A company under Section 66 of the Companies Act, 2013 has a right to reduce the share capital and one of the modes which could be adopted is to reduce the face value of the preference share.
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. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of section 2(47) of the Income Tax Act, 1961.
(Extracted with edits and revisions from Principal Commissioner of Income Tax v. Jupiter Capital Pvt Ltd., (2025 INSC 38)
The expression "extinguishment of any right therein" covers a wide range of cases and is not limited to specific transactions involving the sale or exchange of tangible capital assets. Here is a breakdown of the options and why the third option is correct:
- The expression is not limited to transactions involving the sale or exchange of tangible capital assets alone. These are common forms of transactions but do not capture the full essence of the term "extinguishment of any right therein." Therefore, this option is incorrect.
- The definition of "extinguishment" goes beyond just transactions resulting in the destruction, annihilation, or extinction of the entire capital asset. It includes the partial extinguishment or diminution of rights within a capital asset. This option is therefore incorrect.
- The correct interpretation, as per the Supreme Court's emphasis and the associated context, is the broad interpretation covered in the option, "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." This correctly captures the spirit of the provision in Section 2(47) of the Income Tax Act, 1961.
- The expression does not only cover cases where the face value of the shares is compulsorily reduced by a court order. Such a specific scenario is just one of many possibilities covered under the broader interpretation provided in the third option, and thus, this option is incorrect.
The keyword here is the broad impact, including qualitative or quantitative changes in the bundle of rights associated with a capital asset, as interpreted by the Supreme Court in legal proceedings. Therefore, the correct answer is that it encompasses 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.
The legal context, as derived from cases such as "Principal Commissioner of Income Tax v. Jupiter Capital Pvt Ltd.," highlights that changes such as reducing the face value of share capital result in a proportional reduction of rights and are therefore considered an "extinguishment" under Section 2(47) of the Income Tax Act, 1961.
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