1997 (1) TMI 5 - SC - Income Tax

Preference shares purchased at less than their face value - held that assessee is liable for capital gains on the difference in value between cost price and amount received on redemption of preference shares

Issues Involved:
1. Whether the redemption of preference shares amounts to a "transfer" under Section 2(47) of the Income-tax Act.
2. Whether the difference between the purchase price and the redemption value of preference shares is taxable as capital gains under Section 45 of the Income-tax Act.

Detailed Analysis:

1. Redemption of Preference Shares as "Transfer" under Section 2(47)

The primary issue was whether the redemption of preference shares by Universal Corporation Pvt. Ltd. constituted a "transfer" within the meaning of Section 2(47) of the Income-tax Act. The assessee argued that no "transfer" occurred because the redemption did not involve a sale, exchange, or relinquishment of the asset, nor did it involve the extinguishment of any rights therein.

Legal Provisions and Interpretation:
- Section 2(47): The term "transfer" includes sale, exchange, relinquishment of the asset, or the extinguishment of any rights therein.
- Section 45(1): Any profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head "Capital gains."

The court examined the inclusive definition of "transfer" under Section 2(47). It determined that the redemption of preference shares involves the shareholder giving up or abandoning the shares in exchange for a sum of money. This act of relinquishing the shares fits within the definition of "transfer" as per Section 2(47)(i).

Case Law and Precedents:
- The court referred to the dictionary meaning of "relinquish" and concluded that the act of giving up shares in exchange for money constitutes a relinquishment.
- The court also considered the provisions of the Companies Act, 1956, particularly Section 85 and Section 80, which outline the nature of preference shares and their redemption process. It was noted that redemption involves the company buying back the shares, which is akin to a sale.

2. Taxability of the Difference as Capital Gains under Section 45

The second issue was whether the difference between the purchase price (Rs. 2,66,550) and the redemption value (Rs. 2,97,000) of the preference shares, amounting to Rs. 30,450, should be taxed as capital gains.

Arguments and Contentions:
- The assessee contended that the redemption did not result in a "transfer" and hence, the difference should not be taxed as capital gains.
- The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal held that the difference should be taxed as capital gains under Section 45.

Court's Analysis:
- The court held that the redemption of preference shares is effectively a sale, as the company pays the shareholder the value of the shares and takes them back. This transaction falls within the ambit of "sale, exchange or relinquishment of the asset" under Section 2(47).
- The court also noted that shares are movable property and can be held as capital assets. Therefore, the excess amount received on redemption of these shares qualifies as capital gains.

Relevant Case Law:
- CIT v. R. M. Amin (1977): The court distinguished this case, which involved liquidation and distribution of assets, from the present case of redemption.
- Sunil Siddharthbhai v. CIT (1985): This case was cited to explain the general concept of "transfer of property," but was not directly applicable.
- Sath Gwaldas Mathuradas Mohata Trust v. CIT (1987): Supported the view that redemption of preference shares amounts to a sale and is taxable as capital gains.
- CIT v. Rasiklal Maneklal (HUF) (1989): Discussed in the context of amalgamation, but found not directly relevant.

Conclusion:
The court affirmed the High Court's judgment, concluding that the redemption of preference shares constitutes a "transfer" under Section 2(47) and that the difference between the purchase price and redemption value is taxable as capital gains under Section 45. The appeal was dismissed, and the judgment under appeal dated August 18, 22, 1992, was affirmed with no order as to costs.

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