My client's shareholding was cut down in a court-approved reduction of capital but the face value stayed the same and his percentage did not change. Can he claim the capital loss?
Yes. The Supreme Court held that a reduction of share capital of a subsidiary, with a proportionate reduction in the assessee's shareholding, falls squarely within 'sale, exchange or relinquishment of the asset' in s.2(47), so the resulting capital loss is allowable. It is no answer that the face value per share was unchanged or that the percentage of shareholding stayed the same.
Decided by the Supreme Court (J.B. Pardiwala J and R. Mahadevan J) on 2025-01-02, reported as 2025 INSC 38; Special Leave Petition No. 63 of 2025 (arising out of Diary No. 39934 of 2024). It bears on section 2(47), section 45, section 48, section 46(2) of the Income Tax Act 1961, in Capital Gains matters.
This kills the two grounds Assessing Officers most often use to refuse a capital loss on a reduction of capital: 'the face value has not changed' and 'your percentage holding is the same'. The Court pointed out that Kartikeya V. Sarabhai makes no reference at all to percentage of shareholding before and after the reduction, and that where the number of shares falls from 15,33,40,900 to 9,988 the shareholder plainly has extinguished rights in the shares he no longer holds. It also carried forward two propositions that matter beyond the facts: 'extinguishment of any right therein' is of wide import and covers destruction, annihilation, extinction, termination, cessation or cancellation of all or any of the bundle of rights in a capital asset, and receipt of consideration is not a condition precedent to computing capital gains. For the deemed-dividend side of a capital reduction, note what this case is not about — s.2(22)(d) treats a distribution on reduction of capital as dividend to the extent of accumulated profits, and that charge is separate from the capital-gains computation decided here.
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Jupiter Capital Pvt Ltd was in the business of investing in shares, leasing, financing and money lending. It had invested in Asianet News Network Pvt Ltd by purchasing 14,95,44,130 shares of Rs 10 each and later bought a further 38,06,758 shares, taking its holding to 15,33,40,900 out of 15,35,05,750 shares, or 99.88 per cent. Asianet incurred losses, its net worth was eroded, and it petitioned the Bombay High Court for a reduction of capital to set off the loss against paid-up equity capital. The High Court ordered the share capital reduced from 15,35,05,750 shares to 10,000 shares, so that Jupiter Capital's holding fell proportionately from 15,33,40,900 shares to 9,988 shares, the face value remaining Rs 10, and directed payment of Rs 3,17,83,474 to Jupiter Capital as consideration. Jupiter Capital claimed a long-term capital loss of Rs 164,48,55,840. The Assessing Officer disallowed it, holding that the number of shares had been reduced but the face value and the shareholding pattern were unchanged, so there was no extinguishment of rights within s.2(47). The CIT(A) upheld the disallowance, distinguishing Kartikeya V. Sarabhai. The Tribunal reversed the CIT(A) and allowed the loss, and the Karnataka High Court dismissed the Revenue's appeal on 20 February 2023 in ITA No. 299 of 2019. The Revenue petitioned for special leave.
The petition failed and was dismissed. The reduction in share capital of the subsidiary and the consequent proportionate reduction in the assessee's shareholding is squarely covered by the expression 'sale, exchange or relinquishment of the asset' in s.2(47), and no error of law was committed by the High Court in allowing the capital loss (paras 10, 18 and 19).
The Court held the question was no longer res integra after Kartikeya V. Sarabhai, from which it extracted three principles: that s.2(47) is inclusive and covers relinquishment and extinguishment; that a shareholder continuing as a shareholder after a reduction does not mean no part of his rights has been extinguished; and that where capital is reduced, the right to dividend, to share capital and to share in the distribution of net assets on liquidation is extinguished proportionately, which amounts to a transfer (paras 11 and 12). It adopted the wide reading of 'extinguishment of any right therein' as covering every transaction resulting in the destruction, annihilation, extinction, termination, cessation or cancellation of all or any of the bundle of rights, qualitative or quantitative, in a capital asset (para 13). On the facts, although face value per share was unchanged, the number of shares held fell from 15,33,40,900 to 9,988 and the assessee received 9,988 shares plus Rs 3,17,83,474 in lieu; and Kartikeya V. Sarabhai makes no reference to percentage of shareholding before and after reduction (para 14). The Court further noted Jaykrishna Harivallabhdas for the proposition that receipt of consideration is not a condition precedent to a computation under s.48, since the contrary view would produce the anomaly that a negligible receipt permits a computation while a nil receipt writes off the entire extinguishment (para 16), and Anarkali Sarabhai for the proposition that reduction of capital and redemption of shares both involve the company purchasing its own shares and so fall within transfer (para 17).
In view of the aforesaid, we are of the view that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression "sale, exchange or relinquishment of the asset" used in Section 2(47) the Income Tax Act, 1961.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that a reduction of share capital of a subsidiary, with a proportionate reduction in the assessee's shareholding, falls squarely within 'sale, exchange or relinquishment of the asset' in s.2(47), so the resulting capital loss is allowable. It is no answer that the face value per share was unchanged or that the percentage of shareholding stayed the same. This was decided by the Supreme Court (J.B. Pardiwala J and R. Mahadevan J) and bears on section 2(47), section 45, section 48, section 46(2) of the Income Tax Act 1961. It is reported as 2025 INSC 38; Special Leave Petition No. 63 of 2025 (arising out of Diary No. 39934 of 2024). This kills the two grounds Assessing Officers most often use to refuse a capital loss on a reduction of capital: 'the face value has not changed' and 'your percentage holding is the same'. The Court pointed out that Kartikeya V. Sarabhai makes no reference at all to percentage of shareholding before and after the reduction, and that where the number of shares falls from 15,33,40,900 to 9,988 the shareholder plainly has extinguished rights in the shares he no longer holds. It also carried forward two propositions that matter beyond the facts: 'extinguishment of any right therein' is of wide import and covers destruction, annihilation, extinction, termination, cessation or cancellation of all or any of the bundle of rights in a capital asset, and receipt of consideration is not a condition precedent to computing capital gains. For the deemed-dividend side of a capital reduction, note what this case is not about — s.2(22)(d) treats a distribution on reduction of capital as dividend to the extent of accumulated profits, and that charge is separate from the capital-gains computation decided here. If it applies to you, the first step is this: Put on record the scheme or court order sanctioning the reduction, the share count before and after, and the consideration paid, and compute the loss on the shares actually extinguished.
Jupiter Capital Pvt Ltd was in the business of investing in shares, leasing, financing and money lending. It had invested in Asianet News Network Pvt Ltd by purchasing 14,95,44,130 shares of Rs 10 each and later bought a further 38,06,758 shares, taking its holding to 15,33,40,900 out of 15,35,05,750 shares, or 99.88 per cent. Asianet incurred losses, its net worth was eroded, and it petitioned the Bombay High Court for a reduction of capital to set off the loss against paid-up equity capital. The High Court ordered the share capital reduced from 15,35,05,750 shares to 10,000 shares, so that Jupiter Capital's holding fell proportionately from 15,33,40,900 shares to 9,988 shares, the face value remaining Rs 10, and directed payment of Rs 3,17,83,474 to Jupiter Capital as consideration. Jupiter Capital claimed a long-term capital loss of Rs 164,48,55,840. The Assessing Officer disallowed it, holding that the number of shares had been reduced but the face value and the shareholding pattern were unchanged, so there was no extinguishment of rights within s.2(47). The CIT(A) upheld the disallowance, distinguishing Kartikeya V. Sarabhai. The Tribunal reversed the CIT(A) and allowed the loss, and the Karnataka High Court dismissed the Revenue's appeal on 20 February 2023 in ITA No. 299 of 2019. The Revenue petitioned for special leave. The matter was decided on 2025-01-02 by the Supreme Court (J.B. Pardiwala J and R. Mahadevan J). On those facts the Supreme Court held as follows. The petition failed and was dismissed. The reduction in share capital of the subsidiary and the consequent proportionate reduction in the assessee's shareholding is squarely covered by the expression 'sale, exchange or relinquishment of the asset' in s.2(47), and no error of law was committed by the High Court in allowing the capital loss (paras 10, 18 and 19).
The Court held the question was no longer res integra after Kartikeya V. Sarabhai, from which it extracted three principles: that s.2(47) is inclusive and covers relinquishment and extinguishment; that a shareholder continuing as a shareholder after a reduction does not mean no part of his rights has been extinguished; and that where capital is reduced, the right to dividend, to share capital and to share in the distribution of net assets on liquidation is extinguished proportionately, which amounts to a transfer (paras 11 and 12). It adopted the wide reading of 'extinguishment of any right therein' as covering every transaction resulting in the destruction, annihilation, extinction, termination, cessation or cancellation of all or any of the bundle of rights, qualitative or quantitative, in a capital asset (para 13). On the facts, although face value per share was unchanged, the number of shares held fell from 15,33,40,900 to 9,988 and the assessee received 9,988 shares plus Rs 3,17,83,474 in lieu; and Kartikeya V. Sarabhai makes no reference to percentage of shareholding before and after reduction (para 14). The Court further noted Jaykrishna Harivallabhdas for the proposition that receipt of consideration is not a condition precedent to a computation under s.48, since the contrary view would produce the anomaly that a negligible receipt permits a computation while a nil receipt writes off the entire extinguishment (para 16), and Anarkali Sarabhai for the proposition that reduction of capital and redemption of shares both involve the company purchasing its own shares and so fall within transfer (para 17). In the words reproduced by the source cited on this page: "In view of the aforesaid, we are of the view that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression "sale, exchange or relinquishment of the asset" used in Section 2(47) the Income Tax Act, 1961." The decision followed or applied Kartikeya V. Sarabhai v. Commissioner of Income Tax (1997) 7 SCC 524 — followed; Anarkali Sarabhai v. CIT (1997) 3 SCC 238 — followed; Commissioner of Income-Tax v. Jaykrishna Harivallabhdas (1998) 231 ITR 108 — relied on; Commissioner of Income Tax v. Vania Silk Mills (P.) Ltd. (1977) 107 ITR 300 (Guj) — cited for the width of 'extinguishment of any right therein'.
It was decided by the Supreme Court on 2025-01-02 and is reported as 2025 INSC 38; Special Leave Petition No. 63 of 2025 (arising out of Diary No. 39934 of 2024). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(47), section 45, section 48, section 46(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The petition failed and was dismissed. The reduction in share capital of the subsidiary and the consequent proportionate reduction in the assessee's shareholding is squarely covered by the expression 'sale, exchange or relinquishment of the asset' in s.2(47), and no error of law was committed by the High Court in allowing the capital loss (paras 10, 18 and 19). It arises in Capital Gains matters, on section 2(47), section 45, section 48, section 46(2) of the Income Tax Act 1961, and was decided by J.B. Pardiwala J and R. Mahadevan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the 'no change in face value' and 'no change in percentage' objections head-on by pointing to paragraph 14 — the Supreme Court held those facts do not matter and that Kartikeya V. Sarabhai says nothing about percentage of shareholding. Where nothing at all is received on the reduction, do not abandon the computation: the Court approved Jaykrishna Harivallabhdas for the proposition that receipt of consideration is not a condition precedent. Check separately whether any part of the amount distributed on the reduction is dividend under s.2(22)(d) to the extent of accumulated profits, and reduce the consideration accordingly before computing gain or loss. Keep the loss in the right basket — this is a capital loss and can only be set off and carried forward under the s.70 to s.74 rules.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citator search on the judgment returns nothing, and indiankanoon's own record for it shows 'Cited by 0'. A second search on the case name with reduction of share capital, and a third on its neutral citation 2025 INSC 38, turned up a single later order that mentions it — Vinay Tarachand Chawla v PCIT (Mumbai Tribunal, 26 September 2025) — in which the reference is passing and no decision applying or following the holding could be identified. Nothing doubting, distinguishing or overruling it was found either. The judgment is recent, of the Supreme Court, reportable, and dismisses the Revenue's special leave petition with reasons, so it binds; it simply has not yet been the subject of judicial treatment. It decides the capital-gains characterisation only, and says nothing about the separate charge on a distribution on reduction of capital to the extent of accumulated profits. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two oddities in the report. First, the sentence quoted in paragraph 9 from the Karnataka High Court's order reads that the Tribunal 'rightly followed authority in Kartikeya V. Sarabhai ... by holding that there was no transfer within the meaning of that expression contained in Section 2(47)' — the word 'no' is inconsistent with the outcome, since the High Court dismissed the Revenue's appeal and affirmed the allowance of the loss; treat it as a slip in the text as reported. The same quoted passage cites Kartikeya V. Sarabhai as '1998 2 ITR 163 SC'. Second, paragraph 13 attributes the wide reading of 'extinguishment of any right therein' to Commissioner of Income Tax v. Vania Silk Mills (P.) Ltd. reported at (1977) 107 ITR 300 (Guj) — that is the Gujarat High Court decision, and a reader should be aware that the Supreme Court dealt with Vania Silk Mills separately in 1991; this entry states only what the present judgment says. The document is an order on a special leave petition, numbered SLP (C) No. 63 of 2025, disposed of by dismissal. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The petition failed and was dismissed. The reduction in share capital of the subsidiary and the consequent proportionate reduction in the assessee's shareholding is squarely covered by the expression 'sale, exchange or relinquishment of the asset' in s.2(47), and no error of law was committed by the High Court in allowing the capital loss (paras 10, 18 and 19).
TaxSphere, “PCIT v Jupiter Capital Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/pcit-v-jupiter-capital-reduction-of-capital-is-a-transfer/ (validity last checked 2026-09-08)
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