The Mumbai Tribunal in the case of Tata Sons Limited (TSL) held that reduction of share capital of the company by way of cancellation of shares amounts to extinguishment of the right on the shares. It amounts to ‘transfer’ within the meaning and scope of Section 2(47) of the Income-tax Act, 1961 (the Act) for applying capital gain tax provisions.


  1. The assessee (TSL) held equity shares in Tata Tele-Services Company Limited (TTSL) a company engaged in the business of providing telecom services.
  2. TTSL had incurred substantial losses during its business, resulting in a large part of its paid-up share capital of TTSL being utilized to finance the loss. Accordingly, TTSL and its shareholders entered a Scheme of arrangement or re-structuring as per provisions of the Companies Act, 1956 the scheme was approved by the High Court (HC).
  3. Such a reduction in the share capital was adjusted against the accumulated balance in the Profit & Loss account and share premium account.
  4. Pursuant to the scheme, the number of equity shares of TTSL was reduced from 634,71,52,316 to 317,35,76,158 shares of Rs. 10 each and the paid-up equity share capital was also reduced correspondingly. As a result, shareholding of TSL also reduced from 288,13,17,286 shares to 144,06,58,643 shares.
  5. No consideration was paid by TTSL to its shareholders in respect of cancellation of shares.
  6. As a result of the reduction of capital, while furnishing the return of income, the assessee i.e. TSL based on various decisions1 claimed loss as long-term capital loss (LTCL) of Rs. 20,46,97,54,090 against the long-term capital gain (LTCG) earned by them in another transaction.
  7. The Assessing Officer (AO) approved the claim made by the assessee.
  8. However, the Principal Commissioner of Income-tax (PCIT) initiated revisional proceedings under section 263. The PCIT argued that, as no consideration had been received or accrued to the assessee through the reduction of capital, the computation mechanism outlined in section 48 of the Act failed and accordingly disallowed the claim of Long-term Capital loss (LTCL). The PCIT disallowed the claim of LTCL on the following grounds:
    • If there is no consideration received or accruing because of the transfer, Section 48 of the Act would be inapplicable, and it would not be possible to compute the profit, gains, or losses arising from the transfer of the capital asset.
    • No consideration has been received or accrued to the TSL because of the transfer of shares of TSSL and therefore, Section 48 of the Act will not be applicable, and it would not be possible to compute the profit/loss on transfer of the capital asset.
    • The consideration received or accrued to TSL was ‘NIL’ and not ‘Zero’.
    • PCIT relied on Special Bench of Mumbai of the Tribunal in Bennett Coleman & Co.2 and held that replacement or substitution of earlier shares by the new shares did not amount to transfer.
  1. Consequently, the PCIT rejected the permissibility of the long-term capital loss, contending that it constituted a notional loss. The aggrieved assessee filed an instant appeal to the Mumbai Tribunal.

 Tribunal’s Decision

  1. The Tribunal referring to the Supreme Court, in the case of Kartikeya Sarabhai3, held that reduction of capital, results in the reduction of the face value of shares, the share capital is reduced. Such reduction of the right of the capital asset would amount to a transfer within the meaning of that expression in section 2(47) of the Act.
  2. Accordingly, if the assessee’s right in the capital asset stands extinguished either upon amalgamation or by reduction of shares, it amounts to the transfer of shares within the meaning of 2(47) of the Act and therefore, computation of capital gains has to be made.
  3. The argument that capital gain provisions should only consider actual receipts cannot be accepted for another reason. This view would lead to an illogical and inconsistent outcome. For instance, under this perspective, even if a negligible or insignificant sum is received, it would trigger the computation of capital gains or losses. However, in cases where nothing is disbursed upon the liquidation of a company, resulting in the extinction of rights, it would lead to a total loss with no repercussions.
  4. When any amount, no matter how small, is received, it triggers the computation of capital gains under the Act. However, if no amount is received, the complete extinguishment of rights should be recorded as a write-off without being classified as a loss under capital gains provisions. This interpretation might lead to inconsistent outcomes and should be avoided unless it contradicts the provision’s intended purpose or is not reasonably possible to reach that conclusion.
  5. Accordingly, in view of the ratio and principle laid down by the courts, it was held by the tribunal that:
    • Reduction of capital constitutes the extinguishment of rights on shares, qualifying as a transfer under section 2(47) of the Act.
    • The loss incurred due to the reduction of shares is considered a capital loss as against a notional loss.
    • Even where the assessee hasn’t received any consideration upon capital reduction, resulting in a capital loss, such loss must be accounted for during the computation of capital gains, allowing for set off against any other capital gain.

Key Takeaways

The Tribunal’s rulings on the eligibility of capital loss deductions resulting from share capital reductions provide valuable guidance for taxpayers.

  1. It sets a principle loud and clear that such losses arising from capital reduction without accrual / receipt of actual consideration is actual loss of investment value due to reduction in intrinsic value. Consequently, all the provisions related to claim of capital loss should be available to the assessee.
  2. This significant ruling not only affirms Tata Sons’ entitlement to a capital loss but also sets a precedent for other entities to pursue similar tax benefits in instances of court-sanctioned capital reduction.
  3. Different interpretation of provision of law could lead to inconsistent outcomes and should be avoided unless it contradicts the intended purpose of the provision or is not reasonably possible to reach that conclusion.