CASE LAW: Reduction of Share Capital by way of cancellation of Shares amounts to "Transfer" and Losses available for set-off

Recently, the Mumbai bench of the Income Tax Appellate Tribunal in the case of Tata Sons Limited held that the reduction of share capital of the company by way of cancellation of shares is an extinguishment of rights in shares and be treated as "transfer".

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Assessee: Tata Sons Limited

Decision by: The Income Tax Appellate Tribunal, Mumbai

Assessment Year: 2009-10

Date of Order: 23.01.2024 

Facts of the case

»As on 01/04/2008, the assessee was holder of 288,13,17,286 equity shares in Tata Tele-Services Company Ltd. (TTSL) acquired at various points of time.

» Because of substantial loss, TTSL announced a Scheme of Capital reduction whereby the paid-up equity share capital of TTSL was to be reduced by way of reduction of the number of equity shares of the company of Rs. 10/- each from 634,71,52,316 shares to 317,35,76,158 shares; by reducing the said amount from the accumulated debit balance in the Profit & Loss Account and by reduction from Share Premium Account

» In terms of this Scheme, no consideration was payable to the shareholders in respect of the shares which were to be cancelled. As a result, assesse's shareholding of 288,13,17,286 equity shares in TTSL were reduced to half, i.e., 144,06,58,643.

» The said scheme was approved by the Hon'ble Delhi High Court vide judgment and order dated 07/11/2008.

» In the return of income for the A.Y. 2009-10 filed on 30/09/2009, assessee had shown long-term capital loss on reduction on the shares of TTSL and claimed a loss of INR 2046,97,54,090.

» Assessing officer accepted the loss. and passed the order accordingly.

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