Bennett Coleman & Co. Ltd vs. ACIT (ITAT Mumbai Special Bench)

DATE: (Date of pronouncement)
DATE: October 3, 2011 (Date of publication)

Click here to download the judgement (bennett_reduction_capital_loss_majority_dissenting.pdf)

Loss on pro-rata reduction of share capital is “Notional”. In absence of consideration, capital gains provisions do not apply

The dissenting order is now (6.10.2011 @ 10 hrs) attached. Please re-download if you downloaded earlier)

The assessee invested Rs.24.84 crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction u/s 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to Rs. 5 from Rs. 10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The result was that the assessee’s investment was reduced to Rs.12.42 crores. The assessee, relying on Kartikeya Sarabhai 228 ITR 163 (SC) & G. Narsimhan 236 ITR 327 (SC), claimed that the reduction in face value was a “transfer” and that it had suffered a long-term capital loss of Rs.22.21 crores after indexation. The AO disallowed the claim on the ground that (i) there was no “transfer” and (ii) there was no “consideration” and the machinery provisions of s. 48 cannot apply. The issue was referred to the Special Bench. HELD by the majority (R. S. Syal, AM, dissenting):

(i) First the face value of each share was reduced from Rs. 10 to Rs. 5 and then two shares of Rs. 5 each were consolidated into one share of Rs. 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no “transfer” but it is merely a case of substitution of one kind of share with another kind of share (Rasiklal Maneklal (HUF) 177 ITR 198 (SC) followed);

(ii) Assuming that a reduction of shares in the manner done by the assessee amounts to a “transfer”, s. 45 is not attracted because there is no “consideration” received by the assessee for the transfer. Unless and until a particular transaction leads to “computation” of capital gains or loss as contemplated by s. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee (B. C. Srinivasa Setty 128 ITR 294 (SC) & Bombay Burmah 147 TR 570 followed)

(iii) Further, by the reduction, the assessee’s rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarentee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis-à-vis other shareholders as well as vis-à-vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. Also, there would be no change even in the cost of acquisition of shares by virtue of s. 55(v).

Per R. S. Syal, AM, dissenting:

(iv) On the point of “transfer”, a reduction of share capital u/s 100 of the Companies Act can take place either by paying excess capital to the shareholders or by cancelling lost capital. While the first method amounts to a “transfer” as held in Anarkali Sarabhai 224 ITR 422 (SC), the other method (adopted by the assessee) results in an “extinguishment of rights” in the shares which is also a “transfer” as held in Grace Collis 2481TR 323 (SC). Consequently, a reduction of capital by cancellation of shares results in a “transfer”;

(v) On the point that a capital loss cannot be computed if there is no consideration, while it is true that the failure of the computation provisions results in a failure of the charging provisions as held in B. C. Srinivasa Setty, there is a distinction between a case where the computation provision is incapable of ascertainment and a case where it is ascertained as zero or Nil. In the present case, the consideration received by the assessee was Nil. It was not a case where the consideration was incapable of ascertainment (observations in Mohanbhai Pamabhai 91 ITR 393 (Guj) treated as obiter dicta. Bombay Burma Trading Corp 147 Taxation 570 (Bom) not followed as being only a case of rejection of a s. 256(2) application);

(vi) On the point that there is no “loss”, the argument that as with the reduction of capital, there is a corresponding increase in the net worth per share and the assessee’s interest in TGL remains unaffected on an overall basis is not acceptable because after the reduction, the assessee is left with lesser number of shares. The fact that the book value has increased has no effect. An increase or decrease in the market value of shares is of no consequence if the shares are held as investment (principles laid down in Dalmia Investment Co & Dhun Dadabhoy Kapadia 63 ITR 651 (SC) held not applicable on the ground that Dalmia was in the context of shares held as stock-in-trade and both were under the 1922 Act);

(vii) the apprehension that the assessee would derive a double advantage by claiming the loss now and the entire cost at the time of sale is unfounded because (a) the assessee’s books shows the investments at the reduced amount and (b) u/s 55(2)(iv)(v), the cost of acquisition of the remaining consolidated shares will be the reduced amount.

5 comments on “Bennett Coleman & Co. Ltd vs. ACIT (ITAT Mumbai Special Bench)
  1. Kanj Goel says:

    I seem the argue of assessee was on wrong ground, in accordance of income tax Act, 1961, and various judgements given by the high courts and supreme court. When we look the definition of transfer U/S 2(47) of Income Tax Act,1961 it is not a case covered in the definition, as here is nothing among these, relinquishment,transfer,extinguishment. So assessee should not claim the loss,instead of that he should hold the shares on old value, and he can claim the same on the time of actual transfer.

    Regards/C.A Kanj Goel

  2. Mukesh Kedia says:

    By reduction, value of investments will not go down, in fact it will remain the same, since NET worth of the Company is not going to change. Further reduction of capital unless consideration is received, will not be covered under the definition of Transfer. It was wrongly claimed by the assessee as well as wrongly advised.

  3. vswami says:

    Sorry for catching up late; albeit, personally prefer/believe in – better to be late than never.
    The readers earlier comments cannot be faulted to be unsound and illogical; at best, need to be elaborated on the basis of fundamentals- the FIRST PRINCIPLES- the matter entails.

    For a dilation, look up the comment posted wrt the ITAT ORder of 2018 in re. Jupiter Capital on this website !

  4. vswami says:

    Long AND Short Of ..

    More In Detail(:

    In Short: Poser > Would not the matter have been decided otherwise, had the vital distinction between,-

    “extinguishment of any right” AND
    “extinguishment of the asset”

    been addressed to / appreciated by the itat; instead of resort to /reliance on case law ?!

  5. vswami says:


    According to a write-up published on the website of CAclub, its writer has given the impression, in one’s view wrongly so, that the issue has been decided in assessee’s favour.

    However, on a close reading of the Order, Full Text of which has been reported @‘, the correct
    factual position is noted to be just the opposite.

    Noteworthy, it is the Member, who is an Accountant Member, being one of the 3 Member Bench, having signed the main Order under the signature of all the three, has authored the separate and dissenting Order holding out a view contrary to the majority decision.

    Incidentally, in the recent order of the ITAT (of 2018) in Jupiter Capital case, deciding the point of issue in favour of the assessee,- but for an oblique reference to- no serious note appears to have been taken of the Special Bench Order in Bennett Coleman case. And, that Order, so far as known, has not been contested and pursued any further.

    In the result, the battle of wits in litigation is doomed to be perpetuated and prolonged.


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