TATA SONS LTD,MUMBAI vs. CIT 2, MUMBAI

The assessee has also raised an additional ground which is reproduced as under:- “The Order passed under Section 263 of the Income Tax Act, 1961 (the Act) dated 28 March, 2016 by the Principal Commissioner of Income Tax -2 (PCIT) is bad-in-law and illegal and therefore, should be quashed, since having given an opportunity of being heard to the appellant, the PCIT ought not to have expressed any final opinion as regards the merits of the case, (as held by a Co- ordinate Bench of the Honourable Tribunal in the case of Ved M/s. Tata Sons Limited Prakash Contractors vs. CIT dated 3/11/2015).”

The entire controversy involved in the present case is, firstly, whether the ld. AO was correct in allowing long term capital loss of Rs.20,46,97,54,090/- on account of reduction of capital; and secondly, whether ld. PCIT‟s order is correct in law and facts in cancelling the assessment order holding that ld. AO has committed a mistake in allowing set off of long term capital loss of Rs. 20,46,97,54,090/- in the computation of total income of the assessee company and to direct the ld. AO to disallow the long term capital loss after giving assessee an opportunity of being heard. 4. The brief facts qua the issue involved are that, as on 01/04/2008 the assessee was holder of 288,13,17,286 equity shares in Tata Tele-Services Company Ltd. (TTSL) acquired at various points of time. TTSL is an Indian company engaged in business of providing telecom services. In the assessment years prior to the assessment year in question, TTSL had incurred substantial losses in the course of its business which had resulted in a large part of the paid-up share capital of TTSL being utilized so as to finance / bear the said loss. In view of such losses the „Scheme of Arrangement and Re-structuring‟ between TTSL and its shareholders was entered whereby as per the scheme: (a) the paid-up equity share capital of TTSL was to be reduced by way of reduction of the number of equity shares of the M/s. Tata Sons Limited company of Rs. 10/- each from 634,71,52,316 shares to 317,35,76,158 shares; (b) the said reduction of paid-up equity share capital of 3173,57,61,580 was to be given effect to by reducing the said amount from the accumulated debit balance in the Profit & Loss Account and by reduction from Share Premium Account; (c) the said reduction of capital was effected as part of the Scheme u/s. 100 to 103 of the Companies Act, 1956; (d) the Scheme was to become effective on the happening of the events set out in para 7.2 of the Scheme. The Effective Date of the reduction of capital was 04-12- 2008; (e) in terms of this particular Scheme, no consideration was payable to the shareholders in respect of the shares which were to be cancelled.

Thus, as a result, assessee‟s shareholding of 288,13,17,286 equity shares in TTSL was reduced to half, i.e., 144,06,58,643, that is, equity shares were cancelled as a result of reduction of capital pursuant to the scheme of arrangement u/s.100 and 391 of the then Companies Act, 1956. The said scheme was approved by the Hon‟ble Delhi High Court vide judgment and order dated 07/11/2008 and this resulted in cancellation of interalia certain shares of TTLS as specified in the scheme. The scheme of arrangement and restructuring has been placed before us during the course of the hearing. The relevant portion of the said scheme duly approved by the Hon‟ble High Court reads as under:-

In the return of income for the A.Y. 2009-10 filed on 30/09/2009, assessee had shown long term capital loss on reduction on the shares of TTSL. In the computation of income for capital gain, assessee had shown capital gains / losses arisen as a result of various transfer of capital assets held by it and one of the components of capital gains / loss was long term capital loss of Rs.2046,97,54,090/-. The computation of capital gains filed alongwith return of income was as under:-

This computation of capital gain was filed before the ld. AO in response to his notice u/s. 142(1) dated 04/06/2011. It has been pointed out before us that during the course of assessment proceedings u/s. 143(3), AO has specifically raised this issue in connection with the assessee‟s claim for allowability of long term capital loss of Rs.2046.97 Crores. It has been stated that in M/s. Tata Sons Limited response to the specific query raised in the notices by the ld. AO assessee has given the details, the computation of income and working of its capital gain providing necessary details before the ld. AO and also how the claim of the assessee for long term capital losses is allowable in view of the decision of the Hon’ble Supreme Court in the case of Kartikeya Sarabhai reported in 228 ITR 163 (SC); CIT vs. G. Narasimhan reported in 236 ITR 327 and also the judgement of Hon’ble Supreme Court in the case of D.P. Sandhu Brothers Chembur Pvt. Ltd. reported in 273 ITR 1(SC). It was specifically pointed out that reduction of capital, i.e., loss of shares tantamount to transfer u/s. 2(47) of the Act and it was held that computation provision can only be passed only if it was not possible to conceive of any element of cost. After the assessee‟s reply, ld. AO again issued a show-cause notice dated 13/01/2012 which was on the basis of assessee‟s contention that long term capital loss arose by virtue of cancellation of Rs.144.06 Crores shares of TTSL was correct however, he asked for further clarification stating as under:- “Why the corresponding cost of shares due to reduction in share capital of Tata Teleservices Ltd. should not be treated as cost of shares of the balance shares of Tata Teleservices Ltd."

Thereafter, ld. AO had asked for other details of capital gain which was again replied by the assessee vide letter dated 11/01/2013. The ld. AO after examining the submissions both factual and legal in respect of long term capital loss of Rs.2046.97 crores in the reduction of capital / cancellation of 144.06 Crores number of shares of TTSL accepted the assessee‟s M/s. Tata Sons Limited claim for long term capital loss in his order passed u/s.143(3) dated 09/05/2013. The AO treated the amount of long term capital gain arising on sale of shares of TCS Ltd as business income and correspondingly sought to reduce the same from the computation of capital gains. Ultimately, as against the return income of Rs.43,54,03,565 under normal provision of the Act, income was assessed at 776,47,54,038/-.

Thereafter, on the receipt of the assessment order, assessee filed rectification application dated 26/08/2013 and 27/08/2013 and rectified certain mistake apparent from record and in pursuance of which ld. AO has rectified the order as u/s.154 dated 16/06/2014. 10. Post the above proceedings and examination of material on record by the AO, ld. PCIT in his revisionary jurisdiction issued a notice u/s. 263 dated 28/12/2015 to revise the assessment order passed by the ld. AO dated 09/12/2013 on the same very issue. In his show-cause notice, he has observed that order passed by the ld. AO is erroneous and prejudicial to the interest of the Revenue in view of the following reasons:- i) The Assessing Officer has failed to take into account the fact that the loss of Rs 20,46,97,54,090/- on account of reduction of capital in computation only and not in the books of account. (ii) The Assessing Officer has failed to consider that the assessee did not receive nor it showed accrual of any such consideration in its books of accounts (iii) The Assessing Officer has failed to consider that assessee had suffered only notional loss on the above transaction and that M/s. Tata Sons Limited the same should have not been set off against long term capital gains on shares earned. iv) The Assessing Officer has failed to consider that the Gujarat High Court decision in the case of CIT vs Mohanbhai Pamabhai 1971(9) TMI - wherein the High Court has held that section 45 is the charging section and it undoubtedly provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the heading 'Capital Gains". But, section 48 shows that the transfer that is contemplated by Section 45 is a transfer, if consideration is received by the assessee or accrues to the assessee. (v) The Assessing Officer has failed to consider the decision of Mumbai ITAT Bench, in the case of Bennett Coleman and Co. Ltd. Vs. Addl.CIT 2011(9) TMI-ITAT, Mumbai, Special Branch, wherein the ITAT had considered the judgments given by the Supreme Court in the case of Kartikeya V Sarabhai and CIT vs G. Naralmhan for computation of capital gain on reduction of capital and held that if the earlier shares have been replaced or substituted by new shares then the same would not amount to transfer at all. It would be merely a case of substitution of one kind of share with another kind of share which has been received by the assessee because of the rights of the original shares on the reduction of capital. The transfer of a capital asset, in order to attract the capital gain, must be a transfer as a result of which consideration is received by the assessee accrued to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. Where transfer consists of extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a transfer exigible to capital gains tax. The Tribunal held that if no consideration is received / accrued on account of reduction in capital, then loss arising on account of reduction in M/s. Tata Sons Limited shares capital cannot be subjected to the provisions of Section 45 read with Section 48 and accordingly such loss is not allowable as capital loss. At best such loss can be described as notional loss and it is settled that no notional loss or Income can be subjected to the provisions of Income Tax Act. (vi) The Assessing Officer has failed to consider that as the distribution of surplus to shareholders as bonus is not taxable, in the same way, losses of the company which have been adjusted by reducing the capital cannot be allowed.

Before us, ld. Sr. Counsel for the assessee, Mr. J.D. Mistry, first of all, submitted that in this case on the same very issue, the Assessing Officer has raised query and asked for the details which were duly replied and explained before the ld. AO alongwith the details of computation of long term capital gain and also explaining the law in light of various Hon‟ble Supreme Court judgments stating that in the case of reduction of the M/s. Tata Sons Limited capital, amounts to transfer and not only that the claim of capital loss is also allowed. Once, the AO after considering these facts and the proposition of law laid down by the various statements of the Hon‟ble Supreme Court has accepted the long term capital loss, then ld. PCIT cannot take a different view holding that view of the ld. AO is incorrect. He referred to various judgments on this proposition that if AO has taken one view which is possible view in law then CIT cannot revise or cancel the assessment order within the scope of section 263.

Mr. Mistry further submitted that, ld. PCIT has clearly erred and failed to consider that it is possible in law for schemes of reduction of capital, similar to the scheme in the present case, to provide for payment of consideration to the holders of the shares. He has also filed a table giving three examples of cases where reduction of capital had taken place by cancellation of shares and one of them was M/s. Jupiter Capital Private Limited, wherein consideration payable to the holder of the shares was cancelled. In all these cases the Tribunal has held that it is an allowable capital loss would result to the holders of the shares in all the cases whether or not consideration was payable in terms of the scheme. The lists of these details have been given before us which for the sake of ready reference is reproduced hereinbelow:-

Mr. Mistry further submitted that there is a vast difference between a case where no consideration, i.e., cost or any other element is conceivable in a transaction, as opposed to a case where zero or nil consideration is received in a given case. He further submitted that in respect of ld. PCIT‟s observation that scheme is not a reduction in capital but an extinguishment / effacement has no significance, because there is no such M/s. Tata Sons Limited distinction that exists in law in view of Section 102 of the Companies Act, 1956 on which he drew our attention. He further submitted that the ld. PCIT accepts that no consideration is received by the assessee and then goes on to make some alleged distinction between "nil" consideration and "zero" consideration which distinction is not understood. The simple question to be considered is, if it is conceivable that consideration can result, that consideration may be "zero" or "nil" or any figure. This is vastly different from no consideration being conceivable in a given case.

Further, with respect to the ld. PCIT's findings that there is only one view that can be held in the facts and circumstances of he submitted that only view can be that a capital loss will result on application of the provisions of sections 45 to 48 of the Act, Mr. Mistry submitted that there can be no dispute that assessee had subscribed to the shares and was holding the shares of TTSL and post scheme (which was duly approved by the Hon‟ble High Court), the shares held by the assessee has been reduced which has laid to a huge loss to the assessee as share holding has been reduced from 288,13,17,286 shares to 144,06,58,643 equity shares. It is clearly a capital loss to the assessee and it cannot be held that the loss is not allowable. He submitted that, there can be no dispute that- (a) the reduction of capital effected under the Scheme resulted in 144,06,58,653 equity shares of TTSL held by the assessee being cancelled; M/s. Tata Sons Limited (b) such cancellation and extinguishment of the aforementioned shares would clearly amount to a transfer as defined in section 2(47) of the Act. Section 2(47)(ii) clearly applies to the cancellation of shares under the Scheme and in the alternative, it is possible to contend that section 2(47)(1) may also be applicable. Even in the impugned order, the Ld. PCIT accepts /proceeds on the basis that the transfer of a capital asset/(s) has taken place: (c) the provisions of section 45 of the Act are clearly attracted as the said number of shares of TTSL being capital assets of the assessee have been transferred. (d) the provisions of section 48 of the Act are also clearly attracted which prescribe the mode of computation of any income/loss which arises under the head "capital gains by deducting from the full value of the consideration received/accrued as a result of the transfer, the cost of acquisition of the asset so transferred. (e) On a plain reading of the provisions, it is indisputable that a capital loss of Rs 2046.97 crores has arisen as a result of the transfer of the said shares in TTSL and consequently, allowability of the said capital loss is certainly a possible view and accordingly, the provisions of section 263 of the Act could not be invoked by the ld. PCIT, (f) That the view of the ld. PCIT that, since in the present case, no consideration was received by the assessee on the reduction of capital under the Scheme, the provisions of M/s. Tata Sons Limited sections 45 to 48 could not be applied - cannot be termed to be a correct, irrefutable or definitive view, and the same is not supported by any statutory provision or principle of law or binding judicial precedent. Accordingly, there is no jurisdiction empowering the CIT to invoke section 263 of the Act. In fact, the decision of the Gujarat High Court in the matter of CIT Vs. Jaykrishna Harivallabhdas (1997) 231 ITR 108 (Guj)] holds in favour of the assessee's contention that the capital loss must be computed in cases such as the present one even where no consideration has been received on the transfer of a capital asset.

In so far as the conclusion of ld. PCIT that the computation mechanism u/s.48 fails, he submitted that the correct principle as laid down by the courts is that the capital gain computation provisions may be held not to apply if and only if any part thereof cannot conceivably be attracted. In the case of the assessee, although no consideration has been received by or has accrued to the assessee, it is certainly possible to conceive of consideration being received or receivable in such cases and that consideration here is "zero". The Gujarat High Court in the matter of CIT Vs Jaykrishna Harivallabhdas (1997) 231 ITR 108 has held that a capital loss is sustained by an assessee, when shares of a company which had gone into voluntary liquidation are extinguished and no consideration is received by the assessee. In such a case, a capital loss should have been computed u/s 46(2) r.w.s. 48 of the Act despite the fact that "zero" or no consideration is received or receivable.

Lastly, with regard to reliance placed on Srinivasa Shetty (B.C.) 128 ITR 294 as referred by the ld. PCIT, he submitted that the same would not apply to the facts of the present case. On the contrary, judgment of the Hon‟ble Supreme Court in the case of D.P. Sandhu Brothers Chembur Pvt. Ltd (supra) wherein the principle laid down is that when some element of the provision cannot conceivably apply be attracted then only it may be contended that computation provision fails. Here it cannot be said that it is not conceivable an only consideration here is „Nil‟.

In so far as ground No.3, the ld. PCIT erred in failing to take note of the provisions of Section 55(2)(v)(b) and in not confirming that the cost of remaining shares would include the cost of the shares cancelled on reduction. He submitted that; firstly, the said section 55(2)(b)(v) provides for the cost of shares of a company which became the property on happening of the events mentioned therein to mean the cost of acquisition of the shares from which such asset is derived. The said provision does not include the cancellation of shares held consequent to reduction of the capital. Hence, on the interpretation of the ld. PCIT the cost of the cancelled shares if not allowed in the year of cancellation, will never be allowed; secondly, it is indisputable M/s. Tata Sons Limited that shares of TTSL which it owned were acquired at a cost. The said shares have now been cancelled and extinguished. It has undoubtedly suffered a loss. The view set out above is also upheld by the Mumbai Tribunal in the case of Carestream (supra).

On the other hand, ld. CIT DR submitted that here in this case ld. AO has not examined the correct principle of law on the facts of the case as earlier pointed out by the ld. PCIT in his order at various places. The judgments which have been relied upon by the assessee before the PCIT and by the ld. Sr. Counsel are not applicable in the facts of the case, because none of the case pertains to loss on reduction of capital. Even if it tantamount to transfer u/s. 2(47), then also the computation mechanism fails because there is no cost. Section 48 provides that transfer as contemplated u/s.45 applies only if consideration received by the assessee or accrues to the assessee. Here in this case, ld. AO has failed to consider that assessee did not receive nor it showed accrual of any such consideration in its books of accounts. The transfer of a capital asset, in order to attract the capital gain, must be a transfer as a result of which consideration is received by the assessee accrued to the assessee and if there is no consideration received by the assessee or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 is inapplicable and it is not possible to compute profits or gains arising from the transfer of the capital asset. This precise issue and law has been M/s. Tata Sons Limited well settled way back by the decision of the Hon‟ble Supreme Court in the case of B.C. Srinivasa Shetty (supra).

He further submitted that on this very issue, there is a precise judgment of ITAT Mumbai Special Bench in the case of Bennett Coleman & Co. Ltd. vs. Addl. CIT (supra) wherein this Tribunal after considering all the judgments of the Hon‟ble Supreme Court as cited by the assessee have been duly considered and it has been categorically held that in the case of reduction of capital, if no consideration can be determined then the computation mechanism fails. He also referred to para 17,19,21,23,26,28 & 29 of the Special Bench decision which for the sake of ready reference is reproduced hereunder:- 17. We have considered the rival submissions in the light of material on record as well as the decisions cited by both the parties. Initially the Ld. Counsel argued that share capital of TGL was reduced from Rs. 17,98,62,990/- divided into 17986299 equity shares of face value of Rs. 10/- each to Rs. 8,99,31,495/- divided into 17986299 of Rs. 5/- each paid up. This means basically the capital was reduced by reducing the face value of Rs. 10/- paid up of each share to Rs. 5/- paid up of each share. As a second step such shares (Rs. 5/- per share) were again consolidated into Rs. 10 paid up share and number of shares were reduced to 89,93,149. The Ld. Counsel had argued that basically the original shares got extinguished and, in fact, new shares have been issued by TGL. If the argument is that earlier shares have been replaced or substituted by new shares then the same would not amount to transfer at all. In that case, it would be merely a case of substitution of one kind of share with another kind of share which has been received by the assessee because of its rights to the original shares on the reduction of capital. This position was clarified by the Hon'ble Supreme Court in the case of CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198/ 43 Taxman 259. In that case, the M/s. Tata Sons Limited assessee was holding 90 shares in one S. company of face value of Rs. 100/- each. Pursuant to the scheme of amalgamation sanctioned by the High Court, the holders of the shares in S. company were to be allotted one share of Rs. 125/- each of NS Company for two shares in S. company and S. Company was to be dissolved. The assessee in that case was allotted 45 shares in N.S company. A question arose, whether this would amount to transfer and the Hon'ble Supreme Court held that there was neither an 'exchange' nor a 'relinquishment' in this transaction. The Hon'ble Supreme Court observed as under: "An "exchange" involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. A "relinquishment" takes place when the owner withdraws himself from the property and abandons his rights thereto. It presumes that the property continues to exist after the relinquishment. Where, upon amalgamation, the company in which the assessee holds shares stand dissolved, there is no "relinquishment" by the assessee." The apex court had also observed that in case of exchange that one person transfers a property to another person in exchange of another property, the property continues to be in existence. In that case, shares of S. company had ceased to be in existence and therefore the transaction did not involve any transfer. Similarly in the case before us if argument of assessee is accepted then the older shares with different ISIN number ceases to exist and new shares with a different ISNI numbers have been issued and, therefore, it cannot be called a case of extinguishment or relinquishment and it is a mere case of substitution of one kind of share with another. In case before us also assessee got the new shares on the strength of its rights with the old shares and, therefore, same would not amount to transfer. 18. ……………………………………………………………………..

In that case the court was concerned with the issue whether reduction of face value of equity share from Rs. 1000/- each to M/s. Tata Sons Limited Rs. 210/- each after reduction of share capital which was duly approved by the High Court would amount to transfer. It is important to note that in this case on reduction of capital, certain assets were also given to the shareholders in the form of property, payment of cash and/or adjustment of debit balances. When the matter travelled to Hon'ble Supreme Court, following the decision of Kartikeya V. Sarabhai case (supra) the apex court held that such reduction of capital would constitute transfer and any profit or gain arising from the transfer of capital asset is liable to be taxed u/s.45. In the above mentioned case 90 non-cumulative preference shares, of the face value of Rs. 1000/-, were purchased at a price of Rs. 420/- per share from a company called Sarabhai Limited. In 1965, a sum of Rs. 500/- per preference shares was paid to the assessee upon reduction of share capital and the face value of preference shares was reduced to Rs. 50/- per share and further payment of Rs. 450/- per share was made to the assessee. The ITO was of the opinion that the sum of Rs. 450/- per share which was received now was liable to be taxed under the head 'capital gain'. However, assessee contended that since no transfer had taken place in terms of sec.2 (47), no tax could be imposed. When the matter travelled to Hon'ble Supreme Court it was held that definition of transfer u/s.2 (47) was inclusive and would include relinquishment of an asset or extinguishment of any right therein. It was further observed that even preference shareholders have right to vote on resolutions which would effect the right of preference shareholder u/s. 87(2)(a), 87(2)(b) and 87(2)( c). Therefore the rights of preference shareholders are curtailed to that extent. A careful analysis of the above decision indicates that whenever there is reduction of shares and upon payment by company to compensate the value equivalent to reduction, apart from the effect on shareholders' rights to vote etc., a transfer can be said to have taken place. However, the question is whether the same can still attract sec.45? The answer is given by the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra). In this case the issue was whether there is a transfer if a particular partner retired from the firm and his share in the partnership was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liability and prior charges. The ITO was of the opinion that the amount received by the assessee to M/s. Tata Sons Limited the extent which included his proportionate share in the value of the goodwill is liable to be taxed as capital gain. When the matter travelled to the High Court their lordships observed, at pages 404 & 405, as under: But, even if we are wrong in taking this view and the correct view is that when a partner retires from the partnership his interest in the partnership assets is extinguished and there was, therefore, in the present case, "transfer" of interest of each of the assessees in the goodwill when the assessees retired from the firm, the amount received by each assessee in respect of his share in the value of the goodwill must still be held to be outside the pale of chargeability to capital gains tax. It is not every transfer of a capital asset which attracts the charge of capital gains tax. Section 45 which is the charging section, undoubtedly, provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head "capital gains". But, section 48 shows that the transfer that is contemplated by section 45 is a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Section 48 provides the mode of computation of capital gains by enacting that the income chargeable to tax as capital gain shall be computed by deducting from the "full value of the consideration received or accruing as a result of the transfer of the capital asset" the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer ; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. The amounts specified in clauses (i) and (ii) are to be deducted from the " consideration received or accruing as a result of the transfer of the capital asset " for the purpose of determining the profits or gains chargeable to tax. It is, therefore, clear that the transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. The transaction in order to attract the charge of tax as capital M/s. Tata Sons Limited gains must, therefore, clearly be such that consideration is received by the assessee or accrues to the assessee as a result of the transfer of the capital asset. Where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a transfer exigible to capital gains tax. Thus, it becomes absolutely clear that even if a transfer had taken place, unless and until some consideration is received, the transfer of such asset would not attract the provisions of sec.45. The Revenue has challenged this position in appeal before the Hon'ble Supreme Court and the court dismissed the appeal of the Revenue in Addl. CIT v. Mohanbhai & Pamabhai [1987] 165 ITR 166 (SC) in view of the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. Decision of Hon'ble Gujarat High Court was not approved by the Hon'ble Supreme Court, while adjudicating the case of B.C. Srinivasa Setty (supra) on another point i.e. whether building of goodwill in a business which did not cost anything could still be regarded as capital asset for the purpose of charging the same under the head 'capital gains'. However, as far as proposition that a transfer cannot be subjected to provisions of sec.45 in the absence of consideration still remains valid. It may not be out of place to refer to the commentary on Income Tax Law, Fifth Edition, Volume- 2 page 2772, by Chaturvedi & Pithisaria wherein it has been observed as under: "Transfers not chargeable.—It is not every transfer of a capital asset which attracts the charge of capital gains tax. Although section 45 provides the generality of the charge, it is followed by several sections exonerating the charge under stipulated circumstances. Section 48 provides the mode of computation and in doing so, it excludes expenditure incurred wholly and exclusively in connection with the transfer as also the cost of acquisition of, as well as any improvement to, the capital asset concerned. The transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Without the element of consideration, no transfer will attract capital M/s. Tata Sons Limited gains tax [CIT v. Mohanbhai Pamabhai, [1973] 91 ITR 393, 404 (Guj), not approved, on another point, in (1981) 128 ITR 294 (S.C)]" In any case, to understand the matter further we shall go through the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai (supra). In this case, the issue involved was whether transfer of personal capital assets to the firm towards contribution of capital, would constitute transfer and whether such transfer would attract capital gain tax? The court held that such contribution of capital asset of a partner into the firm would definitely constitute a transfer because in that case the partner's interest in such asset is reduced from exclusive interest to a shared interest. In respect of taxability of this transfer, three arguments were made before the Hon'ble court which are being extracted from page 515 of the report of the above judgment in the case of Sunil Siddharthbhai (supra) as under:

Now in the case before us the assessee has not received any consideration for reduction of share capital. What has happened is that ultimately the number of shares held by the assessee has been reduced to 50% and nothing has moved from the side of the company to the assessee. The Ld. Counsel of the assessee submits that the decision of the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) is not applicable because, in the case before us, it was possible to ascertain the consideration by envisaging the same as zero. In this regard he relied on the decision of the Hon'ble Bombay High Court in the case of Cadell Wvg. Mill (P.) Ltd. (supra) and, in particular, referred to the observations at pages 284 and 285 of the report wherein it was observed that whole of the value of the capital asset transferred could not be brought to tax because that would amount to taxing the value of asset and not profit as contemplated in sec.45. In this case the issue involved was whether the compensation received on surrender of statutory tenancy rights is chargeable as casual income u/s.10(3) or it should be charged u/s.45. The court, after examining the issue in detail, held that amount received on such surrender is chargeable only u/s.45. The court observed that whole value of the compensation could not be charged u/s.56 because same was chargeable u/s.45 and the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was applied. It was also noted that, in fact, sec.55 (2)(a) itself was amended by Finance Act, 1994 w.e.f. 1-04-1995 and the cost of acquisition of tenancy rights was to be taken at nil, therefore, this provision could not be applied retrospectively. Thus, it is clear that the M/s. Tata Sons Limited decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was followed in principle wherein it has been held that if computation provision of sec.48 fails, then such transaction cannot be brought to tax u/s.45. The court specifically declined to entertain the argument that cost of tenancy right should be taken at zero because that would amount to charging of capital value of the asset and not capital gain. In the case of reduction of capital nothing moves from the coffers of the company and, therefore, it is a simple case of no consideration which cannot be substituted to zero. It is pertinent to note that after the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra), the legislature has introduced specific provision wherein cost of acquisition of goodwill was to be taken at nil. Similar amendments were made to specify the cost with reference to trademark, cost of right to manufacture or produce or process any article or thing etc. Therefore, wherever Legislature intended to substitute the cost of acquisition at zero, specific amendment has been made. In the absence of such amendment it has to be inferred that in the case of reduction of shares, without any apparent consideration, that too in a situation where the reduction has no effect on the right of shareholder with reference to the intrinsic rights on the company, it is always possible to argue that cost of acquisition cannot be ascertained and, therefore, provisions of sec.45 would not be applicable. Since no amendment has been made in respect of consideration, principles laid down by the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra)- later confirmed by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) and also in the case of Sunil Siddharthbhai (supra)- are applicable, if the consideration cannot be ascertained, then provisions of sec.45 would not apply. No doubt Learned counsel forcefully submitted that the legislature has listed out all transactions which are not regarded as transfer such as gifts etc, (sec.47-iii) and per contra any other transfer even without specific or zero consideration should be considered for taxation U/s 45 but we find no force in it. The situation regarding non ascertainment of any of the element of sec.48 came to light only after the pronouncement of the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). Perhaps legislature intended to exempt only gifts from subject matter of capital gains and that is why clause (iii)

If after few years, this company suffers a loss and the assets are reduced to Rs. 50, then share of the assessee in the assets of the company would be only Rs. 37.50. If the capital of the company is reduced by 50%, even then the share of the assessee would be 75% and it would remain same at Rs. 37.50. Therefore, the effective share of assessee, in the assets of the company, would remain the same immediately before and after reduction of such capital. In other words, the loss suffered by the company would belong to the company and that cannot be allowed to be set off in the hands of the assessee. This position is further supported by another example. If, in the above illustration, after few years, instead of assets becoming Rs. 50/-, it increases to Rs. 200/-, because of profit, and in turn this company issued bonus shares, even then the profit would remain in the books of the company and mere allotment of such bonus shares cannot be subjected to tax. This position was accepted even by the Ld. Counsel of the assessee. Therefore, when the profits of the company which have been distributed to the shareholders by way of bonus shares cannot be assessed, on the same principle losses of the company which have been adjusted by reducing the capital cannot be allowed. 24. ……………………………………………………………………. 25. ……………………………………………………………………… 26. The Ld. Counsel of the assessee had also relied on the following decisions of the Tribunal- (a) Zyma Laboratories Ltd.'s case (supra) (b) Polychem Ltd.'s case (supra ) (c) Ginners & Presser Ltd.'s case (supra) But in all these cases the principle laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) was neither cited, nor considered and, therefore, these decisions are distinguishable and in any case, not binding on the Special Bench. In fact such profit or loss arising out of issue of bonus shares or reduction of capital is only a notional profit or notional loss and this concept has been approved by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy M/s. Tata Sons Limited Kapadia (supra) and further confirmed by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai (supra). In the case of MissDhun Dadabhoy Kapadia (supra) the facts noted by the Hon'ble apex court are as under:

Thus, in view of the aforesaid judgment of Special Bench, Ld. DR submitted the claim of assessee cannot be upheld, because capital gain / loss cannot be determined. In any case, the ld. AO has not discussed this issue at all in his order nor he has considered this legal aspect and has simply accepted the claim of the assessee. He thus strongly relied upon the order of the ld. PCIT. DECISION 27. We have heard rival submissions and perused the relevant finding given in the impugned order as well as material placed on record. The main issue which for our adjudication is, firstly, whether the ld. AO was correct in allowing long term capital loss of Rs. 2046,97,54,090/- on account of reduction of capital and consequently whether ld. AO was correct in allowing set off of the said amount of long term losses in computation of total income of the assessee company. Secondly, whether ld. PCIT was correct in law and facts in holding that assessment order passed by the ld. AO is erroneous and prejudicial to the interest of the Revenue; and lastly, whether the view taken by the ld. AO for M/s. Tata Sons Limited possible view while allowing the claim of the set off of long term capital loss. 28. We have already discussed the facts relating to reduction of capital of asset and claim of long term capital loss. To put in succinct manner, the assessee was holder of 288,13,17,286 equity shares in TTSL acquired at various points of time. Thus, assessee had invested in the shares of TTSL which was a capital asset in the hands of the assessee company. Since, TTSL had incurred substantial loss in the course of its business for providing telecom services, the large part of the paid-up share capital of TTSL was utilized so as to finance / bear the said loss. In view of such losses, a Scheme of Arrangement and Re- structuring between TTSL and its shareholders was entered and one of the major shareholder was the assessee company. The equity shares of TTSL of Rs.10/- each from 634,71,52,316 shares was reduced to 317,35,76,158 shares. The said reduction of capital was effected as part of the scheme provided u/s. 100 to 103 of the Companies Act, 1956. As per the scheme, no consideration was payable to the shareholders in respect of the shares which were to be cancelled. Consequently, the shareholding of the assessee was also reduced to half, i.e., 144,06,58,643 from 288,13,17,286 equity shares. The relevant portion of the scheme has already been incorporated above. Now, such a reduction of capital has been claimed as long term capital loss by the assessee in the computation of capital gain and has been set off against other long term capital gain as per the working incorporated in para 6 of the order. The entire case of M/s. Tata Sons Limited the ld. PCIT hinges upon the fact that, since no consideration has been received or accrued to the assessee by way of reduction of capital and therefore, computation mechanism provided u/s.48 fails and consequently, long term capital loss cannot be worked out. According to him, Section 48 provides mode of computation of capital gains which is computed by deducting from the full value of consideration received or accruing as a result of the transfer of the “capital asset” including expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the capital asset and if there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 becomes wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. Further, according to him while transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a „transfer‟ exigible to capital gains tax. The observation and the finding of the ld. PCIT have already been dealt in the foregoing paragraphs.

First of all we have to bear in mind the reduction / cancellation of shares were as per the scheme of arrangement and restructuring between TTSL and its shareholders in terms of Section 100 & 391 under the relevant provisions of the Companies Act, 1956. The assessee had invested in the equity shares and has acquired 288,13,17,286 equity shares at face value of Rs. 10/-. Thus, at the time of the acquisition of the M/s. Tata Sons Limited shares, assessee has paid consideration for acquiring the capital asset. As per the scheme, book loss and unabsorbed depreciation was written off first from the balance available in the share premium account and write-off of book losses remaining after deduction against the balance in the share premium account to the amount available from extinguishment of paid up equity shares. As a result of this, the shares of the assessee were reduced to half and the consideration paid on acquisition of capital asset was also reduced to half which resulted into loss to the assessee. There can be no dispute that there was a loss on the capital account by way of reduction of capital invested and therefore any loss on capital account, is a capital loss. The issue is, whether it is a notional loss according to the ld. PCIT and even if it is a capital loss, the same cannot be allowed because of reduction of the capital asset has not received any consideration or any consideration has accrued to the assessee. First of all the reduction of a capital has been provided u/s. 100(1) of the companies Act). It provides the manner in which reduction of capital can be effected. The sub-clause (c) of section also envisaged to pay for any paid up capital which is in excess with the wants of the company. Thus, there is a consideration envisaged in the reduction of capital. There could be a case where consideration is paid on the reduction of capital or consideration is not paid at all. Whether in such circumstances, can two views be taken in the reduction of capital, one where certain consideration is paid and in another where no consideration is paid. For example, if the share capital of the M/s. Tata Sons Limited assessee was reduced from 288.13 Crore shares to 144.06 Crore share and if assessee would have received some amount, say Rs.1 Crore, then as per the ld. PCIT, assessee would be entitled to compute long term capital loss of Rs. 2045,97,54,090/-, because there is some consideration received. If assessee has not received the consideration then, whole computation mechanism fails. We are unable to accept such reasoning or view taken by the Ld. PCIT.

There cannot 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. Now, whether the reduction of face value of shares amounts to transfer or not, has been settled by the Hon‟ble Supreme Court in the case of Kartikeya Sarabhai reported in 228 ITR 163 (SC) wherein the issue was whether reduction of face value of the shares will be subject to levy of capital gains, whether reduction of the face value result in extinguishment of assessee‟s right and is there any transfer within the meaning of Section 2(47). The case of the assessee in that case was, since reduction of face value did not result in extinguishment of assessee‟s right and therefore, there is no transfer and hence, is not exigible to capital gains tax. The Hon‟ble Supreme Court however held that:- “ Section 2(47) which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of share capital, it is not possible to accept the contention that there has M/s. Tata Sons Limited been no extinguishment of any part of his right as a shareholder qua the company. It is not necessary for a capital gain to arise that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to a sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act. Further, the Hon‟ble Supreme Court held that a company under section 100(1)(c) of the Companies Act, 1956 has a right to reduce the share capital and one of the modes which can be adopted is to reduce the face value of the preference share. Section 87(2)(c) which, inter alia, provides that "Where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of this sub-section, his voting right on a poll, as the holder of such share, shall, subject to the provisions of section 89 and sub-section (2) of section 92, be in the same proportion as the capital paid-up in respect of the preference share bears to the total paid-up equity capital of the company." Hence, when as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such reduction of the right of the capital asset would clearly amount to a transfer within the meaning of that expression in section 2(47) of the Income Tax Act, 1961. Thus, reduction of capital has been treated as a transfer within the meaning and expression of Section 2(47).

In the case on hand consequent to the assessee's default in not paying the balance of money on allotment, its right in the shares stood extinguished on its forfeiture by the investee company. The loss suffered by the assessee, i.e., non- recovery of share application money is consequent to the forfeiture of its right in the shares and the same is to be understood to be within the scope and ambit of transfer. In this view of the matter, the Tribunal was justified in holding that it would amount to short-term capital loss to the assessee. No other point was urged before us.

With regard to the extinguishment of any rights, we may profitably refer to the judgment of the Supreme Court in the case of CIT v. Mrs. Grace Collis [2001] 248 ITR 323. In the said case, it has been held as under (page 329) : "It is true that the definition of 'transfer' in section 2(47) of the Act is an 'inclusive' definition and, therefore, extends to events and transactions which may not otherwise be 'transfer' according to its ordinary, popular and natural sense."

For the aforesaid reasons, we are of the considered opinion that the questions posed have to be answered in favour of the assessee and against the Revenue. The appeal accordingly stands disposed of.”

In case of CIT vs. Mrs. Grace Collis And Others reported in 248 ITR 323, Hon‟ble Supreme Court had observed and held as under:-

This being so, the rights of the assessees in the capital asset, being their shares in the amalgamating company, stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company. There was, therefore, a transfer of the shares in the amalgamating company with the meaning of section 2(47). It was, therefore, a transaction to which section 47(vii) applied and, consequently, the cost to the assessees of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of section 49(2), that is to say, the cost was deemed to be the cost of the acquisition by the assessees of their shares in the amalgamating company. 33. Thus, if the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares it amounts to transfer of share within the meaning of 2(47) and therefore, computation of capital gains has to be made. Ergo, there could be no quarrel that M/s. Tata Sons Limited reduction of equity shares under the scheme of arrangement and restructuring in terms of Section 100, amounts to extinguishment of rights in the shares and hence, it is a transfer within the ambit and scope of Section 2(47) of the Act. This fact has also not been disputed by the ld. CIT DR also that reduction of capital amounts to transfer in the present case. 34. Now whether there could be conceivable consideration or it is a case here where consideration itself is inconceivable. The Hon‟ble Supreme Court in the case of CIT vs. D.P. Sandhu Brothers Chembur Pvt. Ltd. reported in 273 ITR 1 (SC), while deciding the issue of surrender of tenancy rights for a consideration, amount to transfer giving rise to capital gains where no cost of acquisition can be computed. The Hon‟ble Supreme Court first of all held that tenancy right is a capital asset and the surrender of tenancy right is “transfer” and the consideration received thereof is a capital receipt within the meaning of Section 45 after referring to the judgment of Hon‟ble Supreme Court in the case of A. Gasper vs. CIT reported in 192 ITR 382. Thereafter, on the issue of cost of acquisition, the Hon‟ble Supreme Court referred to the decision of CIT vs. B. C. Srinivasa Setty (supra) and observed as under:- “8. In 1981 this Court in B.C. Srinivasa Setty's case (supra) held that all transactions encompassed by section 45 must fall within the computation provisions of section 48. If the computation as provided under section 48 could not be applied to a particular transaction, it must be regarded as "never intended by section 45 to be the subject of the charge". In that case, the Court was considering whether a firm was liable to pay capital gains on the M/s. Tata Sons Limited sale of its goodwill to another firm. The Court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. Pathak J. as his Lordship then was, speaking for the Court said :

From the plain reading of the aforesaid judgment, the sequitur is, whether cost of acquisition is inherently incapable of being determined or not, i.e., whether it is possible to envisage a cost of an asset which is capable of acquisition at a cost. The M/s. Tata Sons Limited distinction has been made by the Hon‟ble Supreme Court where the asset which is capable of acquisition at a cost would be included in the provisions pertaining to the head “capital gains” as opposed to assets in the acquisition of which no cost at all can be conceived. If cost can be conceived, then it is chargeable under the head „capital gains‟. In this case, whether sale consideration can be conceived or it cannot be conceived at all? 36. In this case there is no dispute about the cost, because assessee had incurred the cost for acquiring of the shares and therefore, there is no dispute regarding cost of acquisition. Here, the assessee did not receive any consideration due to reduction of capital which has resulted into a loss to the assessee. The issue is whether the price can be conceived or not? The price paid by the assessee for acquiring the asset has been reduced to half of the cost of an asset was waived off / extinguished. For example, assessee acquired 100 shares for Rs.1000/- in a company and after reduction of capital of the company, assessee‟s share was reduced to 50 shares from 100 and share value reduced to Rs. 500/- from Rs.1000/-. What if for reduction of 50 shares instead of getting Rs.10/- per share had assessee received Rs.1/- per share on reduction, can still be said there was no consideration received or consideration is inconceivable; and if assessee has received „Zero‟ consideration, then can it be held that there is no conceivable consideration at all or „Zero‟ is not a consideration. This precise issue had been answered by the Hon‟ble Gujarat High Court in the case of CIT vs. Jaykrishna Harivallabhdas reported in 231 ITR 108. In that case assessee M/s. Tata Sons Limited has claimed loss on shares of particular companies under the head „capital gains‟ and the case of the assessee was that the company with respect to whose shares of loss had been claim had gone into voluntary liquidation and nothing was distributed by those companies to its members, therefore, the assessee received „Nil‟ consideration for his holdings in the companies. The claim of the assessee was that capital loss should have been computed under section 46(2) read with section 48. The Hon‟ble High Court observed as under:- Thus assuming the extinguishment of the shareholder's interest on liquidation in the shares held by him as transfer is a necessary assumption accompanying liquidation of company and computation of "Capital gain" as a result thereof, whether income or loss, is a logical conclusion of operation of section 48 in such state of affairs. Ordinarily operating section 45 to consider any transaction to be a transfer of capital asset by any of the modes referred to in section 2(47) apart from the legal fictions created therein, envisage passing of consideration from one hand to another and passing of rights, notwithstanding extinguishment in the hands of the transferor to the transferee, whether in the form of tangible gain or augmentation of the existing rights of others. It was because of this, on liquidation return of corpus to the shareholders, who were otherwise entitled to the same as a matter of right, was not held to be transfer within the meaning of section 2(47), because on extinguishment of their rights in the shares and their having received cash or assets in the place of rights which they held in the shares, no corresponding rights accrue in any one for that consideration. However, once a legal fiction is created to treat the receipt or assets on distribution of liquidation in the hands of a shareholder, it inheres transfer of assets by extinguishment of rights, by the recipient of M/s. Tata Sons Limited consideration and once that fiction comes into existence it must lead to its logical conclusion in the computation of capital gains in accordance with the provisions of the Act, whether the ultimate result is found to be a gain or loss. The section creates not merely the charge but directs the taxable income to be computed under the head "Capital gains". The phraseology used by the Legislature is not that cash or value of the assets received by a shareholder on liquidation is to be charged to tax as a capital gains but makes it chargeable under the head "Capital gains" by further providing for computation under section 48 in respect of what is considered as consideration. Along with the charge the entire computation provisions for charging the capital gains are made applicable to such computation. Therefore, extinguishment, partly or fully of the right of the shareholder to surplus [capital asset for the purpose of section 46(2)] is to be treated as transfer and as and when such extinguishment takes place, treating such extinguishment as transfer, the net result of such transfer has to be worked out or computed as per section 48. If the result of such computation under the head "Capital gains" is a positive balance, it is to be added in the total income chargeable to tax augmenting the same. If the balance is negative, it has to be treated under the Chapter titled, "Set off and carry forward losses" in accordance with the provisions to the extent the same are permissible. Section 48 provides for the mode of computing income under the head "Capital gain". The mode of computation shorn of all technicalities and other complexities is to deduct from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the asset. It does not envisage that in all cases such computation must result in surplus or gains. Section 4 of the Act makes the income computed in accordance with the provisions of the Act subject to tax. Section 46(2) which has also been held to be the charging section for bringing the result of receipts by member of a M/s. Tata Sons Limited company on its liquidation too provides for computation of capital gains in accordance with section 48, for which receipt or value of asset after deducting sum assessed as dividend under section 2(22)(c), if any, is to be deemed to be the full value of the consideration. Entire receipt or value of asset has not been subjected to charge, but what has been subjected to tax is event of a receipt on liquidation of a company giving rise to capital gain, by treating it to be consideration. Consideration in the ordinary sense means something in lieu of or exchange of. It does not provide, that on computation of capital gain as per section 48, the surplus if any only is to be charged to tax as capital gains. This is how it was suggested to us to read the provision. On the contrary, the provision in question section 46(2) does not provide any such further inhibition against treatment of the balance. Such balance resulting as per computation made in accordance with section 48 has to be subjected to charge of tax as per the provisions of the Act. Section 71 of the Act envisages where computation under any head of income is a loss, the assessee is entitled to set off such loss against computation of income assessable under other head for that year. Section 74 specifically provides that where in respect of any assessment year, the net result of computation under the head "Capital gains" is a loss to the assessee, the same may be carried forward, if it cannot be set off against income of that year. Thus the computation of income under any head, including under the head "Capital gain", envisages a situation where such computation may result in negative balance or loss. In other words, computation of income chargeable to tax includes computation of loss as well, for the purpose of levy of tax in accordance with the provisions of the Act and to be treated accordingly. There is nothing in the provision of section 46(2) which excludes the applicability of other provisions of the Act dealing with set off and carry forward of loss under any head of income to the computation of income chargeable to tax under the head "Capital gains" under it.

Ergo, the Hon‟ble High Court had rejected the contention of the Revenue that the provision of capital gain should apply to actual receipts only cannot be accepted because it would result into incongruous and anomalous results because in case even where negligible or insignificant sum received, it would result in computation of capital gain or loss but in case where nothing was disbursed or received on extinguishment of rights will not result in loss cannot be upheld. The Hon‟ble High Court even held that even where there is a „nil‟ receipt of the capital, the entire extinguishment of rights has to be written off as a loss resulting from computation of capital gains. Thus, once a conclusion is reached that extinguishment of rights in shares is deemed to be transferred for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical M/s. Tata Sons Limited conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt. The said ratio of the Hon‟ble Gujarat High Court is clearly applicable on the facts of the present case also because there could be no distinction where assessee receives some negligible or insignificant consideration and where assessee had received „Nil‟ consideration. This judgment and the ratio clearly clinch the issue in favour of the assessee.

Thus, in view of the ratio and principle laid down in the aforesaid judgments, we hold that:  firstly, in this case the reduction of capital is extinguishment of right on the shares and it amounts to transfer within the meaning and scope of section 2(47);  secondly, the loss on reduction of shares is a capital loss and not notional loss; and  lastly, even when assessee has not received any consideration on reduction of capital but its investment has reduced to loss resulting into capital loss and while computing the capital gain, capital loss has to be allowed or set-off against any other capital gain. 39. The entire case of the Revenue is hinges upon the judgment of ITAT Special Bench in the case of Bennett Coleman & Co. Ltd. (supra). In the facts of that case assessee was holding investments in equity shares of another company wherein the paid-up capital was reduced to Rs. 5/- from Rs. 10/- per share and subsequently, two equity shares of Rs 5/- each were M/s. Tata Sons Limited consolidated into one equity share of Rs. 10/- each. The holders of the original shares received new shares. Thus, it was a case of substitution of shares which is not the facts in the present case. This distinction on the facts as a Special Bench have been dealt by the ITAT Mumbai Bench in the case of Carestream Health INC vs. DCIT (2020) (ITA No. 826/Mum/2016). The majority judgement held that though the loss arising to the shareholder on account of reduction in share capital cannot be subject to the provision of Section 45 r.w.s. 48 and accordingly, the said loss is not allowable as a capital loss at best such loss can be described as notional loss, after relying to the decision of the Hon‟ble Supreme Court in the case of B.C. Srinivasa Shetty (supra). However, they noted that in that case assessee had not suffered any loss of reduction of share capital because share had not been canceled but only number of shares had been reduced which was replaced by another set of shares and assessee‟s percentage of shareholding of 74.9% immediately before reduction of share capital and after such reduction remain same. Such capital has been reduced not only in the case of the assessee but also for all the shareholders of TGM. As per the minority judgment, the Hon‟ble Accountant Member held that reduction of capital of a company by any more has the effect of reducing the liability of the company but its shareholder to the extent of the capital reduced and shareholders whose capital has been reduced is deprived of its right to receive that part of the share capital which has been so reduced and therefore, the consequence which follow of such reduction is loss.

In the result, appeal of the assessee is allowed. Order pronounced on 23rd January, 2024.