The assessee is a company incorporated in and a tax resident of United States of America (USA). It made investments to the extent of 64769142 equity shares of face value of Rs 10 each of Carestream Health India Private Limited (CHIPL), its wholly owned Indian Subsidiary. During the Asst Year 2011-12, CHIPL undertook a capital reduction of its share capital pursuant to a scheme approved by the Hon‟ble Bombay High Court. Under the capital reduction scheme, 29133280 share (out of total holding of 6,47,69,142 shares) held by the assessee were cancelled and total consideration amounting to Rs 39,99,99,934/- was received by assessee towards such cancellation / capital reduction. This consideration sum of Rs 39,99,99,934/- worked out to Rs 13.73 for every share cancelled by CHIPL. This was also supported by an independent share valuation report. As per the provisions of section 2(22)(d) of the Act, out of the total consideration of Rs 39,99,99,934/- , the consideration to the extent of accumulated profits of CHIPL i.e Rs 10,33,11,000/- was considered as deemed dividend in the hands of assessee. Accordingly, Dividend Distribution Tax on such deemed dividend @ 16.609% amounting to Rs 1,71,58,924/-(10,33,11,000 * 16.609%) was paid by CHIPL. Since the aforesaid sum of Rs 10,33,11,000/- suffered Dividend Distribution Tax u/s 115-O of the Act, the assessee claimed the same as exempt u/s 10(34) of the Act in the return of income. The balance consideration of Rs 29,66,88,934/- was appropriated towards sale consideration of the shares and capital loss was accordingly determined by the assessee as prescribed in Rule 115A to Rs 3,64,84,092/- and return was filed claiming such long term capital loss. Accordingly, the assessee had claimed long term capital loss of Rs 3,64,84,092/- upon cancellation of the shares held by it in CHIPL pursuant to reduction of capital in the return of income for the year under consideration. The AO held that there was no transfer within the meaning of section 2(47) of the Act in the instant case. He observed that the assessee was holding 100% shares of its subsidiary company and during the year, it had reduced its capital. The assessee company had 100% shares in the subsidiary company and after the scheme of reduction of capital also, the assessee was holding 100% of the shares. This clearly establishes that by way of reduction of capital by cancellation of the shares, rights of the assessee do not get extinguished. The assessee before and after the scheme was having full control over its 100% subsidiary. The conditions of transfer therefore are not satisfied. Further the shares have been cancelled and are not maintained by the recipient of the shares. The assessee also took an alternative argument of treating the same as a buy-back before the ld AO. The  AO in this regard observed that since the assessee had taken approval from the Hon‟ble High Court for reduction of capital, the same cannot be treated as a buy- back. He therefore disallowed the claim of long term capital loss in the sum of Rs 3,64,84,092/- due to indexation, and also did not allow it to be carried forward. The assessee filed objections before the ld DRP against this denial of capital loss. The  DRP disposed off the objections of the assessee by holding that the issue in dispute is covered by the decision of the Special Bench of Mumbai  Bennett Coleman & Co Ltd v. Add. CIT (2011)  133 ITD 1  (SB)(Mum) (Trib) ) Applying the ratio laid down in the said decision, the  DRP observed that the share of the assessee in the total share capital of the company as well as the net worth of the company would remain the same
even after capital reduction/ cancellation of shares. Thus there is no change in the intrinsic value of the shares and the rights of the shareholder vis a vis the other shareholders as well as the company. Thus, there is no loss that can be said to have actually accrued to the shareholder as a result of the capital reduction. Pursuant to this direction of the  DRP, the  AO passed the final assessment order on 23.12.2015
disallowing the long term capital loss of Rs 3,64,84,092/- claimed by the assessee in the return of income. On appeal the Tribunal held that a  reduction of capital results in an “extinguishment of rights” in the shares and constitutes a “transfer‟- The fact that the percentage of shareholding remains unchanged even after the reduction is irrelevant. The loss arising from the cancellation of shares is entitled to indexation and is allowable as a long-term capital loss .  (Bennett Coleman & Co Ltd v. Add. CIT (2011)  133 ITD 1  (SB)(Mum) (Trib) ) distinguished.)  ( ITA No.826/Mum/2016, dt. 06.02.2020)(AY. 2011-12)