ITR Filing: How and when you can claim losses on delisted shares (2024)

May investors are not sure whether they can claim the loss on account of their shares getting delisted. Here’s what you need to know.

There are many investors who are staring at huge losses on account of shares in which they had invested getting delisted. May investors are not sure whether they can claim the loss on account of their shares getting delisted.

In this article I wish to discuss the issue threadbare.

When can you claim the losses in respect of delisted shares?

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Income under the head ‘Capital Gains’ generally becomes taxable only when there is transfer of the capital asset held by you. A transfer may result into loss or gain. The gains are taxable and the losses incurred on transfer of capital assets can be set off against other gains as per the provisions of income tax laws. So, just because the shares are not traded on the stock exchanges and their value has become zero, does not mean that you can claim your losses in respect of such shares in your ITR. Transfer is very widely defined under the income tax laws.

The Income Tax Act defines transfer to include sale and exchange which is generally understood as transfer in common parlance. Moreover, the definition of transfer under the income tax laws also includes relinquishment of any right in the asset as well as extinguishment of the asset.
Even if the shares are delisted from the stock exchanges, the event of delisting does not come within the wider definition of transfer under the income tax laws. So though the shares are not traded on the stock exchanges after delisting, they are still there in your demat account. So, delisting cannot amount to extinguishment of the shares or your rights in the shares. The shares may be delisted for a variety of reasons and just the incident of delisting does not result in a loss as long as the shares are lying in your demat account. Amongst various reasons for delisting one of the reasons for delisting is as per resolution plan under Insolvency and Bankruptcy Code (IBC) approved by the National Company Law Tribunal (NCLT).

Under the resolution plan under IBC for a company, the first to suffer are the equity shareholder who generally do not get anything. Under the resolution plan NCLT generally orders extinguishment of the share capital of the company partly or fully. So, in case your shares are extinguished under the order of NCLT, you lose all your rights in such shares and such extinguishment amount to transfer under the Income Tax Act entitling you to claim such losses. You can also claim losses in your investment in case your investee company goes for voluntary liquidation and the shares are extinguished.

However, there is one way to claim the losses on shares which are delisted and still lying in your demat account. You can transfer these shares from your demat account through off-market transaction for a very nominal price to any of your friends or relatives. Since these shares are no longer listed and the question of payment of STT on this transaction does not arise, the holding period requirement would be 24 months for qualifying as long term but you will be able to avail the benefit of indexation on the cost of such shares.

How to compute and claim such losses

You can adjust such loss against your gains under the head ‘Capital Gains’. Any loss incurred on extinguishment of share capital becomes long term if held for more than 24 months, else the loss is be treated as short term. In case such shares were treated as stock in trade, the loss of value of your investments can be debited in your profits and loss account.

Since the shares are unlisted, the question of payment of Security Transaction Tax does not arise and therefore you will be entitled to avail the benefit of indexation if the shares have been held by you for more than 24 months. In case your loss is short term, you can set off such losses against any capital gains whether short term or long term. In case the loss as computed is a long term loss, the same loss can be set off only against long term capital gains, including capital gains arising on sale/redemption of listed equity shares or units of equity-oriented scheme.
The losses which cannot be set off during the year against the eligible taxable capital gains, the unabsorbed losses can be carried forward for eight years for set off in future.

Practical difficulty in claiming such losses in your ITR

As explained above, technically and legally you can claim capital loss on delisted shares only on extinguishment of your rights in shares as extinguishment is treated as transfer but there are practical difficulties when your try to fill up your ITR form for claiming such losses. The exiting ITR forms do not have any modality to claim any loss on extinguishment of your right in a capital asset making it impossible for you to do so. The ITR forms only recognise sale and normal transfer transactions for the purpose of computing capital gains. As you are entitled to claim such loss and since the ITR forms do not have any modality to put zero as sale consideration, you can put very nominal figure like one paisa as value of the sale consideration as well as for fair market value of such shares in the ITR form for claiming such losses.

This discussion will help a many investors whose shares have been extinguished.

(The author is a tax and investment expert, and can be reached at jainbalwant@gmail.com)