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TMI Blog1997 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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 are concerned with the further reduction of the face value of the shares which took place in the year 1966. In the extraordinary general meeting of Sarabhai Limited held on January 10, 1966, a special resolution was passed by the company by virtue of which it reduced its liability on the preference shares from Rs. 500 per share to Rs. 50 per share by paying off in cash a sum of Rs. 450 per share. Thus, the share held by the appellant which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel, that no capital gains tax could be levied in the present case. It was submitted that reduction of the face value of the share from Rs. 500 to Rs. 50 per share did not amount to extinguishment of any right and, therefore, could not be regarded as transfer within the meaning of section 2(47) of the Act and the appellant continued to be a shareholder of the company. It was also submitted that there can be no transfer where shareholders get back money from the company and in this connection, he relied upon the decision in the case of CIT v. R. M. Amin [1977] 106 ITR 368 (SC). Lastly, it was submitted that section 45 of the Act was not applicable as the appellant had not made any sale. It was submitted that as a result of the company's special resolution, the appellant got the money against surrender of shares and this would not amount to a sale. It is not possible to accept the contention of 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 extin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, 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 reduced to his receiving dividend on Rs. 50 per share. Similarly, if liquidation were to take place, whereas he originally had a right to Rs. 500 per share, now his right stood reduced to receiving Rs. 50 per share only. Even though the appellant continues to remain a shareholder his right as a holder of those shares clearly stands reduced with the reduction in the share capital. The Gujarat High Court had in another case in Anarkali Sarabhai v. CIT [1982] 138 ITR 437 followed the judgment under appeal. That was a case where there had been redemption of preference share capital by the company and money was paid to the shareholders. It was held therein that the difference between the face value received by the shareholder and the price paid for the preference share was exigible to capital gains tax. In coming to this conclusion, the Gujarat High Court had followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 50 per share. A company under section 100(1)(c) of the Companies Act has a right to reduce the share capital and one of the modes, which can be adopted, is to reduce the face value of the preference shares. This is precisely what has been done in the instant case. Instead of there being a 100 per cent. extinction of the right which was there in Anarkali's case [1997] 224 ITR 422 (SC), here the right as a preference shareholder of the appellant stands reduced from Rs. 500 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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