top of page

ITAT rules in favour of Tata Sons holding them eligible to claim capital loss on account of capital reduction

Introduction

 

The Hon’ble Income Tax Appellate Tribunal (ITAT) Mumbai, held that reduction of share capital shall be deemed to be capital loss and not a notional loss where the same is arising from court-approved capital reduction, irrespective of whether any consideration has been received or not. The ITAT categorically held in the case of M/s. Tata Sons Limited vs. Commissioner of Income Tax (ITA No.3468/Mum/2016)1 dated January 23, 2024, that (i) reduction of capital is extinguishment of right on the shares and amounts to transfer within the meaning and scope of section 2(47), (ii) the loss on reduction of shares is a capital loss and not notional loss, and (iii) even where Assessee has not received any consideration on reduction of capital the same shall be allowed to be set-off against any other capital gain. This categorical stance by ITAT Mumbai not only validates Tata Sons' claim for a capital loss but also sets a precedent in acknowledging the eligibility of entities to seek such tax relief in case of a Court-approved capital reduction.

 

Facts


  1. On April 1, 2008, M/s. Tata Sons Limited (‘Assessee’) possessed 288,13,17,286 equity shares in Tata Tele-Services Company Ltd. (TTSL), acquired at different instances.

  2. In the assessment years preceding the year under consideration, TTSL incurred significant losses in the course of its business. As a consequence, a considerable portion of TTSL's paid-up share capital was utilized to finance or absorb the incurred losses.

  3. In view of such losses, a "Scheme of Arrangement and Restructuring" was implemented between TTSL and its shareholders. By virtue of such a scheme, the number of shares of TTSL was to be reduced to half with no consideration being charged in respect of these shares which were to be cancelled.

  4. As a result of the implementation of the aforesaid scheme of arrangement, the Assessee's ownership of 288,13,17,286 equity shares in TTSL was halved to 144,06,58,643 due to the cancellation of equity shares following the reduction of capital.

  5. In the income tax return for the Assessment Year (‘AY’) 2009-10, filed on September 30, 2009, the Assessee reported a long-term capital loss related to the reduction of shares in TTSL. In the computation of income for capital gains, the Assessee accounted for gains or losses arising from various transfers of capital assets including the long-term capital loss on capital reduction amounting to INR 2,046.97 Crores.

  6. After examining both factual and legal submissions related to the long-term capital loss of INR 2046.97 crores arising from the reduction of capital, the Assessing Officer (‘AO’) accepted the Assessee's claim to allow such capital loss in the order passed under section 143(3) dated May 09, 2013, and rectified certain apparent mistakes from the record through an order under section 154 dated June 16, 2014.

  7. Following the aforementioned proceedings and the examination of the material on record by the AO, the Principal Commissioner of Income Tax (‘PCIT’), in the exercise of his revisionary jurisdiction, held that the computation provision of Section 48 of the Income Tax Act, 1961 (‘the Act’) fails in the instant case of capital reduction due to absence of any consideration, therefore, a capital loss cannot be allowed. The PCIT opined that the order passed by the AO is erroneous and prejudicial to the interests of the Revenue.


Assessee’s Contention


  1. The Assessee asserted that it had duly responded to the queries raised by the AO, providing details and explanations along with the computation of long-term capital gain.

  2. The response included an explanation of the relevant legal principles, citing various judgments from the Hon'ble Supreme Court.

  3. The Assessee claimed that the reduction in capital should be treated akin to a transfer for taxation purposes. Additionally, the claim for capital loss was to be considered permissible, and this position is supported by legal precedents.

  4. The Assessee further claimed that once the AO, considering the facts and legal principles established by various statements of the Hon'ble Supreme Court has accepted the long-term capital loss, the PCIT cannot subsequently take a different view by asserting that the AO's view is incorrect.

  5. The Assessee also made reference to various legal judgments supporting the proposition that if the AO has taken a view that is legally plausible, the Commissioner cannot revise or cancel the assessment order passed by the AO.


PCIT’s Contention


  1. The PCIT claimed that in case where no consideration is accrued or received as a result of the transfer of capital assets, Section 48 of the Act cannot be applied and it would not be possible to compute the profits, gains, or losses arising from the transfer of such capital asset.

  2. The PCIT opined that the said scheme, although claimed as a scheme of arrangement and restructuring, did not qualify as a scheme of reduction of capital.

  3. The PCIT observed that there is no extinguishment of rights in the present case, and the consideration received is asserted to be Nil, not Zero.

  4. The PCIT further held that there is a possible view in the facts of the instant case that if no consideration was received or accrued to the Assessee, then the computation provision under Section 148 of the Act fails.

  5. Accordingly, the PCIT directed the AO to determine the total income by disallowing the long-term capital loss of INR 2,046.97 Crores.


Judgments referred by Assessee in support of its Arguments:


  1. Kartikeya Sarabhai v. CIT2

  2. CIT vs. G. Narasimhan3

  3. CIT vs. D.P. Sandhu Brothers Chembur Pvt. Ltd.4


Issues raised before the ITAT


  1. Whether long term capital loss on account of reduction of capital can be allowed?

  2. Whether the PCIT was correct in law and facts in holding that the assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue?


Decision of the ITAT


  1. Whether long term capital loss on account of reduction of capital can be allowed?

    1. The ITAT observed that there cannot be any divergent view that a ‘capital asset’ is subject to tax if there is a ‘transfer’ within the scope and meaning of Section 2(47) of the Act.

    2. Basis the facts of the instant case, the ITAT emphasized that if the Assessee's rights in the capital asset i.e. shares, are being extinguished, either through amalgamation or reduction of shares, it constitutes a transfer of shares as per the definition in section 2(47). Consequently, the calculation of capital gains becomes necessary.

    3. The ITAT further observed that even in scenarios where the Assessee hasn't received any consideration upon the reduction of capital but has incurred a loss leading to a decrease in investment, it is regarded as a capital loss.

    4. Consequently, the ITAT determined that the loss suffered by the Assessee in this particular instance qualifies as a capital loss, distinct from a notional loss.

    5. Hence, on the basis of the above observations, the ITAT held that in the computation of capital gains, such capital loss shall be allowed in computing the income of the Assessee and is also permitted for set-off against any other capital gain.

  2. Whether the PCIT was correct in law and facts in holding that the assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue?

    1. Basis the facts of the instant case, the ITAT observed that the AO’s judgment highlights the existence of a plausible perspective.

    2. Consequently, the ITAT reiterated that if the AO has adopted a stance in favour of the Assessee, and such a position aligns with a possible interpretation under the Act, the PCIT is not empowered to assert that the AO's order is erroneous and detrimental to the interests of the Revenue.

    3. Hence, relying on the aforementioned observations, the ITAT concluded that the PCIT does not have the authority to set aside or cancel the order issued by the AO.

 

Conclusion


The landmark position taken by the ITAT in the instant case affirmed that the reduction of share capital should be considered a capital loss rather than a notional loss. This holds true regardless of whether any consideration has been received in the process of such capital reduction. This decision also underscores the broader implications for other entities facing similar circumstances, providing a precedent for seeking tax relief on account of significant financial challenges related to Court approved reduction in share capital.


Credits: This article has been co-authored by Ashwini Gundu, Executive, Transaction Advisory - Finance & Tax and Pratik Mehta, Manager, Transaction Advisory - Finance & Tax at Constellation Blu.

36 views0 comments

Recent Posts

See All

Commenti


bottom of page