Reduction of Capital as per Companies Act 2013
Company may reduce share capital in following manner –
(a) extinguish or reduce
the liability on any of its shares in respect of the share capital not paid –
up; or
(b) either with or without
extinguishing or reducing liability on any of its shares –
- cancel any paid – up share capital which is lost or
is unrepresented by available assets; or
- pay off any paid – up share capital which is in
excess of the wants of the company
CONDITION:
- No reduction of capital shall be made if the company
is in arrears in the repayment of any deposits accepted by it or the
interest payable thereon.
- It should have the power under its Articles of
Association to do so.
- All creditors entitled to object to the reduction
have either consented to the said reduction or that they should be paid
off or their interest secured
- Before filing a petition one have to obtain the
consent of BSE listing agreement, if the company is a listed entity.
PROCEDURE:
- Call for Board Meeting for the approval of the
proposal
- Call for Members meeting for Reduction of capital &
be approved by special resolution passed by the company
- File Form MGT 14 for intimating special Resolution
& alteration of MOA/AOA for change of Capital in EOGM and eForm SH 7
for reduction in share capital
- File the petition with Tribunal for its sanction,
Also Accounting treatment for reduction of share capital should be in
conformity with the accounting standards specified in section 133 or any
other provision of Companies Act 2013. The company shall obtain a
certificate to this effect from auditors of the company and file it before
the Tribunal.
- The Tribunal shall give notice of every application
made to for reduction of capital to the Central Government, Registrar and
to the Securities and Exchange Board, in the case of listed companies, and
the creditors of the company and shall take into consideration the
representations, if any, made to it by that Government, Registrar, the
Securities and Exchange Board and the creditors within a period of three
months from the date of receipt of the notice., it shall be presumed that
they have no objection to the reduction, if no representation made by any
within the said period.
- In respect of any debt of claim of every creditor
should have been discharged or determined or secured by the company.
Otherwise, the company should obtained consent of creditors for reduction
of capital.
ORDER FOR REDUCTION
The tribunal may make an order
confirming the reduction of share capital only after it is satisfied that the
debt or claim of every creditor of the company has been discharged or
determined or has been secured or his consent is obtained. The order of
the tribunal may contain such terms and conditions as it may deem fit.
Publication of Order
The order of confirmation of the
reduction of share capital by the Tribunal shall be published by the company in
the manner directed by the Tribunal.
Filing of Order of Tribunal with
ROC
File order within 30 days from
the receipt of the copy of the order along with a minute approved by the
Tribunal
DEFAULT & PENALTY:
If any officer of the company—
(a) Knowingly conceals the
name of any creditor entitled to object to the reduction;
(b) Knowingly misrepresents the
nature or amount of the debt or claim of any creditor; or
(c) Abets or is privy
to any such concealment or misrepresentation as aforesaid, he shall be liable
under section 447.
If a company fails to comply with
the provisions relating to publication of order, it shall be punishable with
fine which shall not be less than five lakh rupees but which may extend to
twenty-five lakh rupees.
IMPLICATIONS UNDER INCOME-TAX ACT, 1961 (‘IT ACT’)
When any company reduces the
share capital as per the provisions of the Companies Act, 1956 by way of
reducing the face value of shares or by way of paying off part of the share
capital, it amounts to extinguishments of the rights of the member to the
extent of reduction of face value of share capital and therefore it is treated
as transfer under sec. 2(47) of the IT Act. The amount received is liable to
capital gain tax u/s. 45 of the IT Act.
There are two aspects involved in
the taxability of the income received on reduction of capital in the hands of
the shareholders of the company:
1. Amounts distributed by the
company on reduction of share capital to the shareholders
attributable to accumulated
profits will be considered as deemed dividend u/s. 2(22)(d) and will be
chargeable accordingly, and,
- Distribution attributable to capital will be subject
to capital gains tax u/s. 45.
Only the distribution, which is
over and above the accumulated profits, can be treated as capital receipts in
the hands of shareholder and only when the capital receipt is in excess of
original cost of acquisition of that interest which stands extinguished,
capital gains will arise to the shareholder.
This is supported by the
following case laws:
• Kartikeya V. Sarabhai vs. CIT,
228 ITR 163 (SC),
It is held in this case that even
if there is reduction in the face value of the shares and consequent payment by
the company to the shareholder towards such reduction, the transaction results
in extinguishments of right in the shares held by the shareholder.
Consequently, the reduction of the share capital would be eligible to capital
gains. The Supreme Court has referred the decision in the matter of Anarkali
Sarabhai vs. CIT (SC), 224 ITR 422 in which case preference shares were
redeemed in entirety whereas in the present case it was partly redeemed by
reduction of share capital, therefore the analogy is same.
*Tribunal means NCLT
For more details, contact CS Neha Seth & Associates at csnehaseth@gmail.com or call us at
9871903449
