Reduction in shareholding in subsidiary company pursuant to a share reduction would be “transfer”: Supreme Court

The Supreme Court (SC) held* that a reduction of share capital qualifies as a “transfer” under section 2(47) of the Income-tax Act, 1961 (the Act). Accordingly, the Apex Court allowed the taxpayer’s claim of having incurred a long-term capital loss of INR 164 crores due to the capital reduction.

The SC reaffirmed the broad and inclusive definition of “transfer” emphasizing that even non-sale transactions leading to a loss or extinguishment of rights in capital assets would be “transfer” for the purpose of the Act.

This SC clarified that “extinguishment of rights” in a capital asset need not necessary involve the sale of shares but includes any cancellation or reduction of rights in a shareholder’s investment. The Court reiterated that capital reduction involves a proportional surrender of rights, qualifying as a “transfer” irrespective of whether the face value or percentage of shareholding remains constant.