Relinquishment or extinguishment of rights is taxable even without a conventional sale




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Relinquishment or extinguishment of rights is taxable even without a conventional sale

The Supreme Court in a recent case before it has clarified a critical aspect of income tax law, ruling that capital reduction constitutes a ‘transfer’ of capital assets under Section 2(47) of the Income Tax Act, 1961. Here’s a quick breakdown of the case and its implications:

The judgment comes in the matter of M/s Jupiter Capital Pvt. Ltd. [SLP No. 63 OF 2025], upholding the Karnataka High Court’s decision in favor of the taxpayer.

Let us have a Short Overview of the case:  

M/s Jupiter Capital held 15.33 crore shares i.e., 99.88% of Asianet News Network Pvt. Ltd. (ANNPL).

ANNPL incurred losses, leading to reduction of share capital (approved by the Bombay High Court) from 15.35 crore shares to 10,000 shares.
Jupiter’s shareholding was reduced proportionately to 9,988 shares, with a payment of ₹3.18 crore as consideration.

Supreme Court Observations:

1 Definition of Transfer:
Section 2(47) includes relinquishment or extinguishment of rights as a transfer. Even partial extinguishment, like in this case, qualifies.


2 Capital Reduction:

Under Section 66 of the Companies Act, 2013, companies can reduce share capital, which affects shareholders’ rights proportionately.


3 Rights Extinguished:

Reduction impacts rights like dividends, share capital, and liquidation proceeds—qualifying as a transfer under Section 2(47).


4 Mode of Transfer:

Transfer isn’t limited to a sale; relinquishment or extinguishment of rights also counts, making such transactions taxable under Section 45.

Supreme Court Ruling:

The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would fall under the ambit of ‘sale, exchange, or relinquishment of the asset’ within Section 2(47) of the Income Tax Act, 1961.

Takeaways for Taxpayers:
Capital reduction with payment consideration may attract capital gains tax.
Relinquishment or extinguishment of rights is taxable, even without a conventional sale.

The Copy of the order is as under:

39934_2024_15_15_58197_Judgement_02-Jan-2025




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