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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 ..... escribed 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 with the property/amounts so received by the assessee on reduction of his share capital in the said company, the Tribunal was required to consider whether any capital gains accrued to the assessee. The Tribunal held that no capital gains accrued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany'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 are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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), Income-tax Act, at the rates in force. Section 194 clearly treats such payment as dividend. Therefore, when a loan by a company to a shareholder in the manner set out in section 2(22)(e) is treated as a deemed dividend, it is to be treated as payment out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts/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 (ii) the extinguishment of any rights therein; or..." In the case of Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163, this court examined the question of capital gains in the context of an amount received by a shareholder from a company on reduction in the face value of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 dividend in the hands of the assessee. Therefore, it will have to be treated as income of the assessee and taxed accordingly. It is only when any distribution is made which is over and above the accumulated profits of the company (capitalised or otherwise), that the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its 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 from Rs. 1,000 to Rs. 210. Out of the total amounts so received including the value of the property so received, the portion attributable to accumulated profits will have to be deleted. Only the balance amount can be treated as a capital receipt. Thereafter looking to the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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