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TMI Blog1998 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the assessment year 1963-64, the assessee held 70 shares in Kasturi Estates (Pvt.) Ltd. The face value of each share was Rs. 1,000. During the said accounting period, the said company passed a resolution to reduce its capital. The procedure prescribed under the Companies Act for the reduction of share capital was undergone. An appropriate order was obtained from the court. The reduction was given effect on and from May 26, 1962. As a result, the face value of the shares in the company was reduced from Rs. 1,000 each to Rs. 210 each. As a result of this reduction, there was a pro-rata distribution of some properties of the company and payment of money to the shareholders, including the assessee. In the income-tax proceedings connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,667, Rs. 1,400 and Rs. 200. Thus the total advances to the shareholders by the company were to the time of Rs. 64,517. We have to consider whether the accumulated profits of the company would stand reduced by the sum of Rs. 64,517 at the time of the company's reduction of share capital. Under section 2(22) of the Income-tax Act, 1961, dividend includes : "(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1953, whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umulated profits. We fail to appreciate this contention. A dividend under section 205 of the Companies Act can be paid only out of the profits of a company whether for that year or out of the profits of the company for any previous financial years as set out in that section, and in the manner set out in that section. Therefore, under section 2(22) of the Income-tax Act, 1996, when any payment by a company is treated as a deemed dividend, the section has provided that it should be treated is payment out of the accumulated profits of the company whether capitalised or not. In fact, under section 194 of the Income-tax Act, an obligation is cast upon the principal officer of the company to deduct from the payment so made under section 2(22)(e), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are required to be determined. Question No. 1 is, therefore, answered in the affirmative and in favour of the assessee. Question No. 2 : We have to consider whether the assessee in the present case was assessable to any capital gains tax in respect of the amounts/property received by him from the company as a result of the reduction of his share capital. Under section 45(1) of the Income-tax Act, any profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head "Capital gains". "Transfer" is defined in section 2(47) of the Income-tax Act, 1961, as follows : "2. (47) 'transfer' in relation to a capital asset, includes,--- (i) the sale, exchange or relinquishment of the asset; or (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the face value of his shares is a capital receipt subject to section 45. However, in the case of Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163, this court did not consider the provisions of section 2(22)(d) in the context of capital gains arising on a reduction of the share capital. Under section 2(22)(d) any distribution to its shareholders by a company on the reduction of its capital, is deemed to be a distribution of dividend to the extent that the company possesses accumulated profits---whether such profits have been capitalised or not. Therefore, any distribution which is made by a company on a reduction of its share capital which can be correlated with the company's accumulated profits (whether capitalised or not), will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount distributed by a company on reduction of its share capital has two components---distribution attributable to accumulated profits and distribution attributable to capital (except capitalised profits). Therefore, in the present case, to the extent of the accumulated profits in the hands of Kasthuri Estates (Pvt.) Ltd., whether such accumulated profits are capitalised or not, the return to the shareholder on the reduction of his share capital, is a return of such accumulated profits. This part would be taxable as dividend. The balance may be subject to tax as capital gains, if they accrue. The assessee in the present case has been paid not merely cash but has also been given a property for the reduction in the value of his shares fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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