Supreme Court of India
PRINCIPAL COMMISSIONER OF INCOME TAX-4 & ANR.versusM/S JUPITER CAPITAL PVT. LTD.
- Citation
- 2025 INSC 38
- Decided
- 1 January 2025
- Disposal
- Dismissed
Holding
Reduction in share capital and the consequent proportional reduction in the assessee's shareholding constitute a transfer under Section 2(47) of the Income Tax Act, 1961.
Summary
M/s Jupiter Capital Pvt. Ltd. held a 99.88% share in Asianet News Network Pvt. Ltd. which reduced its share capital from 15,35,05,750 to 10,000 shares, proportionately reducing Jupiter's holding to 9,988 shares and receiving Rs. 3,17,83,474 as consideration. The Revenue argued that this reduction did not constitute a "transfer" under Section 2(47) of the Income Tax Act, 1961, and thus the capital loss claimed by the assessee should be disallowed. The ITAT allowed the loss, relying on the Supreme Court’s decision in Kartikeya V. Sarabhai, and the High Court affirmed this view. The Supreme Court examined the definition of "transfer" in Section 2(47), emphasizing that relinquishment or extinguishment of rights in a capital asset falls within its ambit, even where the shareholder retains a proportional interest. It held that the reduction in share capital extinguished the assessee’s rights in the original shares, amounting to a transfer and making the loss allowable. Consequently, the petition filed by the Revenue was dismissed.
Issues considered
- Whether reduction in share capital of a subsidiary company amounts to a "sale, exchange or relinquishment of the asset" within the meaning of Section 2(47) of the Income Tax Act, 1961.
- Whether the extinguishment of rights in the original shares during a capital reduction triggers the provisions of Section 45 relating to capital gains.
Legislation cited
- Companies Act, 2013s. 66
- Income Tax Act, 1961s. 2(47), s. 45
Subjects
Section 2(47) Income Tax ActReduction in share capitalTransfer of capital assetExtinguishment of rightsCapital lossShareholding proportionate reductionCompanies Act 2013
Judgment
[2025] 1 S.C.R. 431 : 2025 INSC 38
Principal Commissioner of Income Tax-4 & Anr.
v.
M/s Jupiter Capital Pvt. Ltd.
(Special Leave Petition No. 63 of 2025)
02 January 2025
[J.B. Pardiwala and R. Mahadevan, JJ.]
Issue for Consideration
Whether reduction in share capital is covered under “sale, exchange
or relinquishment of the asset” used in Section 2(47) of the Income
Tax Act, 1961.
Headnotes†
Income Tax Act, 1961 – s.2(47) – “sale, exchange or
relinquishment of the asset” – Reduction in share capital,
if covered within the expression “sale, exchange or
relinquishment of the asset”:
Held: Yes – Reduction in share capital of the subsidiary company
and subsequent proportionate reduction in the shareholding
of the assessee, is squarely covered within the ambit of the
expression “sale, exchange or relinquishment of the asset” used in
s.2(47) – s.2(47) is an inclusive definition, inter alia, providing that
relinquishment of an asset or extinguishment of any right therein
amounts to a transfer of a capital asset – While the taxpayer
continues to remain a shareholder of the company even with the
reduction of share capital, it could not be accepted that there
was no extinguishment of any part of his right as a shareholder
qua the company – When as a result of the reducing of the face
value of the preference 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 – Such a reduction of the right of the capital
asset amounts to a transfer within the meaning of s.2(47) – In the
present case, the face value per share remained the same before
the reduction of share capital and after the reduction of share
capital – However, as the total number of shares were reduced
432 [2025] 1 S.C.R.
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from 15,35,05,750 to 10,000 and out of this the assessee was
holding 15,33,40,900 shares prior to reduction and 9988 shares
after reduction, it can be said that on account of reduction in
the number of shares held by the assessee in the company, the
assessee extinguished its right of 15,33,40,900 shares, and in
lieu thereof, it received 9988 shares at Rs. 10 each along with an
amount of Rs. 3,17,83,474 – No error committed by High Court
in passing the impugned order dismissing the appeal filed by the
Revenue and affirming the order passed by the ITAT. [Paras 9,
10, 12, 14, 18]
Case Law Cited
Kartikeya V. Sarabhai v. Commissioner of Income Tax [1997] Supp.
3 SCR 746 : (1997) 7 SCC 524 – relied on.
Commissioner of Income Tax v. Vania Silk Mills (P.) Ltd. (1977)
107 ITR 300 (Guj) : 1976 SCC OnLine Guj 92; Commissioner
of Income-Tax v. Jaykrishna Harivallabhdas (1998) 231 ITR 108 :
1997 SCC OnLine Guj 255; Anarkali Sarabhai v. CIT [1997] 1
SCR 500 : (1997) 3 SCC 238 : – referred to.
List of Acts
Income Tax Act, 1961; Companies Act, 2013.
List of Keywords
Section 2(47) of the Income Tax Act, 1961; Reduction in share
capital; Transfer of a capital asset; Sale; ‘transfer’; “sale,
exchange or relinquishment of the asset”; Relinquishment of
an asset; Extinguishment of any right; Subsidiary company;
Subsequent proportionate reduction in the shareholding of
the assessee; Inclusive definition, Preference share; Right of
the preference shareholder; Reducing of the face value of the
preference share.
Case Arising From
EXTRAORDINARY APPELLATE JURISDICTION: Special Leave
Petition (Civil) No. 63 of 2025
From the Judgment and Order dated 20.02.2023 of the High Court
of Karnataka at Bengaluru in ITA No. 299 of 2019
[2025] 1 S.C.R. 433
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
Appearances for Parties
N. Venkataraman, A.S.G., Raj Bahadur Yadav, Suyash Pandey,
Navanjay Mahapatra, V. Chandrashekhara Bharathi, Chinmayee
Chandra, Advs. for the Petitioners.
Judgment / Order of the Supreme Court
Order
1. Delay condoned.
2. This petition is at the instance of the Revenue, seeking leave to
appeal against the judgement and order dated 20.02.2023 passed
by the High Court of Karnataka at Bengaluru in Income Tax Appeal
(ITA) No. 299 of 2019 by which the appeal filed by the Revenue
against the judgement and order passed by the ITAT Bengaluru
came to be dismissed and thereby the judgement and order passed
by the ITAT came to be affirmed.
3. The appeal was admitted by the High Court on the following substantial
question of law:
“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.”
4. It appears from the materials on record that the respondent-
assessee is a company engaged in the business of investing
in shares, leasing, financing and money lending. The assessee
had made an investment in Asianet News Network Pvt. Ltd., an
Indian company engaged in the business of telecasting news,
by purchasing 14,95,44,130 shares having face value of Rs 10/-
each. Thereafter, the assessee purchased 38,06,758 shares from
other parties, thereby increasing its shareholding to 15,33,40,900
shares which constituted 99.88% of the total number of shares of
the company, i.e., 15,35,05,750.
434 [2025] 1 S.C.R.
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5. The said company incurred losses, as a result of which the net worth
of the company got eroded. Subsequently, the company filed a petition
before the Bombay High Court for reduction of its share capital to set
off the loss against the paid-up equity share capital. The High Court
ordered for a reduction in the share capital of the company from
15,35,05,750 shares to 10,000 shares. Consequently, the share of
the assessee was reduced proportionately from 15,33,40,900 shares
to 9,988 shares. However, the face value of shares remained the
same at Rs. 10 even after the reduction in the share capital. The High
Court also directed the company for payment of Rs. 3,17,83,474/- to
the assessee as a consideration.
6. During the year, the assessee claimed long term capital loss accrued
on the reduction in share capital from the sale of shares of such
company. However, the Assessing Officer while disagreeing with
the assessee’s claim held that reduction in shares of the subsidiary
company did not result in the transfer of a capital asset as envisaged
in Section 2(47) of the Income Tax Act, 1961. The Assessing Officer
took the view that although the number of shares got reduced by
virtue of reduction in share capital of the company, yet the face
value of each share as well as shareholding pattern remained the
same. The relevant observations from the assessment order are
extracted hereinbelow:
“10. [...] However, the question of extinguishment of rights
with relation to the shareholders does not arise. It was only
reduction of shares by way of extinguishing the number of
shares and not extinguishing the rights of the shareholders.
For the reason that the word “extinguished” is mentioned
in the Petition or the Court Order, it does not amount to
translate the meaning of the word “extinguishment of rights”
as per section 2(47) of the Act.
xxx xxx xxx
Extinguishment of Rights would mean that the assessee
has parted with those shares or sold off those shares to
a second party. Here, the assessee has not sold off any
shares or has not parted with the shares as the it still holds
the proportionate percentage which he initially held is still
shown as an investment.”
[2025] 1 S.C.R. 435
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
7. In appeal the CIT(A) vide order dated 14.12.2017 while distinguishing
the facts of the present case from those involved in the decision of
this Court in Kartikeya V. Sarabhai v. Commissioner of Income
Tax reported in (1997) 7 SCC 524 held that any extinguishment
of rights would involve parting the sale of percentage of shares to
another party or divesting rights therein. The relevant observations
made by the CIT(A) are reproduced as follows:
“6.6(ii) The factual position of and the applicability of the
judicial decisions in the present case, clearly reveals that
the Assessee’s claim of capital loss, is not acceptable
in view of certain crucial questions, emerging for
consideration in the present case. The AO has analysed
the Assessee’s shareholding pattern, in the impugned
order, which has been perused. A comparative-analysis
of the opening / closing balances of ANNPL shares and
the consequent reduction in numbers / face value and
the percentage ratio of share- holding, reveals a clear
position that there was no effective transfer, resulting in
Long Term Capital Loss…
(iii) [...] It clearly emerges, that there was no effective
transfer, which could result in any real Long Term Capital
Loss as claimed by the appellant in the present case. It
transpires that the appellant company invested in total
equity share of Rs. 153340900/- at face value of (Rs. 10)
on different dates, in its subsidiary company (ANNPL).
The total number of shares of ANNPL was 153505750
out of which the assessee’s shareholding was 99.88%.
Pursuant to the share reduction scheme there was
reduction in share capital of ANNPL from 153340900
to 10000 and thus the shares of the Assessee were
reduced from 153505750 to 9988. The face value of
the shares-reduced remained unchanged at Rs. 10,
even after the reduction. The shareholding ratio of the
assessee company also remained constant even after
implementation of the share-reduction scheme. This
percentage continued to be at the previous shareholding
figures of 99.88%.”
436 [2025] 1 S.C.R.
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8. However, the ITAT reversed the order passed by the CIT(A) and
allowed the appeal filed by the assessee observing that the decision
of this Court in Kartikeya V. Sarabhai (supra) is squarely applicable
to the facts of the present case. The relevant observations from the
order of the ITAT order are extracted hereinbelow:
“6. [...] In the present case, the face value per share
remains same i.e. Rs. 10 per share before reduction of
share capital and after reduction of share capital but the
total number of shares has been reduced from 153505750
to 10000 and out of this, the present assessee was holding
prior to reduction 153340900 shares and after reduction
9988 shares. In addition to this reduction in number of
shares held by the assessee company in ANNPL, the
assessee received an amount of Rs. 3,17,83,474/- from
ANNPL. Hence it is seen that in the facts of present
case, on account of reduction in number of shares held
by the assessee company in ANNPL, the assessee has
extinguished its right of 153340900 shares and in lieu
thereof, the assessee received 9988 shares at Rs. 10/-
each along with an amount of Rs. 3,17,83,474/. As per
this judgment of Hon’ble Apex Court rendered in the
case of Kartikeya V. Sarabhai Vs. CIT (supra), there is
no reference to the percentage of share holding prior to
reduction of share capital and after reduction of share
capital and hence, in our considered opinion, the basis
adopted by the CIT(A) to hold that this judgment of Hon’ble
Apex Court is, not applicable in the present case is not
proper and in our considered opinion, this is not proper.
In our considered opinion, in the facts of present case,
this judgment of Hon’ble Apex Court is squarely applicable
and 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. We hold accordingly.”
9. The Revenue went in appeal before the High Court. The High Court
while dismissing the appeal filed by the Revenue and affirming the
order passed by the ITAT observed in para 8 as under:
[2025] 1 S.C.R. 437
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
“Undisputed facts are, pursuant to the order passed by
the High Court of Bombay, number of shares has been
reduced to 9988. It is significant to note that the face value
of the share has remained same at Rs. 10/- even after
the reduction. The AO’s view that the voting power has not
changed as the percentage of assessee’s share of 99.88%
has remained unchanged is untenable because if the shares
are transferred at face value, the redeemable value would
be Rs.99,880/- whereas the value of 14,95,44,130 number
of shares would have been Rs.1,49,54,41,300/-. In our
considered view, the ITAT has rightly followed authority in
Kartikeya V. Sarabhai v. The Commissioner of Income Tax :
1998 2 ITR 163 SC with regard to meaning of transfer by
holding that there was no transfer within the meaning of
that expression contained in Section 2(47) of the Income
Tax Act, 1961.”
10. Having heard Mr. N. Venkataraman, learned ASG appearing for the
Revenue, and having gone through the materials on record, we
are of the view that no error, not to speak of any error of law, could
be said to have been committed by the High Court in passing the
impugned order.
11. Whether reduction of capital amounts to transfer is no longer res
integra in view of the decision of this Court in Kartikeya V. Sarabhai
(supra) wherein this Court while elaborating upon Sections 2(47)
and 45 of the Income Tax Act, 1961 respectively observed as under:
“9. It is not possible to accept the contention of Shri
Ganesh, learned counsel that reduction does not amount
to a transfer of the capital asset. Section 2(47) of the Act
reads as follows:
“2. (47) ‘transfer’ in relation to a capital asset, 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
438 [2025] 1 S.C.R.
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(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.
Explanation.—For the purposes of sub-clauses (v) and
(vi), ‘immovable property’ shall have the same meaning
as in clause (d) of Section 269-UA;”
10. Section 45 of the Act reads as follows:
“45. Capital gains.—(1) Any profits or gains arising
from the transfer of a capital asset effected in the
previous year shall, save as otherwise provided in
Sections 53, 54, 54-B, 54-D, 54-E, 54-F and 54-G,
be chargeable to income tax under the head ‘Capital
gains’ and shall be deemed to be the income of the
previous year in which the transfer took place.”
11. 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.
It is not necessary that for a capital gain to arise there
[2025] 1 S.C.R. 439
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
must be sale of a capital asset. Sale is only one of the
modes of transfer envisaged by Section 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 Section 45 of the Act.
12. 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. 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.
13. The Gujarat High Court had in another case reported
as Anarkali Sarabhai v. CIT [(1982) 138 ITR 437 (Guj)]
followed the judgment under appeal. That was a case
where there had been redemption of preference share
capital by the company and money was paid to the
shareholders. It was held therein that difference between
the face value received by the shareholder and the price
paid for preference shares was exigible to capital gains tax.
In coming to this conclusion, the Gujarat High Court had
followed the judgment under appeal in the present case.
14. The aforesaid decision of the Gujarat High Court in
Anarkali case [(1982) 138 ITR 437 (Guj)] was challenged
and this Court in Anarkali Sarabhai v. CIT [(1997) 3
SCC 238 : (1997) 224 ITR 422] upheld the High Court’s
decision. It had been contended in Anarkali case
440 [2025] 1 S.C.R.
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[(1997) 3 SCC 238 : (1997) 224 ITR 422] on behalf of
the assessee that reduction of preference shares was
not a sale or relinquishment of asset and, therefore, no
capital gains tax was payable. Repelling this contention,
this Court considered the definition of the word “transfer”
occurring in Section 2(47) of the Act and reading the
same along with Section 45, it came to the conclusion
that when a preference share is redeemed by a company,
what the shareholder does in effect is to sell the share
to the company. The company redeems its preference
shares only by paying the preference shareholders the
value of the shares and taking back the preference shares.
It was observed that 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 relinquishment” of an asset under
Section 2(47) of the Act. It was also held that the definition
of the word “transfer” under Section 2(47) of the Act was
not an exhaustive definition and that sub-section (I) 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.
15. In our opinion, the aforesaid decision of this Court in
Anarkali case [(1997) 3 SCC 238 : (1997) 224 ITR 422]
is applicable in the instant case. The only difference in
the present case and Anarkali case [(1997) 3 SCC 238 :
(1997) 224 ITR 422] is that whereas in Anarkali case
[(1997) 3 SCC 238 : (1997) 224 ITR 422] preference
shares were redeemed in entirety, in the present case,
there has been a reduction in the share capital inasmuch
as the company had redeemed its preference shares of
Rs 500 to the extent of Rs 450 per share. The liability of
the company in respect of the preference share which was
[2025] 1 S.C.R. 441
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
previously to the extent of Rs 500 now stood reduced to
Rs 50 per share.”
12. The following principles are discernible from the aforesaid decision
of this Court:
a. Section 2(47) of the Income Tax Act, 1961, 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 the taxpayer continues to remain a
shareholder of the company even with the reduction of share
capital, it could not be accepted that there was no extinguishment
of any part of his right as a shareholder qua the company.
b. A company under Section 66 of the Companies Act, 2013 has
a right to reduce the share capital and one of the modes which
could be adopted is to reduce the face value of the preference
share.
c. 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. Such a reduction of the right of the capital asset clearly
amounts to a transfer within the meaning of section 2(47) of
the Income Tax Act, 1961.
13. As observed in Commissioner of Income Tax v. Vania Silk
Mills (P.) Ltd. reported in (1977) 107 ITR 300 (Guj), the expression
“extinguishment of any right therein” is of wide import. It covers every
possible transaction which results in the destruction, annihilation,
extinction, termination, cessation or cancellation, by satisfaction
or otherwise, of all or any of the bundle of rights - qualitative or
quantitative - which the assessee has in a capital asset, whether
such asset is corporeal or incorporeal.
14. In the present case, the face value per share has remained the
same before the reduction of share capital and after the reduction
of share capital. However, as the total number of shares have been
reduced from 15,35,05,750 to 10,000 and out of this the assessee
was holding 15,33,40,900 shares prior to reduction and 9988 shares
442 [2025] 1 S.C.R.
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after reduction, it can be said that on account of reduction in the
number of shares held by the assessee in the company, the assessee
has extinguished its right of 15,33,40,900 shares, and in lieu thereof,
the assessee received 9988 shares at Rs. 10 each along with an
amount of Rs. 3,17,83,474. This Court in the case of Kartikeya V.
Sarabhai (supra) has not made any reference to the percentage of
shareholding prior to reduction of share capital and after reduction
of share capital.
15. This Court in the case of Kartikeya V. Sarabhai (supra) observed
that reduction of right in a capital asset would amount to ‘transfer’
under Section 2(47) of the Act, 1961. Sale is only one of the modes
of transfer envisaged by Section 2(47) of the Income Tax Act, 1961.
Relinquishment of any rights in it, which may not amount to sale, can
also be considered as transfer and any profit or gain which arises
from the transfer of such capital asset is taxable under Section 45
of the Income Tax Act, 1961.
16. A Division Bench of the Gujarat High Court in the case of
Commissioner of Income-Tax v. Jaykrishna Harivallabhdas
reported in (1998) 231 ITR 108 further clarified that receipt of some
consideration in lieu of the extinguishment of rights is not a condition
precedent for the computation of capital gains as envisaged under
Section 48 of the Income Tax Act, 1961. The relevant observations
made by the High Court are reproduced hereinbelow:
28. The contention that this provision should apply to
actual receipts only also cannot be accepted for yet
another reason, because acceptance of that would
lead to an incongruous and anomalous result as will
be seen presently. The acceptance of this view would
mean whereas even in a case where a sum is received,
howsoever negligible or insignificant it may be, it would
result in the computation 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
[2025] 1 S.C.R. 443
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
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 in all cases
of extinguishment of such rights, whether as a result of
some receipt or nil receipt, so as to treat the subjects
without discrimination. Where there does not appear to be
ground for such different treatment the Legislature cannot
be presumed to have made deeming provision to bring
about such anomalous result.
(Emphasis supplied)
17. This Court in the case of Anarkali Sarabhai v. CIT reported in (1997)
3 SCC 238 observed that the reduction of share capital or redemption
of shares is an exception to the rule contained in Section 77(1) of
the Companies Act, 1956 that no company limited by shares shall
have the power to buy its own shares. In other words, the Court held
that both reduction of share capital and redemption of shares involve
the purchase of its own shares by the company and hence will be
included within the meaning of transfer under Section 2(47) of the
Income Tax Act, 1961. The relevant observations are reproduced
hereinbelow:
“21. The Bombay High Court in Sath Gwaldas Mathuradas
Mohata Trust v. CIT [(1987) 165 ITR 620 (Bom)] dealt with
the question which has now arisen in this case. There
the question was whether the amount received by the
assessee on redemption of preference shares was liable
to tax under the head “capital gains”. After referring to the
444 [2025] 1 S.C.R.
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meaning given to “transfer” by Section 2(47) of the Income
Tax Act, the Court held:
“Here, a regular ‘sale’ itself has taken place. That is
the ordinary concept of transfer. The company paid
the price for the redemption of the shares out of its
fund to the assessee and the transaction was clearly
a purchase. As rightly observed by the Tribunal, if
the company had purchased a valuable right, the
assessee had sold a valuable right. ‘Relinquishment’
and ‘extinguishment’ which are not in the normal
concept of transfer but are included in the definition
by the extended meaning attached to the word are
also attracted in the transaction. The shares were
assets and they were relinquished by the assessee
and thus relinquishment of assets did take place.
The assessee by virtue of his being a holder of
redeemable cumulative preference shares had a
right in the profits of the company, if and when made,
at a fixed rate of percentage. Quite obviously, this
was a valuable right and this right had come to an
end by the company’s redemption of shares. Thus,
the transaction also amounted to ‘extinguishment’
of right. Under the circumstances, viewed from any
angle, there is no escape from the conclusion that
Section 2(47) was attracted and that the amount of
Rs 50,000 received by the assessee was liable to
be taxed under the head ‘Capital gains’.”
22. The view taken by the Bombay High Court accords with
the view taken by the Gujarat High Court in the judgment
under appeal. In the judgment under appeal, it was pointed
out that the genesis of reduction or redemption of capital
both involved a return of capital by the company. The
reduction of share capital or redemption of shares is an
exception to the rule contained in Section 77(1) that no
company limited by shares shall have the power to buy its
own shares. When it redeems its preference shares, what
in effect and substance it does is to purchase preference
[2025] 1 S.C.R. 445
Principal Commissioner of Income Tax-4 & Another v.
M/s Jupiter Capital Pvt. Ltd.
shares. Reliance was placed on the passage from Buckley
on the Companies Acts, 14th Edn., Vol. I, at p. 181:
“Every return of capital, whether to all shareholders or
to one, is pro tanto a purchase of the shareholder’s
rights. It is illegal as a reduction of capital, unless
it be made under the statutory authority, but in the
latter case is perfectly valid.”
(Emphasis supplied)
18. In view of the aforesaid, we are of the view that the reduction in
share capital of the subsidiary company and subsequent proportionate
reduction in the shareholding of the assessee would be squarely
covered within the ambit of the expression “sale, exchange or
relinquishment of the asset” used in Section 2(47) the Income Tax
Act, 1961.
19. As a result, this petition fails and is hereby dismissed.
Result of the case: Petition dismissed.
†
Headnotes prepared by: Divya Pandey
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