Reduction of Share Capital Amounts to Transfer Under Section 2(47), Supreme Court Holds

A bench of Justices J.B. Pardiwala and R. Mahadevan heard a Special Leave Petition filed by the Revenue against the Karnataka High Court’s judgment affirming the ITAT’s allowance of a long‑term capital loss claimed by a shareholder following a court‑ordered reduction in the subsidiary’s share capital. The substantial question was whether the Tribunal was right in law in treating the reduction as an extinguishment of rights in 15,33,40,900 shares within the meaning of Section 2(47) of the Income Tax Act when the face value per share remained unchanged.

The Court dismissed the Revenue’s petition and upheld the High Court and Tribunal decisions, holding that reduction of share capital could constitute a “transfer” under Section 2(47) read with Section 45 and therefore attract capital gains consequences. The Court relied on this Court’s precedents in Kartikeya V. Sarabhai and Anarkali Sarabhai, observing that “sale is only one of the modes of transfer envisaged by Section 2(47) of the Act” and that relinquishment or extinguishment of rights also amounted to transfer. The Court, in its reasoning, observed: “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 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 further noted that, on the facts, “the assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the assessee received 9,988 shares at Rs. 10 each along with an amount of Rs. 3,17,83,474.”

Background The respondent company, an investor engaged in shares, financing and leasing, acquired 14,95,44,130 shares and subsequently additional shares to hold 15,33,40,900 shares (99.88%) in Asianet News Network Pvt. Ltd. The subsidiary incurred losses and obtained an order from the Bombay High Court reducing its share capital from 15,35,05,750 shares to 10,000 shares; the respondent’s holding was correspondingly reduced to 9,988 shares while the face value per share remained Rs.10. The company paid Rs.3,17,83,474 to the assessee as consideration. The assessee claimed a long‑term capital loss on the reduction; the Assessing Officer disallowed the claim on the ground that there was no “extinguishment of rights” or transfer under Section 2(47) since face value and percentage holding remained the same. The CIT(A) affirmed the AO’s view, holding there was “no effective transfer.” The ITAT reversed, applying Kartikeya V. Sarabhai and holding that reduction of share capital amounted to extinguishment of rights and was therefore a transfer attracting capital gains. The Karnataka High Court dismissed the Revenue’s appeal and affirmed the Tribunal’s reliance on Kartikeya. The Supreme Court, after hearing the Revenue (Mr. N. Venkataraman, learned ASG), recorded that no error of law was shown and reiterated settled principles that extinguishment or relinquishment of rights in capital assets falls within the inclusive definition of “transfer” in Section 2(47) and is chargeable under Section 45. The Court also relied on Anarkali Sarabhai and related authority which treated reduction or redemption as akin to the company buying back shares and therefore within the scope of transfer. The petition was dismissed and delay in filing was condoned. No interim directions were issued.

Case Details: Case No.: Special Leave Petition No. 63 of 2025; Citation: 2025 INSC 38 Case Title: Principal Commissioner of Income Tax-4 & Anr. v. M/s. Jupiter Capital Pvt. Ltd. Appearances: For the Petitioner(s): Mr. N. Venkataraman, learned Additional Solicitor General (appeared for the Revenue) For the Respondent(s): [Not indicated in the order]