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Issues Involved:
1. Whether the reduction of share capital by paying off a part of the paid-up capital results in the extinguishment of the right of the shareholders to the extent of the reduction of the face value of the share. 2. Whether any profits or gains arising from such extinguishment are chargeable to income-tax under the head "Capital gains" under Section 45 read with Section 2(47) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: Issue 1: Extinguishment of Shareholder Rights The primary issue is whether the reduction of share capital by paying off a part of the paid-up capital results in the extinguishment of the right of the shareholders to the extent of the reduction of the face value of the share. The court examined the facts where a private limited company reduced the face value of its 3% non-cumulative preference shares from Rs. 1,000 to Rs. 50 and paid off Rs. 950 per share to its shareholders. This reduction was done under Section 100(1)(c) of the Companies Act, 1956. The court noted that the assessee had purchased the shares at Rs. 420 per share and received Rs. 950 per share due to the reduction. The Tribunal held that this transaction resulted in an extinguishment of the assessee's rights in the shares to the extent of the reduction in face value. The court agreed with the Tribunal's view, stating that the reduction in share capital extinguished the shareholder's right to dividends and the right to share in the distribution of net assets upon liquidation, proportionate to the extent of the reduction. The court distinguished this case from R. M. Amin's case, where the payment to the shareholder was made in the context of liquidation and not due to the extinguishment of any rights. The court emphasized that in the present case, the reduction of capital by paying off a part of the capital resulted in the extinguishment of the shareholder's rights to the extent of the reduction. Issue 2: Chargeability to Capital Gains Tax The consequential issue is whether any profits or gains arising from such extinguishment are chargeable to income-tax under the head "Capital gains" under Section 45 read with Section 2(47) of the Income Tax Act, 1961. The court examined whether the extinguishment of rights due to the reduction of share capital constitutes a "transfer" under Section 2(47) of the Act. The court noted that the definition of "transfer" includes the extinguishment of any rights in a capital asset. The court held that the reduction of share capital by paying off a part of the capital resulted in the extinguishment of the shareholder's rights, which falls within the ambit of "transfer" under Section 2(47). Consequently, the profits or gains arising from such extinguishment are chargeable to capital gains tax under Section 45 of the Act. The court also referred to the decision in CIT v. Minor Bababhai, where the court held that the reduction of a debt due to a scheme of compromise resulted in the extinguishment of the original right and constituted a capital loss. The court found that the reasoning in Minor Bababhai's case supports the view that the reduction of share capital results in the extinguishment of the shareholder's rights and is chargeable to capital gains tax. Conclusion The court answered the questions referred to it in the affirmative and against the assessee. The court held that the reduction of preference share capital resulted in the extinguishment of the shareholder's rights and that the profits or gains arising from such extinguishment are chargeable to capital gains tax. The court granted a certificate of fitness for appeal to the Supreme Court, noting that it was taking a view different from the Madras High Court. Summary of Judgments: - I.T.R. No. 68/76: 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. - I.T.R. No. 369: The Tribunal was justified in holding that the assessee had made a capital gain of Rs. 28,710 as a result of the reduction in preference share capital of Sarabhai Ltd. Both references were answered accordingly with no order regarding costs.
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