(2001) 248 ITR 323 (SC)
Meaning of transfer; capital gains — charging section
Extinguishment is an independent limb. Rights in a capital asset may be extinguished without any corresponding transfer to another person, and such extinguishment is itself a transfer for capital gains purposes.
Does the extinguishment of rights in a capital asset amount to a transfer only where it accompanies a transfer of the asset to someone else, or is extinguishment an independent head?
Shareholders held shares in a company which amalgamated with another. On the amalgamation taking effect, the amalgamating company ceased to exist and the shares held in it were extinguished, the shareholders receiving shares in the amalgamated company. The question was whether the extinguishment of the original shareholding constituted a transfer, an earlier line of authority having suggested that extinguishment counted only where it was accompanied by a transfer of the asset to another party.
The matter came before the Supreme Court, which reconsidered the narrower reading of the extinguishment limb adopted in an earlier decision and departed from it.
For the assessee
On the earlier view, extinguishment qualifies only where rights pass to another person; here the shares in the amalgamating company simply ceased to exist on its dissolution, with nothing passing to anyone, so there was no transfer and no chargeable gain.
For the Revenue
The definition lists sale, exchange, relinquishment and the extinguishment of any rights as separate limbs. Reading extinguishment as requiring a correlative transfer would make the limb redundant, since a transfer to another is already covered by the earlier words.
The Court examined the structure of the definition and held that its several limbs are disjunctive. Sale, exchange and relinquishment each involve the asset or rights in it passing to another. If the extinguishment limb were also confined to cases where rights pass, it would add nothing to what precedes it, and a construction rendering statutory words superfluous is to be avoided. The Court therefore held that the extinguishment of any rights in a capital asset is an independent limb, which may be satisfied whether or not there is a corresponding acquisition by anyone else. To the extent that an earlier decision had held that extinguishment must be accompanied by a transfer of the asset to another person, the Court held that view to be erroneous. Applying that construction, the shares in the amalgamating company were extinguished on amalgamation, and that extinguishment was a transfer within the definition.
The extinguishment limb carries into the definition of transfer under the IT Act 2025, with the charge in Section 67. It underpins the treatment of amalgamations, reduction of share capital, surrender of rights, and the buyback analysis. Note that exemptions for qualifying amalgamations operate separately — establishing that a transfer occurred is the first step, not the last.