9911796707
TMI Blog1997 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... pital would be exigible to capital gains 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 per 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 the 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. 1,000 to Rs. 500 and by paying off 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. 500 per share, in place of being the holder of shares of the face value of Rs. 1,000 per share. In the present case, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a sum of Rs. 23,490, which had been included as capital gains, was held not to 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 orders 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a 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 of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h section 45, it came to the conclusion that when a preference share is redeemed by a company, what the shareholder does in effect is to sell the share to the company. The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. It was observed that in effect the company buys back the preference shares from the shareholders. 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 the word " transfer " under section 2(47) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 50 per share. A sum of Rs. 450 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 voting right. According to section 87(2)(a) of the Companies Act, a holder of a preference share has a right to vote only on resolutions 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 two years preceding the date of commencement of the meeting, then even a preference shareholder, by virtue of section 87(2)(b) of the Companies Act, gets a righ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
