Bennett Coleman & Co. Ltd. v. Addl. CIT

Case Laws Analysis
Relied CIT v. Reliance Utilities & Power Ltd. 2009 TaxPub(DT) 1275 (Bom-HC)
Applied CIT v. G. Narasimhan (Died) 1999 TaxPub(DT) 1078 (SC)
Applied Kartikeya V. Sarabhai v. CIT 1997 TaxPub(DT) 1341 (SC)
Applied CIT v. B.C. Srinivasa Setty 1981 TaxPub(DT) 0902 (SC)
Relied CIT v. Motors & General Stores (P) Ltd. 1967 TaxPub(DT) 0365 (SC)

SUBSCRIBE FOR FULL CONTENT


The Tax PublishersITA No. 3013/Mum/2007 2012 TaxPub(DT) 0324 (Mum-Trib) : (2011) 133 ITD 0001 : (2011) 141 TTJ 0777 : (2011) 062 DTR 0106 : (2011) 012 ITR (Trib) 0097 INCOME TAX ACT, 1961 --Capital gains--Long-term capital lossTransfer under section 2(47) and receipt of consideration--During the course of assessment proceedings, the AO noticed that assessee had claimed long-term capital loss amounting to Rs. 22,21,85,693. It is not in dispute that assessee made an investment of Rs. 2484.02 lakhs in equity shares of a group company, viz., TGL. Under section 100 of the Companies Act, 1956, TGL applied for reduction of equity share capital and approached the Bombay High Court for approval of the same. The High Court approved the petition of TGL and allowed reduction in its share capital by 50% by reducing the face value of each equity share from Rs. 10 to Rs. 5. Consequently, assessee's investment in TGL got reduced from Rs. 2484.02 lakhs to Rs. 1242.01 lakhs. After applying the indexation a sum of Rs. 22,21,85,693 was claimed as long-term capital loss. On a query as to how this loss was allowable, it was mainly contended that in view of the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163 (SC) : 1997 TaxPub(DT) 1341 (SC), wherein it was held that reduction in face value of shares would amount to transfer-such loss was allowable. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. G. Narsimhan (Decd) & Ors. (1999) 236 ITR 327 (SC) : 1999 TaxPub(DT) 1078 (SC), wherein similar view was taken. The AO, after considering these submissions, was of the opinion that in the case of Kartikeya V. Sarabhai the Court was concerned with the reduction of non-cumulative preference shares. Therefore, according to the AO, this was merely a case involving reduction in face value of preference shares and accordingly, same should not be applied particularly because the Court had also observed that in terms of section 87(2)(i) the voting rights were also reduced proportionately on the resolution which effected the rights of preference shareholders whereas, in case of equity shares, there is no reduction in the rights of such equity shareholders. He further observed that in the present case assessee has not received any consideration for reduction in the value of shares, nor any part of the shares have been passed to anyone else. This means that there was no change in the rights of the assessee vis-a-vis other shareholders and, therefore, no transfer had taken place and, thus, assessee was not entitled to the claim of long term capital loss. On an appeal, similar submissions were made before the Commissioner (Appeals) who upheld the action of the AO on similar reasoning. Held: Justified. During the course of hearing, it was pointed out that the capital loss has not been disallowed by the AO on the only ground that it did not amount to transfer but mainly on the point that assessee had not received any consideration, i.e., by applying the principle laid down by the Supreme Court in the case of B. C. Srinivasa Setty 128 ITR 294 (SC) : 1981 TaxPub(DT) 902 (SC), wherein it was held that if computation provision fails, capital gains cannot be assessed under section 45. [Para 10] In the present case if argument of assessee is accepted then the older shares with different ISIN number ceases to exist and new shares with a different ISNI numbers have been issued and, therefore, it cannot be called a case of extinguishment or relinquishment and it is a mere case of substitution of one kind of share with another. In present case also assessee got the new shares on the strength of its rights with the old shares and, therefore, same would not amount to transfer. [Para 17] It becomes absolutely clear that even if a transfer had taken place, unless and until some consideration is received, the transfer of such asset would not attract the provisions of section 45. However, as far as proposition that a transfer cannot be subjected to provisions of section 45 in the absence of consideration still remains valid. In respect of taxability of this transfer, three arguments were made before the Court which are being extracted from page 515 of the report of the above judgment in the case of Sunil Siddharthbhai v. CIT as under: 1. There must be a 'transfer' of a capital asset either under the general law or within the definition in clause (47) of section 2 of the Income Tax Act. 2. Consideration must be received or must accrue as a result of the transfer and the consideration must be capable of being determined in monetary terms in order that the computation of capital gains may be made as required by section 48. 3. Profits or gains must arise from the transfer and must be embedded in the consideration. Since the point raised in the first argument is not material regarding the issue involved, therefore, it would suffice to point out that the Court held that such contribution of the capital by way of transfer of personal capital assets into the firm would constitute transfer. [Para 19] The court relied on the principles laid down in the case of B. C. Srinivasa Setty (supra) and held that unless and until the consideration was present the computation provision of section 48 would not be workable and, therefore, such transfer could not be subjected to tax. The court further went on to hold that unless and until the profits or losses are real, same cannot be subjected to tax. [Para 19] Now, in the present case, the assessee has not received any consideration for reduction of share capital. What has happened is that ultimately the number of shares held by the assessee has been reduced to 50% and nothing has moved from the side of the company to the assessee. [Para 21] Even extinguishment of rights in a particular asset would amount to transfer. The chargeability of the capital gain was upheld because on extinguishment of shares in the amalgamating company, the assessee got the new shares and, therefore, the question whether any cost of acquisition could be ascertained was answered in favour of the Revenue. In the present case, as pointed out by the DR, the assessee's rights have not been extinguished. Tribunal had asked during the hearing that how much percentage assessee was holding in TGL and it was submitted that it was more than 51%. On verification of the details, it is seen that after reduction, TGL is having 89,93,149 equity shares of Rs. 10 each (after reduction and consolidation) and assessee is holding 67,37,399 shares which comes to about 74.9%, i.e., 75% for easy calculation. Let one examine whether assessee's rights have been extinguished or not. [Para 22] In the present case, the value of asset of a company immediately before and after reduction of share capital remained the same and therefore by reducing the amount and number of shares the assessee's proportionate share in such assets remained the same. In the case also the value of assets even after reduction of capital remained the same and, therefore, loss, if any, at best can be called notional loss which cannot be allowed as observed by the Supreme Court in the case of Sunil Siddharthbhai v. CIT. [Para 26] There is also force in the submissions of the DR that as per section 55(v), the cost of acquisition of shares even after conversion, etc., has to be taken with reference to the cost of original shares. Therefore, after reduction of share capital the cost of acquisition of the remaining shares would be reckoned with references to the original cost. Though at this stage assessee has not obtained any benefit because loss has been computed with reference to the actual cost, but, in future, if assessee decides to sell its shareholding in TGL then assessee has the right, under section 55(v), to substitute the cost of acquisition with reference to the original shareholding and in that case it may amount to double benefit later on which is not permissible under the law. [Para 28] Therefore, in the light of the above discussion, that the loss arising on account of reduction in share capital cannot be subjected to provisions of section 45 read with section 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 IT Act. [Para 29] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 3013/Mum/2007
2012 TaxPub(DT) 0324 (Mum-Trib) : (2011) 133 ITD 0001 : (2011) 141 TTJ 0777 : (2011) 062 DTR 0106 : (2011) 012 ITR (Trib) 0097

INCOME TAX ACT, 1961

--Capital gains--Long-term capital lossTransfer under section 2(47) and receipt of consideration--During the course of assessment proceedings, the AO noticed that assessee had claimed long-term capital loss amounting to Rs. 22,21,85,693. It is not in dispute that assessee made an investment of Rs. 2484.02 lakhs in equity shares of a group company, viz., TGL. Under section 100 of the Companies Act, 1956, TGL applied for reduction of equity share capital and approached the Bombay High Court for approval of the same. The High Court approved the petition of TGL and allowed reduction in its share capital by 50% by reducing the face value of each equity share from Rs. 10 to Rs. 5. Consequently, assessee's investment in TGL got reduced from Rs. 2484.02 lakhs to Rs. 1242.01 lakhs. After applying the indexation a sum of Rs. 22,21,85,693 was claimed as long-term capital loss. On a query as to how this loss was allowable, it was mainly contended that in view of the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163 (SC) : 1997 TaxPub(DT) 1341 (SC), wherein it was held that reduction in face value of shares would amount to transfer-such loss was allowable. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. G. Narsimhan (Decd) & Ors. (1999) 236 ITR 327 (SC) : 1999 TaxPub(DT) 1078 (SC), wherein similar view was taken. The AO, after considering these submissions, was of the opinion that in the case of Kartikeya V. Sarabhai the Court was concerned with the reduction of non-cumulative preference shares. Therefore, according to the AO, this was merely a case involving reduction in face value of preference shares and accordingly, same should not be applied particularly because the Court had also observed that in terms of section 87(2)(i) the voting rights were also reduced proportionately on the resolution which effected the rights of preference shareholders whereas, in case of equity shares, there is no reduction in the rights of such equity shareholders. He further observed that in the present case assessee has not received any consideration for reduction in the value of shares, nor any part of the shares have been passed to anyone else. This means that there was no change in the rights of the assessee vis-a-vis other shareholders and, therefore, no transfer had taken place and, thus, assessee was not entitled to the claim of long term capital loss. On an appeal, similar submissions were made before the Commissioner (Appeals) who upheld the action of the AO on similar reasoning. Held: Justified.

During the course of hearing, it was pointed out that the capital loss has not been disallowed by the AO on the only ground that it did not amount to transfer but mainly on the point that assessee had not received any consideration, i.e., by applying the principle laid down by the Supreme Court in the case of B. C. Srinivasa Setty 128 ITR 294 (SC) : 1981 TaxPub(DT) 902 (SC), wherein it was held that if computation provision fails, capital gains cannot be assessed under section 45. [Para 10] In the present case if argument of assessee is accepted then the older shares with different ISIN number ceases to exist and new shares with a different ISNI numbers have been issued and, therefore, it cannot be called a case of extinguishment or relinquishment and it is a mere case of substitution of one kind of share with another. In present case also assessee got the new shares on the strength of its rights with the old shares and, therefore, same would not amount to transfer. [Para 17] It becomes absolutely clear that even if a transfer had taken place, unless and until some consideration is received, the transfer of such asset would not attract the provisions of section 45. However, as far as proposition that a transfer cannot be subjected to provisions of section 45 in the absence of consideration still remains valid. In respect of taxability of this transfer, three arguments were made before the Court which are being extracted from page 515 of the report of the above judgment in the case of Sunil Siddharthbhai v. CIT as under: 1. There must be a 'transfer' of a capital asset either under the general law or within the definition in clause (47) of section 2 of the Income Tax Act. 2. Consideration must be received or must accrue as a result of the transfer and the consideration must be capable of being determined in monetary terms in order that the computation of capital gains may be made as required by section 48. 3. Profits or gains must arise from the transfer and must be embedded in the consideration. Since the point raised in the first argument is not material regarding the issue involved, therefore, it would suffice to point out that the Court held that such contribution of the capital by way of transfer of personal capital assets into the firm would constitute transfer. [Para 19] The court relied on the principles laid down in the case of B. C. Srinivasa Setty (supra) and held that unless and until the consideration was present the computation provision of section 48 would not be workable and, therefore, such transfer could not be subjected to tax. The court further went on to hold that unless and until the profits or losses are real, same cannot be subjected to tax. [Para 19] Now, in the present case, the assessee has not received any consideration for reduction of share capital. What has happened is that ultimately the number of shares held by the assessee has been reduced to 50% and nothing has moved from the side of the company to the assessee. [Para 21] Even extinguishment of rights in a particular asset would amount to transfer. The chargeability of the capital gain was upheld because on extinguishment of shares in the amalgamating company, the assessee got the new shares and, therefore, the question whether any cost of acquisition could be ascertained was answered in favour of the Revenue. In the present case, as pointed out by the DR, the assessee's rights have not been extinguished. Tribunal had asked during the hearing that how much percentage assessee was holding in TGL and it was submitted that it was more than 51%. On verification of the details, it is seen that after reduction, TGL is having 89,93,149 equity shares of Rs. 10 each (after reduction and consolidation) and assessee is holding 67,37,399 shares which comes to about 74.9%, i.e., 75% for easy calculation. Let one examine whether assessee's rights have been extinguished or not. [Para 22] In the present case, the value of asset of a company immediately before and after reduction of share capital remained the same and therefore by reducing the amount and number of shares the assessee's proportionate share in such assets remained the same. In the case also the value of assets even after reduction of capital remained the same and, therefore, loss, if any, at best can be called notional loss which cannot be allowed as observed by the Supreme Court in the case of Sunil Siddharthbhai v. CIT. [Para 26] There is also force in the submissions of the DR that as per section 55(v), the cost of acquisition of shares even after conversion, etc., has to be taken with reference to the cost of original shares. Therefore, after reduction of share capital the cost of acquisition of the remaining shares would be reckoned with references to the original cost. Though at this stage assessee has not obtained any benefit because loss has been computed with reference to the actual cost, but, in future, if assessee decides to sell its shareholding in TGL then assessee has the right, under section 55(v), to substitute the cost of acquisition with reference to the original shareholding and in that case it may amount to double benefit later on which is not permissible under the law. [Para 28] Therefore, in the light of the above discussion, that the loss arising on account of reduction in share capital cannot be subjected to provisions of section 45 read with section 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 IT Act. [Para 29]