INCOME TAX ACT, 1961

Section 2(47)

Capital gains - Transfer under section 2(47) - Cancellation of shares held in 100% subsidiary pursuant to scheme of reduction of capital -

Assessee claimed long-term capital loss upon cancellation of shares held by if in 100% subsidiary CHIPL pursuant to reduction of capital by CHIPL year under consideration. AO denied assessee's claim holding that there was no transfer within meaning of section 2(47). Assessee was holding 100% shares of its subsidiary company and during the year, it reduced its capital. After the scheme of reduction also, assessee was holding 100% of the shares. This clearly established that by way of reduction of capital by cancellation of the shares, rights of assessee did not get extinguished. The assessee before and after the scheme was having full control over its 100% subsidiary. Assessee argued that merely because transaction resulted in loss due to indexation, AO ignored the same. Had it been profit or surplus even after indexation, AO could have very well taxed it as capital gains. Held : Though AO held that there was no transfer pursuant to reduction of capital, however it is a fact that the assessee had indeed received a sale consideration of Rs. 39.99 crores towards reduction of capital. This sale consideration was not sought to be taxed by AO under any other head of income. This went to prove that AO had indeed accepted this to be sale consideration received on reduction of capital under the head 'capital gains' only as admittedly same was received only for the capital asset, i.e., shares. Hence existence of a capital asset was proved beyond doubt. The capital gain was also capable of getting computed in the instant case as cost of acquisition of shares of CHIPL and sale consideration received thereon were available. Then AO was not justified in holding subject mentioned transaction did not tantamount to 'transfer' under section 2(47) as reduction of capital had resulted in 'extinguishments of rights in shares and definition of 'transfer' under section 2(47) includes 'extinguishments of any rights' in capital asset. Accordingly loss arising to assessee for cancellation of its shares in CHIPL pursuant to reduction of capital had to be allowed as long-term capital loss eligible to be carried forward to subsequent years.