In Brief
A company holding 15.3 crore shares in a subsidiary company obtained High Court approval to reduce the subsidiary's share capital. This reduced the holding company's shares to 9,988 from 15.3 crore, though the face value per share (Rs. 10) and shareholding percentage (99.88%) remained unchanged. The holding company claimed a capital loss of Rs.164.48 crores. The Supreme Court upheld the capital loss claim, holding that reduction in share capital constitutes 'extinguishment of rights' under the Income Tax Act's definition of 'transfer'. Although shareholding percentage and face value remained the same, the shareholder lost proportionate rights to dividends and liquidation proceeds—a sufficient extinguishment to trigger capital gains taxation.
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