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PETITIONER:

SHRI KARTIKEYA V.SARABHAI.

Vs.

RESPONDENT:

THE COMMISSIONER OF INCOME TAX.

DATE OF JUDGMENT: 04/09/1997

BENCH:

B.N. KIRPAL, K.T. THOMAS

ACT:

HEADNOTE:

JUDGMENT:

THE 4TH DAY OF SEPTEMBER ,1997 PRESENT:

Hon'ble Mr. Justice B.N. Kirpal

Hon'ble Mr. Justice K.T. Thomas

S. Ganesh, Mrs. A.K. Verma, Advs. for M/S. J.B.D. & Co,

Advs. for the appellant

S. Rajappa and B.K. Prasad, Advs. for the Respondent

J U D G M E N T

The following Judgment of the Court was delivered:

J U D G M E N T

KIRPAL, J.

The only question which arises for consideration in

this appeal, under certificate having been granted by the

High Court, is whether on reduction of share capital with

the company paying a part of the capital by reducing face

value of its share, results in extinguishment of right in

the shares held by the share-holder so that the amount

paid on reduction of shares capital would be exigible to

capital gain tax.

The appellant had purchased 90 non-cumulative

preference shares, each of the face value of Rs. 1,000/- at

a price of Rs. 420/- share, of a company called Sarabhai

limited. In 1965, a sum of Rs. 500/- per preference share

was paid off to the assessee upon a reduction of a share

capital of the company under Section 100(1)(c) of the

Companies act. This was done by reducing the face value of

each share from Rs. 500/- in cash. As a result thereof the

appellant became a holder in respect of 90 non-cumulative

preference shares of the value of Rs. 1,000/- per share.

In the present case, we are concerned with the further

reduction of the face value of the shares which took place

in the year 1966. In the Extra-Ordinary General Meeting of

Sarabhai Limited held on 10.1.1966, a special resolution was

passed by the Company by virtue of which it reduced its

liability on the preference shares from Rs. 500/- per share

to Rs. 50/- per share by paying off in cash a sum of Rs.

450/- per share. Thus the share held by the appellant which

was originally of the face value of Rs. 1,000/- became a

share of the face value of Rs. 50/- only. This reduction

had taken place in two stages, firstly when the face value

was reduced from Rs. 1,000/- to Rs. 500/- per share and

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secondly when the face value was reduced from Rs. 500/- per

share to Rs. 50/- per share.

The appellant had originally purchased the preference

shares of the face value of rs. 1000/- per share at a price

of Rs. 420/- per share. At the time of first reduction, he

got back Rs. 500/- per share in cash. At the time of second

reduction, with which we are concerned in this case, the

appellant got a further sum of Rs. 450/- per share in cash.

The Income Tax Officer was of the opinion that a sum of

Rs. 450/- per share, which was now received by the assessee

, was liable to be subject to levy of capital gain tax. The

appellant, however, contended that such reduction of the

face value did not result in extinguishment of the

assessee's right and there was no transfer within the

meaning of that expression as contained in Section 2(47) of

the Income Tax Act, 1961 (hereinafter referred to as 'the

Act') and, secondly no tax could be imposed thereon. The

Income-Tax officer did not accept the appellant's contention

and taxed the said amount.

The appeal of the appellant before the Appellate

Assistant Commissioner succeeded and sum of Rs. 23,490/-,

which had been included as capital gains, was held not be

liable to tax. The Revenue, however, filed a second appeal

and the Income Tax Appellate Tribunal set aside the order of

the Appellate Assistant Commissioner and restored the order

of the Income Tax Officer. At the instance of the

appellant, the Income Tax Tribunal referred the following

question of law to the High Court of Gujarat.

"Whether, on the facts of the case,

the Tribunal rightly held that the

assessee had made capital gains on

the reduction of preference share

capital which was exigible to

capital gains tax?"

The high court considered the matter in its entirely

and came to the conclusion that the Tribunal had rightly

held that the appellant had made capital gains on the

reduction of preference share capital and the same was

exigible to capital gains tax. Therefore, at the request of

the appellant, the High Court granted leave to appeal.

hence, this appeal.

on behalf of the appellant, it wads vehemently

contended by Mr. Ganesh, learned counsel that no capital

gains tax could be levied in the present case. It was

submitted that reduction of the face value of the share from

Rs. 500/- to Rs. 50/- per share did not amount to

extinguishment of any right and, therefore, could not be

regarded as transfer within the meaning of Section 2(47) of

the Act and the appellant continued to be a share can be no

transfer where share-holders get back money from the company

and in this connection, he relied upon the decision in the

case reported as Commissioner of Income-tax, Gujarat Vs.

R.M. Amin, 106 ITR 368. Lastly, it was submitted that

Section 45 of the act was not applicable as the applicable

as the appellant had not made any scale. It was submitted

that as a result of the Company's Special Resolution, the

appellant got the money against surrender of shares and this

would not amount to a scale.

It is not possible to accept the contention of Shri

Ganesh, learned counsel that reduction does not amount to a

transfer of the capital asset. Section 2(47) of the Act

reads as follows:

"2(47) 'transfer' in relation to a

capital asset, includes,-

i. the scale, exchange or

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relinquishment of the asset; or

ii. the extinguishment of the any

rights therein; or

iii. the compulsory acquisition

thereof under any law; or

iv. in a case where the asset in

converted by the owner thereof

into, or it is treated by him as,

stock-in-trade or a business

carried on by him, such conversion

or treatment; or

v. any transaction involving the

allowing of the possession of any

immovable property to be taken or

retained in part performance of a

contract of the nature referred to

in Section 53A of the transfer of

Property Act, 1882 (4 of 1882); or

vi. any transaction (whether by way

of becoming a member of, or

acquiring shares in, a co-operative

society, company or other

association of persons or by way of

any agreement or any arrangement or

in any other manner whatsoever)

which has the effect of

transferring, or enabling the

enjoyment of, any immovable

property:

Explanation-For the purposes of

sub-clauses (v) and (vi),

`immovable property' shall have the

same meaning as in clause (d) of

Section 269UA."

Section 45 of the Act reads as

follows:

"Capital gains- (1) Any profits or

gains arising from the transfer of

capital asset effected in the

previous year shall, save as

otherwise, provided in sections 53,

54, 54B, 54D, 54E, 54F and 54G, be

chargeable to income-tax under the

head 'capital gains' and shall be

deemed to be the income of the

previous year in which the transfer

took place."

Section 2(47) which is an inclusive definition, inter

alia, provides that relinquishment of an asset or

extinguishment of any right therein amounts to a transfer of

a capital asset. While, it is no doubt true that the

appellant continuous of a share capital but it is not

possible to accept the contention that there has been no

extinguishment of any part of his right as a share holder

qua the company. It is not necessary that for a capital

asset. Sale is only one of the modes of transfer envisaged

by Section 2(47) of the Act. Relinquishment of the asset or

the extinguishment of any right in it, which may not amount

to sale, can also be considered as a transfer and any profit

or gain which arises from the transfer of a capital asset is

liable to be taxed under section 45 of the Act.

When as a result of the reducing face value of the

share, the share capital is reduced, the right of the

preference share holder to the divided or his share capital

and the right to share in the distribution of the net assets

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upon liquidation is extinguished proportionately to the

extent of reduction in the capital. Whereas the appellant

had a right to dividend on a capital of Rs. 500/- per share

that stood reduced to his receiving dividend on Rs. 50/- per

share. Similarly, if the liquidation was to take place

whereas he originally had a right to Rs. 50/- per share

only. Even though the appellant continues to remain a share

holder his right as a holder of those shares clearly stands

with the reduction in the share capital.

The Gujarat High Court had in another case reported as

Anarkali Sarabhai Vs. Commissioner of Income-Tax, Gujarat

138 I.T.R. 437 followed the judgement under appeal. That

was a case where there had been redemption of preference

share capital by the company and money had money was paid to

the share-holders. It was held therein that different

between the face value received by the Share-holder and the

price paid for preference share was exigible to capital

gains tax. In coming to this conclusion, the Gujarat High

Court had followed the Judgement under appeal in the present

case.

The aforesaid decision of the Gujarat High Court in

Anarkali's (supra) was challenged and this Court in the

Anarkali Sarabhai Vs. Commissioner of Income-Tax, 224 I.T.R.

422 upheld the High Court's decision. It had been contended

in Anarkali's case (supra) on behalf of the assessee that

reduction of preference share was not a sale or

relinguishment of asset and, therefore, no capital

considered the definition of word "transfer" occurring in

Section 2(47) of the Act and reading the same along with

Section 45, it came to the conclusion that when a preference

share is redeemed by a company, what the share holder does

in effect is to sell the share to the company. The company

redeems its preference shares only by paying the preference

shares. It was observed that in effect the company buys

back the preference shares from the share-holders. Further,

referring to the provisions of the Companies Act, it held

that the reduction of preference shares by a company was a

sale and would squarely come within the phrase "sale,

exchange or relinquishment" of an asset under Section 2(47)

of the Act. It was also held that the definition of words

"transfer" under Section 2(47) of the Act was not an

exhaustive definition and that subsection (1) of clause (47)

of Section 2 implies that parting with any capital asset for

again would be taxable under Section 45 of the Act. In this

connection, it was noted that when preference shares are

redeemed by the company, the share-holder has to abandon or

surrender the shares, in order to get the amount of money in

lieu thereof.

In our opinion, the aforesaid decision of this Court in

Anarkali's (supra) is applicable in the instant case. The

only different in the present case and Anarkali's

case(supra) preference shares were redeemed in entirety, in

the present case, there has been a reduction in the share

capital inasmuch as the company had redeemed its preference

share of Rs. 500/- to the extent of Rs. 450/- per share.

The liability of the company in respect of the preference

share which was previously to the extent of Rs. 500/- now

stood reduced to Rs. 50/- per share

The company under Section 100(1 )(c) of the Companies

Act has a right to reduce the share capital and one of the

modes, which can be adopted, is to reduce the face value of

the preference shares. This is preciously what has been

done in the instant case. Instead of there being a 100%

extinction of the right which was there in the Anarkalis's

cases (supra), here the right as a preference share holder

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of the appellant stands reduce from Rs. 500/- to Rs. 50/-

per share has been paid by the company to the appellant on

account of the extinguishment of his right to the aforesaid

extent.

Yet another right which is apparently effected as a

consequence of this reduction is with regard to the vote

right. Accordingly to Section(87)(2) of the companies Act,

a holder of a preference share has right to vote only a

resolution placed before the company which directly affect

the rights attached to his preference shares. In the case

of cumulative preference share, if dividend remains unpaid

for not less than even a preference share holder, by virtue

of Section(2)(b) of the Companies Act, ger right to vote on

every resolution placed before the company at any meeting

like a member holding equity shares. What is important for

our purpose is the provisions of section 87(2) (c) which,

inter alia, provides:

"Where the holder of any preference

share has a right to vote on any

resolution in accordance with the

provisions of its sub-section, his

voting right on a poll, as the

holder of such share, shall,

subject to the provisions of

Section 89 and sub-section (2) of

Section 92, be in the same

proporation as the capital paid up

in respect of the preference share

bears to the total paid-up equity

capital of the company."

Therefore, with the reduction in the face of the share

from Rs. 500/- per share to Rs. 50/- per share, the value of

the vote of the appellant in the event of there being a poll

would stand considerably reduced. Such reduction of the

right in the capital asset would clearly amount to a

transfer within the meaning of that expression in Section

2(47) of the Act.

The decision in R.M. Amin's case (supra) can be of no

help to the appellant. In that case, the company had gone

into voluntary liquidation and the assessee had received a

sum in cash of the amount which he had paid for the share.

It was held that when share holder receives money

representing his share on the distribution of the net assets

of a company in liquidation, he receives that money in

satisfaction of the right which belongs to him by virtue of

his holding the share and not by any operation of any

transaction which amounted to sale, exchange,

relinquishment, transfer of a capital asset or

extinguishment of any right in capital assets. The payment

received by the contributories on the liquidation of the

company would not amount to a transfer and it is for this

reason that R.M. Amin's case (supra) was distinguished by

this Court in Anarkali's case.

In our opinion, the High Court was right in coming to

the conclusion that the appellant was liable to pay capital

capital gains tax on the capital gains of Rs. 28710/- as a

result of reduction in the preference share in Sarabhai

Limited. This appeal is, accordingly dismissed with costs.