1983 (1) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Whether the irredeemable preference shares sold by the assessee were acquired on 30th September, 1971, or earlier.
2. Whether the capital loss incurred by the assessee is a short-term or long-term capital loss.
3. Whether the re-organization of the capital of the company on 30th September, 1971, constituted a transfer of shares within the meaning of Section 2(47) of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Acquisition Date of Preference Shares:
The primary issue was whether the irredeemable preference shares sold by the assessee were acquired on 30th September, 1971, or earlier. The assessee contended that the preference shares did not exist prior to 30th September, 1971, and thus could not have been acquired before that date. The AAC initially agreed that the sales were genuine but concluded that the shares were acquired earlier, in 1965, as part of the original equity shares from an HUF partition. The Tribunal found that preference shares, being different in nature from equity shares, came into existence only on 30th September, 1971. Therefore, the shares could not have been acquired before this date.

2. Nature of Capital Loss:
The second issue was whether the capital loss incurred by the assessee was a short-term or long-term capital loss. The AAC held that the capital loss was long-term, as the shares were acquired in 1965. However, the Tribunal disagreed, stating that since the preference shares came into existence only on 30th September, 1971, the loss should be treated as a short-term capital loss. The Tribunal relied on the distinction between equity and preference shares under Section 85 of the Companies Act, emphasizing that the rights and liabilities attached to these shares are different.

3. Re-organization as Transfer:
The third issue was whether the re-organization of the company's capital on 30th September, 1971, constituted a transfer of shares within the meaning of Section 2(47) of the IT Act, 1961. The AAC concluded that there was no transfer or exchange. The Tribunal, however, found that there was indeed an exchange of the earlier equity shares with new equity and preference shares on 30th September, 1971, which amounted to a transfer. This exchange allowed the assessee to acquire the preference shares only on 30th September, 1971.

Conclusion:
The Tribunal concluded that the preference shares were acquired on 30th September, 1971, and not earlier. Consequently, the capital loss of Rs. 68,236 was a short-term capital loss. The Tribunal directed that the assessee's claim be accepted and the assessment be modified accordingly. The appeal was allowed.