital loss cannot be allowed. It was argued by the Ld. Counsel of the assessee that detailed facts are not available, but we find that the Hon'ble Madhya Pradesh High Court in the case of National Textile Corpn. v. CIT [2008] 171 Taxman 339 has clearly held that a decision of jurisdictional High Court cannot be ignored by the Tribunal simply because it is assumed that certain aspects of the issue might not have been considered by the jurisdictional high court. In the case of National Textiles Corporation, it was observed as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case it may amount to double benefit later on which is not permissible under the law. 29. Therefore, in the light of the above discussion, we are of the opinion, that the loss arising on account of reduction in share capital cannot be subjected to provisions of sec.45 r.w.s. 48 and, accordingly, such loss is not allowable as capital loss. At best such loss can be described as notional loss and it is settled principle that no notional loss or income can be subjected to the provisions of the I.T. Act. We hold accordingly. 26. Thus, in view of the aforesaid judgment of Special Bench, Ld. DR submitted the claim of assessee cannot be upheld, because capital gain / loss cannot be determined. In any case, the ld. AO has not discussed this issue at all in his order nor he has considered this legal aspect and has simply accepted the claim of the assessee. He thus strongly relied upon the order of the ld. PCIT. DECISION 27. We have heard rival submissions and perused the relevant finding given in the impugned order as well as material placed on record. The main issue which for our adjudication is, firstly, whether the ld. AO was correct in allowing long term capital loss of Rs. 2046,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed by deducting from the full value of consideration received or accruing as a result of the transfer of the "capital asset" including expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the capital asset and if there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 becomes wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. Further, according to him while transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a "transfer" exigible to capital gains tax. The observation and the finding of the ld. PCIT have already been dealt in the foregoing paragraphs. 29. First of all we have to bear in mind the reduction / cancellation of shares were as per the scheme of arrangement and restructuring between TTSL and its shareholders in terms of Section 100 & 391 under the relevant provisions of the Companies Act, 1956. The assessee had invested in the equity shares and has acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Now, whether the reduction of face value of shares amounts to transfer or not, has been settled by the Hon'ble Supreme Court in the case of Kartikeya Sarabhai reported in 228 ITR 163 (SC) wherein the issue was whether reduction of face value of the shares will be subject to levy of capital gains, whether reduction of the face value result in extinguishment of assessee's right and is there any transfer within the meaning of Section 2(47). The case of the assessee in that case was, since reduction of face value did not result in extinguishment of assessee's right and therefore, there is no transfer and hence, is not exigible to capital gains tax. The Hon'ble Supreme Court however held that:- " 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. While it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of 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 for a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in holding that it would amount to short-term capital loss to the assessee. Thus, the loss was allowed even if share application money paid by the assessee was forfeited due to default in payment and balance money of allotment. The relevant observation of the High Court reads as under:- "10. On account of the aforesaid fact that the binding contract existed between the assessee and the investee company, the irresistible conclusion that can be drawn on the aforesaid facts and circumstances is that as soon as the allotment is made, the assessee would be deemed to have acquired a right in such shares even if the call monies or the full face value of the shares has not been paid. Thus, in a case where only share application money is paid and the balance is yet to be paid on actual allotment of shares, the holder of such allotment would be recognised as a member of the investee company. Thus, it cannot be said that the assessee had not acquired right in such shares on account of its failure to deposit the balance amount for allotment of shares. The aforesaid view would attract the provisions of section 2(47) of the Act. The extinguishment of any rights therein as appeared in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot 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. 33. Thus, if the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares it amounts to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money..." (p. 300) 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 principle propounded in B.C. Srinivasa Setty's case (supra) has been followed by several High Courts with reference to the consideration received on surrender of tenancy rights. [See Among others Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 (Delhi); CIT v. Mangtu Ram Jaipuria [1991] 192 ITR 533 (Cal.); CIT v. Joy Ice Cream (Bang.) (P.) Ltd. [1993] 201 ITR 894 (Kar.); CIT v. Markapakula Agamma [1987] 165 ITR 386 (A.P.); CIT v. Merchandisers (P.) Ltd. [1990] 182 ITR 107 (Ker.)]. In all these decisions the several High Courts held that if the cost of acquisition of tenancy rights cannot be determined, the consideration received by reason of surrender of such tenancy rights could not be subjected to ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss should have been computed under section 46(2) read with section 48. The Hon'ble High Court observed as under:- Thus assuming the extinguishment of the shareholder's interest on liquidation in the shares held by him as transfer is a necessary assumption accompanying liquidation of company and computation of "Capital gain" as a result thereof, whether income or loss, is a logical conclusion of operation of section 48 in such state of affairs. Ordinarily operating section 45 to consider any transaction to be a transfer of capital asset by any of the modes referred to in section 2(47) apart from the legal fictions created therein, envisage passing of consideration from one hand to another and passing of rights, notwithstanding extinguishment in the hands of the transferor to the transferee, whether in the form of tangible gain or augmentation of the existing rights of others. It was because of this, on liquidation return of corpus to the shareholders, who were otherwise entitled to the same as a matter of right, was not held to be transfer within the meaning of section 2(47), because on extinguishment of their rights in the shares and their having received cash or assets in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harging section for bringing the result of receipts by member of a company on its liquidation too provides for computation of capital gains in accordance with section 48, for which receipt or value of asset after deducting sum assessed as dividend under section 2(22)(c), if any, is to be deemed to be the full value of the consideration. Entire receipt or value of asset has not been subjected to charge, but what has been subjected to tax is event of a receipt on liquidation of a company giving rise to capital gain, by treating it to be consideration. Consideration in the ordinary sense means something in lieu of or exchange of. It does not provide, that on computation of capital gain as per section 48, the surplus if any only is to be charged to tax as capital gains. This is how it was suggested to us to read the provision. On the contrary, the provision in question section 46(2) does not provide any such further inhibition against treatment of the balance. Such balance resulting as per computation made in accordance with section 48 has to be subjected to charge of tax as per the provisions of the Act. Section 71 of the Act envisages where computation under any head of income is a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Bench in the case of Bennett Coleman & Co. Ltd. (supra). In the facts of that case assessee was holding investments in equity shares of another company wherein the paid-up capital was reduced to Rs. 5/- from Rs. 10/- per share and subsequently, two equity shares of Rs 5/- each were consolidated into one equity share of Rs. 10/- each. The holders of the original shares received new shares. Thus, it was a case of substitution of shares which is not the facts in the present case. This distinction on the facts as a Special Bench have been dealt by the ITAT Mumbai Bench in the case of Carestream Health INC vs. DCIT (2020) (ITA No. 826/Mum/2016). The majority judgement held that though the loss arising to the shareholder on account of reduction in share capital cannot be subject to the provision of Section 45 r.w.s. 48 and accordingly, the said loss is not allowable as a capital loss at best such loss can be described as notional loss, after relying to the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty (supra). However, they noted that in that case assessee had not suffered any loss of reduction of share capital because share had not been canceled but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment but we have to bear in mind that this is a case under revisionary jurisdiction u/s. 263 wherein the ld. PCIT has cancelled the order of the ld. AO who has accepted the long term capital loss. The dissenting judgment goes to show that it is possible view and therefore, if a view has been taken by the AO in favour of the assessee, then it could not be held that order of AO is erroneous and therefore, can be set aside or cancelled. In any case we have already noted the judgment and the ratio of Hon'ble Gujarat High Court in the case of CIT vs. Jaykrishna Harivallabhdas(supra) wherein, similar proposition has been upheld that even if the sale consideration is "Nil" then also computation of capital gain can be made and accordingly, we are following the judgment of Hon'ble Gujarat High Court upon the majority judgment given by ITAT Special Bench in the case of Bennett Coleman & Co. Ltd. Accordingly, we hold that AO has rightly allowed the computation of long term capital loss to be set off against the capital gain shown by the assessee, consequently order of Ld. PCIT u/s 263 is set aside. Accordingly, on merits, appeal of the assessee is allowed. 42. In the result, appeal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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