In the case of Tata Sons Ltd.[1] (Taxpayer), the issue before the Tribunal pertained to whether long-term capital loss arising on reduction of share capital by cancellation of shares is an allowable capital loss under provisions of the Income Tax Laws (ITL).
In the facts of the case, the Taxpayer was a shareholder in Tata Tele-Services Company Ltd. (TTSL). In order to write off its past losses, TTSL and the shareholders entered into a scheme of arrangement wherein TTSL reduced its share capital by cancelling half of its issued shares. The amount available from extinguishment of share capital was written off against book losses and unabsorbed depreciation. No consideration was paid to the shareholders. Hence, the shareholder claimed long-term capital loss (LTCL) on cancellation of shares. While the assessing tax authority allowed the claim of the taxpayer, the Principal Commissioner of Income-tax (PCIT) undertook revisionary proceedings to disallow the loss. PCIT contended that the order is erroneous as loss arising on reduction of capital is a notional loss. In absence of conceivable consideration, the computation mechanism fails for determination of LTCL and the scheme does not involve reduction of capital but is rather scheme of arrangement. PCIT principally relied on the decision of Mumbai Tribunal in the case of Bennett Coleman vs. Add.CIT (2011) (133 ITD 1) (SB) which held that where capital reduction is undertaken for no consideration, loss will not be tax admissible as reduction of capital without any consideration to the taxpayer would render the capital gains computation mechanism infructuous.
In instant case, Mumbai Tribunal relied on certain decisions[2] to hold that reduction of share capital is a transfer under the ITL.As regards the allegation of the PCIT that capital gain/loss computation mechanism fails in the absence of any consideration on transfer, the Tribunal, referred to the decision of Gujarat High Court in the case of Jaykrishna Harivallabhdas[3] which held that if mere non-receipt of consideration would lead to failure of capital gain/loss computation, it would imply that negligible or insignificant consideration would still make the mechanism work. This would lead to incongruous results. Hence, the Tribunal held that capital gain/loss can be computed even in case of NIL consideration where such consideration is conceivable, though not received.
The Tribunal observed that even in issue before Bennett Coleman (supra), the Bench was divided, and the minority view in that decision corresponds to the view taken by the assessing tax authority in the instant case. The Tribunal held that the view taken by tax authority to allow capital loss arising on cancellation/reduction of share capital is a possible view and hence PCIT cannot hold the same to be erroneous for invoking its revisionary powers.
Accordingly, the Tribunal held that loss arising on reduction/cancellation of shares is a capital loss (allowable to be set off against other capital gain income) and is not a notional loss. The revision order of PCIT was thus set aside.
[1] TS-42-ITAT-2024(Mum) dated 23 January 2024
[2] Supreme Court (SC) in the case of Kartikeya Sarabhai [228 ITR 163]; Karnataka High Court in the case of DCIT v. BPL Sanyo Finance Ltd. [312 ITR 63]; SC in the case of CIT v. Grace Collis & Ors. [248 ITR 323]
[3] 231 ITR 108
