Your questions – Income tax: shares of a deregistered company cannot be cited as losses

By Chirag Nangia

I bought shares of a listed company in 2015, which was suspended in 2017. In 2018, I sold the shares of another listed company with a long-term gain. How can I adjust gains with losses. —M Amala

Under the Income Tax Act, a capital gain or loss arises when capital property is transferred. In addition to the actual transfer (sale) of an asset, the term “transfer” includes the extinction of rights in the asset. Since the shares were only written off and still exist, it cannot be said that they were extinguished or transferred and therefore there can be no capital gain or loss. Although the investment appears to be totally sunk and it is a real loss, you cannot claim this loss as the shares were neither extinguished nor transferred by you.

The loss can only be claimed when the company goes into liquidation or the shares are actually transferred by you to another person for less than the indexed cost of acquiring the shares. This long-term capital loss may also be offset by the long-term capital gains (LTCG), if any, of the relevant year. The gain on the sale of listed shares relating to the 2018-19 financial year should have been declared in the tax return for the 2019-20 financial year.

Companies like DHFL and Lakshmi Vilas Bank are no longer listed on the stock exchange as they are subject to insolvency law. How do you know which company has disappeared to claim short-term losses? —Ritesh Goyal

Lakshmi Vilas Bank (LVB) merged with DBS Bank India (DBIL). It has been established in various court precedents that shareholders’ rights to the shares of a merging company are extinguished as a result of the merger. Following the merger plan, effective November 27, 2020, an extinction occurred in the shares of LVB. One can claim the loss for FY21 which can be carried forward if there are no corresponding capital gains to offset. As the shares were listed, they will be classified as long-term fixed assets if they have been held for more than 12 months. Long-term capital loss can only be compensated with LTCG. However, short-term capital losses can be offset by short-term and long-term capital gains. Depending on your holding period, you can compensate for losses.

(The author is the director, Nangia Andersen India. Send your questions to [email protected])

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