Kindly guide whether there is any method by which capital loss under Income Tax provisions can be set off against the shares which get delisted and are not traded, or have become unmarketable? Please also guide about the tax treatment on equity shares where capital reduction has been effected.
E Madhavan NairAs per the provisions of Section 71 of the Income-tax Act, 1961 (‘the Act’), losses under the head of capital gains can be set-off against income under the head of capital gains only. Further, as per the provisions of Section 70 of Act, Short-Term Capital Loss can be set-off against Long-Term or Short-Term Capital Gain. However, Long-Term Capital Loss can be set-off only against Long-Term Capital Gains. Holding period of capital asset determines the nature of Capital Assets viz. a Long-Term Capital Asset or a Short-Term Capital Asset. As per the provisions of the Act, assets in the nature of unlisted equity share would qualify as Long-Term Capital Asset, if at the time of selling, the same has been held for a period of 24 months or more. Otherwise, the same would qualify as Short-Term Capital Asset. In order to answer the query, additional facts and clarity would be required. However, in the instant case, if the subject Capital Loss is Short-Term in nature (to be ascertained based on the period of holding and nature of the asset), such loss can be set off against Short-Term / Long- Term Capital Gain arising from any other capital asset. However, if such loss is Long-Term in nature, the same can be set off against Long-Term Capital Gain arising from any other capital asset. In case of a Capital Reduction, if the shareholders receive any payout the tax treatment as per the provisions of the Act would be twofold as mentioned below:
Taxability as Dividend: As per the provisions of section 2(22)(d), distribution by company on capital reduction (to the extent attributable to its accumulated profits), shall be considered as deemed dividend. It is also important to note that as per the amendments made by Finance Act 2020, companies are no longer required to pay dividend distribution tax. Dividend income is taxable in the hands of the shareholder at applicable slab rates. The payor company would be required to deduct Taxes at Source (TDS) on such dividend under section 194 of the Act at 10 per cent, for dividends paid in cash. For dividends paid via any mode other than cash, TDS shall be required, if aggregate payment exceeds ₹5,000. Taxability as Capital Gain / Loss: Taxation for distribution of profits (over and above accumulated profits) has been a matter of debate. There are judicial precedents which suggest that such distributions shall be regarded as transfer and would result in Capital Gain / Loss in the hands of the shareholder.
The writer is a practising chartered accountant
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