Delhi Tribunal holds reduced shareholding due to fresh share issue is not relinquishment of right; deletes capital gains addition

In the case of Sunita Sanjeev Aeren ^[1]  (Taxpayer), the Delhi Income Tax Appellate Tribunal (Tribunal) deleted an addition in the facts of the case, where the Taxpayer was a shareholder holding 2.5% in two companies; however, due to a fresh issue of shares the companies to third party, the ownership percentage  dropped to just 0.562% without selling any shares by herself. These companies owned a valuable property worth INR 150 crores. The tax authority held the entire transaction as de-facto transfer of ownership and control of the underlying property and computed the proportionate value by noting that the Taxpayer’s ownership in an underlying property was reduced to INR 84.30 Lacs post transfer as against INR 3.37 Cr before transfer, thereby computing the differential amount of INR 2.53 Cr as short-term capital gain. On appeal, the first appellate authority deleted the addition.

The Tribunal upheld the first appellate authority’s decision in favor of the Taxpayer, confirming that no shares were sold and that the dilution of the Taxpayer’s shareholding, arising solely from a fresh issue of shares by the companies, does not amount to any surrender or relinquishment of rights. Since no right was offered to the Taxpayer and nothing was given up by the Taxpayer, the conditions necessary to constitute a “transfer” under the Income Tax Laws (ITL) were not satisfied. A valid transfer requires an identifiable right in a capital asset, a relinquishment in favor of a specific person, and a corresponding consideration for such relinquishment—none of which existed in this case.

Furthermore, the Tribunal followed a similar Delhi High Court (HC) decision in the case of Snerea Properties Pvt. Ltd. ^[2], which emphasized that any tax should apply to the actual buyers and sellers of shares, not the diluted shareholder, who didn't transfer anything. The Delhi HC had further held that since there is no transfer of any part of taxpayer’s interest or title in the underlying property to any third party, the income does not arise in taxpayer’s hands. Following the same principle in the present case, the ITAT dismissed the tax authority’s appeal.  

^[1] [TS-1563-ITAT-2025(DEL)]
^[2] [TS-927-HC-2025(DEL)]