A) ABSTRACT / HEADNOTE

This judgment concerns whether a statutory reduction in share capital by a company with consequent proportional diminution in a shareholder’s number of shares but with the face value per share unchanged falls within the statutory ambit of “sale, exchange or relinquishment of the asset” in Section 2(47) of the Income Tax Act, 1961, and therefore amounts to a transfer attracting capital gains tax under Section 45. The Supreme Court, relying on its earlier precedents (notably Kartikeya V. Sarabhai v. CIT and Anarkali Sarabhai v. CIT), holds that the reduction of share capital which extinguishes part of the shareholder’s bundle of rights is a species of relinquishment/extinguishment and thus a transfer under Section 2(47).

Even though the shareholder continued to be a member post-reduction and percentage holding remained materially unchanged, the Court emphasised the substance over the form: the shareholder’s rights (dividend entitlement, capital entitlement on liquidation etc.) were proportionately extinguished and consideration was received so the transaction falls within the inclusive definition of transfer and attracts capital gains treatment. The Supreme Court therefore dismissed the Revenue’s Special Leave Petition and affirmed the High Court and Tribunal decisions allowing the assessee’s capital loss claim.

Keywords: Section 2(47) Income Tax Act, 1961; reduction of share capital; extinguishment of rights; transfer; capital gains; redemption/reduction of preference shares.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The respondent-assessee (an investment company) held 15,33,40,900 equity shares (face value Rs. 10 each) in Asianet News Network Pvt. Ltd. (ANNPL), representing 99.88% of total share capital (15,35,05,750 shares). On ANNPL incurring losses and erosion of net worth, the company obtained Bombay High Court sanction to reduce share capital from 15,35,05,750 to 10,000 shares to set off losses against paid-up capital. Pursuant to the scheme the assessee’s holding reduced proportionately to 9,988 shares and ANNPL paid Rs. 3,17,83,474 as consideration to the assessee; critically the face value per share remained Rs. 10.

The Assessing Officer disallowed the assessee’s claim of long-term capital loss on the ground that there was no transfer under Section 2(47) because :

(i) face value per share was unchanged

(ii) the assessee’s percentage shareholding remained substantially the same

thus, AO reasoned, there was no extinguishment of shareholder rights in the statutory sense. The CIT(A) upheld the AO, but the ITAT allowed the assessee by applying this Court’s earlier test that reduction/redemption which extinguishes rights is transfer; High Court affirmed the ITAT. The Revenue sought SLP; the Supreme Court dismissed it, holding reduction with proportionate extinguishment of rights is a transfer under Section 2(47).

D) FACTS OF THE CASE

The assessee initially bought 14,95,44,130 shares and later purchased 38,06,758 more, totaling 15,33,40,900 shares (face value Rs.10 each). ANNPL’s losses eroded net worth; the company petitioned for capital reduction to write off losses. Bombay High Court sanctioned reduction: total shares reduced to 10,000; assessee’s holding became 9,988 shares; the company paid the assessee Rs. 3,17,83,474 as part consideration. The AO’s assessment view: despite numerical reduction, since face value per share remained Rs.10 and percentage holding remained 99.88%, there was no extinguishment of rights and hence no transfer within Section 2(47). CIT(A) agreed.

ITAT distinguished and applied Kartikeya V. Sarabhai and other precedents, treating reduction that destroys part of the shareholder’s bundle of rights as extinguishment/relinquishment ergo transfer. High Court agreed with the ITAT and rejected Revenue’s appeal. Revenue challenged before Supreme Court. The admitted substantial question: whether ITAT was right in holding extinguishment of rights of 153,340,900 shares when no such extinguishment was alleged and there was no reduction in face value.

E) LEGAL ISSUES RAISED

i. Whether reduction of share capital which proportionately reduces the number of shares held (but keeps face value unchanged) amounts to a transfer under Section 2(47)?
ii. Whether extinguishment of rights as contemplated by Section 2(47) requires sale to a third party or change in percentage holding?
iii. Whether receipt of consideration is a necessary pre-condition before capital gains computation can arise on extinguishment?

F) PETITIONER / APPELLANT’S ARGUMENTS

The Revenue contended that:

(i) mere numerical reduction of shares without change in face value does not extinguish shareholder rights;

(ii) the assessee did not part with rights to any third party and continued to hold same percentage therefore no ‘transfer’;

(iii) Kartikeya V. Sarabhai was distinguishable because that case involved different factual matrix and the test of extinguishment must be strictly applied;

(iv) taxing such reduction where percentage holding remains would lead to anomalous taxation without real transfer. (AO & CIT(A) views are reproduced in the record).

G) RESPONDENT’S ARGUMENTS

The assessee (respondent) argued that:

(i) Section 2(47) is inclusive and expressly covers relinquishment/extinguishment of rights;

(ii) reduction that results in diminution of dividend and liquidation entitlements constitutes extinguishment of rights even if membership continues;

(iii) prior apex authority (Anarkali Sarabhai; Kartikeya Sarabhai) treats redemption/reduction as purchase by company and as transfer;

(iv) receipt of consideration (here Rs. 3,17,83,474) and allotment of 9,988 shares in lieu shows the assessee surrendered a vast number of shares and received value hence capital gains/loss arises.

H) JUDGMENT 

The Bench found no error in High Court’s reasoning and dismissed Revenue’s petition. The Court reaffirmed the settled doctrine: Section 2(47) is wide and includes relinquishment/extinguishment; a shareholder may continue membership but still suffer extinguishment of part of bundle of rights, which suffices for transfer. The Court relied on Kartikeya V. Sarabhai and Anarkali Sarabhai which had held redemption/reduction of preference shares = company buying back shares = sale/relinquishment.

The Court emphasized substance over mere percentage continuity: although percentage shareholding may superficially appear the same, the economic rights (dividend right, capital entitlement on liquidation, nominal value recovered) were proportionately reduced ergo extinguishment. The Court also cited Vania Silk Mills (P.) Ltd. for a broad interpretation of extinguishment covering termination of qualitative or quantitative rights.

The Court noted that Companies Act (s.66) permits reduction and that the statutory machinery effecting reduction produces a real transfer resulting in receipt of consideration; jurisprudence shows that receipt is not an absolute prerequisite for recognition of capital gains (Jaykrishna Harivallabhdas). Consequently, the impugned orders allowing assessee’s capital loss stand affirmed and SLP dismissed.

a. RATIO DECIDENDI

The ratio is that reduction of share capital which extinguishes part of a shareholder’s bundle of rights even if the shareholder remains on the register and percentage appears unchanged constitutes transfer under Section 2(47) because the statutory definition includes relinquishment and extinguishment of any right. Where such extinguishment results in receiving consideration (or otherwise), capital gains charges under Section 45 follow. The Court applied prior binding precedents and treated the reduction as effectively a purchase by the company of the shareholder’s rights.

b. OBITER DICTA 

The Court reinforced policy and interpretative propositions:

(i) sale is only one mode of transfer;

(ii) legislative purpose favors treating extinguishment uniformly irrespective of technical receipt presence (to avoid anomalous outcomes);

(iii) Companies Act reduction/redemption mechanisms have substance of buy-back/purchase these serve as permissible modes that generate tax consequences.

The observations stress avoiding formalistic tests (like unchanged percentage) where economic rights are destroyed.

c. GUIDELINES 

• Section 2(47) must be read inclusively — examine substance (bundle of rights) not merely form (register or percentage).

• For income-tax purposes, determine whether any quantitative or qualitative rights (dividend, capital on liquidation) have been extinguished.

• Where consideration is paid or value is received on reduction, compute capital gains/loss as per Sections 45 & 48; absence of large consideration does not automatically exclude capital gains if extinguishment is evident.

• Revenue officers should not equate unchanged voting percentage with absence of transfer; detailed factual and valuation analysis required.

I) CONCLUSION & COMMENTS

The decision reaffirms settled judicial approach: tax characterisation follows economic reality of a transaction. Reduction/redemption that destroys part of shareholder rights is functionally equivalent to sale/purchase and attracts capital gains rules. The judgment provides clarity against narrow formalistic defences based on numeric percentage or mere continuity of legal membership. Practically, taxpayers and revenue must look to the bundle of rights and consideration received; companies must factor potential tax consequences when proposing capital reductions or partial redemptions. The ruling also aligns with corporate law machinery (Companies Act) recognising statutory reduction as permissible purchase of shares tax law follows. For practitioners, the case is an instructive precedent for contesting/formulating assessments on share capital restructuring and underlines the need for careful valuation and documentation at the time of sanctioned reductions.

J) REFERENCES

a. Important Cases Referred
i. Kartikeya V. Sarabhai v. Commissioner of Income Tax, (1997) 7 SCC 524. (Referred in uploaded judgment).
ii. Anarkali Sarabhai v. CIT, (1997) 3 SCC 238 : (1997) 224 ITR 422.
iii. Commissioner of Income-Tax v. Vania Silk Mills (P.) Ltd., (1977) 107 ITR 300 (Guj).
iv. Commissioner of Income-Tax v. Jaykrishna Harivallabhdas, (1998) 231 ITR 108 (Guj).

b. Important Statutes Referred
i. Income Tax Act, 1961: Section 2(47); Section 45; Section 48 (computation rules).
ii. Companies Act, 2013: Section 66 (reduction of share capital).

Primary source: Principal Commissioner of Income Tax-4 & Anr. v. M/s Jupiter Capital Pvt. Ltd., [2025] 1 S.C.R. 431 : 2025 INSC 38 (uploaded judgment).