Question

What was the core issue before the Supreme Court in this Special Leave Petition filed by the Income Tax Department?

• A. Whether the assessee's claim for a long-term capital gain was correctly disallowed by the Assessing Officer.
• B. Whether the reduction in the number of shares due to a reduction in share capital amounted to a "transfer" under Section 2(47) of the Income Tax Act, 1961, allowing for a capital loss claim.
• C. Whether the High Court of Karnataka correctly relied on the decision of Anarkali Sarabhai v. CIT.
• D. Whether the face value of the shares remaining the same after the reduction nullified the claim of capital loss.
• A. Because the shareholder's voting percentage remains constant, which is a form of continuous transfer.
• B. Because it involves a sale or exchange of the capital asset to another party.
• C. Because it is covered under the inclusive definition of "transfer" as an extinguishment of any rights in the capital asset.
• D. Because the face value of the shares remains unchanged, constituting a deemed transfer.
• A. That the reduction of share capital must result in a change in the percentage of shareholding.
• B. That the face value of the shares must be reduced for the transfer to be valid.
• C. That the transfer must be a sale or relinquishment, and not merely an extinguishment of rights.
• D. That receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains/loss.
• A. Right to voting power and right to attend general meetings.
• B. Right to proportional share of debt and right to appoint directors.
• C. Right to dividend/share capital and right to share in the distribution of net assets upon liquidation.
• D. Right to face value of the share and right to receive consideration.
• A. Only transactions involving the sale or exchange of tangible capital assets.
• B. Only transactions resulting in the destruction, annihilation, or extinction of the entire capital asset.
• C. Every possible transaction that results in the destruction, annihilation, extinction, termination, cessation, or cancellation of all or any of the bundle of rights- qualitative or quantitative-that the assessee has in a capital asset.
• D. Only transactions where the face value of the shares is compulsorily reduced by a court order.

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks to identify the central legal issue in the case described in the passage.
Step 2: Detailed Explanation:
The passage explains that a reduction in share capital (specifically, the face value of preference shares) leads to a proportionate extinguishment of the shareholder's rights. It then states that this extinguishment "clearly amounts to a transfer within the meaning of section 2(47) of the Income Tax Act, 1961." The consequence of an event being a "transfer" is that any resulting profit is a capital gain and any resulting loss is a capital loss. Therefore, the central dispute must be whether this event is a 'transfer' that would allow the taxpayer (assessee) to claim the resulting loss as a capital loss against their income.
Option (B) encapsulates this perfectly. It identifies the event (reduction of share capital), the legal question (whether it is a "transfer" under Section 2(47)), and the consequence (allowing a capital loss claim). The other options are either too narrow or incorrect.
Step 3: Final Answer:
The core issue was whether the reduction of share capital qualified as a "transfer" under the Income Tax Act, which would validate the assessee's claim for a capital loss.

Answer 2

Step 1: Understanding the Question:
The question asks for the specific legal reasoning provided by the Supreme Court for treating a reduction of share capital as a "transfer".
Step 2: Detailed Explanation:
The passage gives the reasoning explicitly. It starts by quoting the definition from Section 2(47): "...relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset." It then applies this to the facts: "When as a result of reducing the face value of the share... the right of the preference shareholder... is extinguished proportionately.... Such a reduction of the right of the capital asset clearly amounts to a transfer...".
This directly matches option (C). The reason is not a sale or exchange (B) or anything to do with voting rights (A). Option (D) is factually incorrect as the passage states the face value is reduced. The legal basis is the broad, inclusive definition of 'transfer' which includes the extinguishment of rights in an asset.
Step 3: Final Answer:
The reduction amounts to a transfer because the shareholder's rights in their shares (a capital asset) are partially extinguished, and "extinguishment of any right" is explicitly included in the definition of transfer under Section 2(47) of the Income Tax Act.

Answer 3

Step 1: Understanding the Question:
The question asks about a specific principle clarified by the Supreme Court regarding the computation of capital gains or loss under Section 48 of the Income Tax Act, in the context of a transfer that happens via extinguishment of rights (like in a share capital reduction).
Step 2: Key Formula or Approach:
The computation of capital gains is governed by Section 48 of the Income Tax Act, which is:
Capital Gain/Loss = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Expenses on Transfer).
Step 3: Detailed Explanation:
When an event is deemed a "transfer" under Section 2(47), the computation mechanism under Section 48 automatically applies. A crucial issue is whether Section 48 can be applied if no actual money or consideration is received by the assessee.


In a case like the reduction of share capital, the shareholder's rights are extinguished, but they may not receive any payment in return.
The Supreme Court has clarified that the term "transfer" does not presuppose the receipt of consideration. A transfer can occur even for nil consideration.
Once a transaction is established as a "transfer," the computation must be done as per Section 48. If no consideration is received, the "Full Value of Consideration" is taken as nil. A capital loss can then be computed as: \( \text{Loss} = 0 - \text{Cost of Acquisition} \).
Therefore, the receipt of consideration is not a necessary pre-condition for a "transfer" to occur or for the computation of capital gains/loss to be undertaken. This makes statement (D) the correct clarification.
Step 4: Final Answer:
The Supreme Court clarified that for a transaction to be a 'transfer' and for capital gains/loss to be computed, it is not essential that some consideration must be received by the assessee.

Answer 4

Step 1: Understanding the Question:
The question asks to identify the two specific rights of a preference shareholder that were mentioned in the preceding comprehension passage as being extinguished during a reduction of share capital.
Step 2: Detailed Explanation:
The comprehension passage provided for the previous questions contained the direct answer. It stated:
"When as a result of reducing the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital."
This sentence explicitly names the two key financial rights associated with a preference share that are diminished.

Option (C) is a direct match with the text from the judgment extract.
Other options list either incorrect rights (like share of debt) or general rights (like voting) that are not the primary financial rights affected and mentioned in this context.
Step 3: Final Answer:
The two specific rights mentioned as being extinguished are the right to dividend/share capital and the right to share in the distribution of net assets upon liquidation.

Answer 5

Step 1: Understanding the Question:
The question asks for the scope and meaning of the phrase "extinguishment of any right therein," which is part of the definition of "transfer" in Section 2(47) of the Income Tax Act.
Step 2: Detailed Explanation:
In tax jurisprudence, inclusive definitions are interpreted broadly to cover all possible scenarios and prevent tax evasion. The Supreme Court has consistently held that the term "transfer" is of the widest possible amplitude. The phrase "extinguishment of any right therein" is a key part of this wide definition.

It does not require the entire asset to be destroyed. The word "any" right signifies that even a partial loss or reduction of a right in a capital asset amounts to an extinguishment. This makes option (B) incorrect.
The passage itself deals with the reduction of rights in shares (an intangible asset), so option (A) which limits it to tangible assets is incorrect.
Option (D) is too specific and narrow. The principle of extinguishment applies to many situations, not just court-ordered share reductions.
Option (C) provides the most comprehensive and accurate description. It covers the extinguishment of "all or any" of the "bundle of rights" an assessee has. It correctly points out that the extinguishment can be both "qualitative or quantitative." This captures the wide import that the Supreme Court has given to this expression.
Step 3: Final Answer:
The expression "extinguishment of any right therein" is interpreted very broadly to cover any transaction that results in the termination or reduction of any part of the bundle of rights that a person has in a capital asset.