1982 (6) TMI 50 - HC - Income Tax

Summary

Issues Involved:

1. Tax liability on capital gains from the redemption of preference shares.
2. Tax liability on capital gains from the sale of shares by a trust where the assessee is the sole beneficiary.
3. Applicability of relief under Section 80T in determining capital gains for the trust and the assessee.

Issue-wise Detailed Analysis:

1. Tax Liability on Capital Gains from the Redemption of Preference Shares:

The primary issue is whether the redemption of preference shares constitutes a "transfer" under Section 2(47) of the Income-tax Act, 1961, thereby attracting capital gains tax under Section 45. The assessee argued that the redemption of preference shares does not amount to a transfer and thus should not be taxed as capital gains. The Tribunal, however, held that the redemption of preference shares involves the extinguishment of the shareholder's rights in those shares, which constitutes a transfer within the meaning of Section 2(47).

The court examined the definition of "transfer" under Section 2(47) and the relevant case law, including CIT v. R. M. Amin and Kartikey V. Sarabhai v. CIT. It was observed that the case of Kartikey V. Sarabhai, where the reduction of share capital was considered a transfer, was directly applicable. The court concluded that the redemption of preference shares results in the extinguishment of the shareholder's rights, thereby constituting a transfer. Consequently, the amount received over the purchase price of the shares is taxable as capital gains.

2. Tax Liability on Capital Gains from the Sale of Shares by a Trust:

This issue pertains to whether the assessee is liable for capital gains tax on the sale of shares by a trust where the assessee is the sole beneficiary. The court referred to its earlier decision in Kum. Pallavi S. Mayor v. CIT, which held that the capital gains arising from the sale of shares by a trust should not be taxed in the hands of the beneficiary. Following this precedent, the court answered this question in the negative, ruling against the Revenue.

3. Applicability of Relief under Section 80T:

Given the negative answer to the second issue, the third issue concerning the applicability of relief under Section 80T for determining capital gains of the trust and the assessee did not survive and thus was not addressed by the court.

Conclusion:

The court concluded that the redemption of preference shares constitutes a transfer under Section 2(47) of the Act, thereby attracting capital gains tax under Section 45. The court ruled against the Revenue on the issue of taxing capital gains from the sale of shares by a trust in the hands of the beneficiary. Consequently, the question of relief under Section 80T did not arise. The reference was answered accordingly, with costs awarded to the Revenue. A certificate of fitness for appeal to the Supreme Court was granted due to the differing views between the High Courts.