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TMI Blog1996 (8) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... see was a private limited company having capital of rupees, twenty-four lakhs divided into 2,400 shares of Rs. 1,000 each. By a resolution under an extraordinary general body meeting held on November 30, 1961, the company reduced its capital to Rs. 5,04,000 divided into 2,400 shares of Rs. 210 each. Consequent to such reduction, the company was to return to the shareholders in cash or in kind paid-up capital to the extent of Rs. 790 per share. This was approved by the High Court, by order dated April 20, 1962. In giving effect to this reduction of capital, the company had to pay to the shareholders difference of Rs. 18,96,000 between the paid-up share capital of rupees twenty-four lakhs and the reduced share capital of Rs. 5,04,000. The company actually paid Rs. 10,78,806 in cash and transferred immovable properties of the book value for the balance of Rs. 8,17,194. According to the Department, the market value of the immovable properties was actually of Rs. 40,20,956, and, therefore, the excess value over the book value of Rs. 8,17,194 equivalent to Rs. 32,07,764 was assessable as deemed gift under section 4(1)(a) of the Gift-tax Act. Section 4(1)(a) deals with the difference betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erties worth Rs. 40,24,958 were transferred. The difference between Rs. 8,17,194 and Rs. 40,24,958 was deemed to be a gift under section 4(1)(a) of the Gift-tax Act. The reduction of share capital and the return of the sum of Rs. 790 per share was in accordance with the resolution passed by the company in its general body meeting. Therefore, there is no room for revaluing the shares once again. It is not the resolution for return of share value to the extent of Rs. 790 per share, but the return was only a sum of Rs. 790 simpliciter. Therefore, adding further value to Rs. 790 per share would not arise on the facts of this case. Therefore, the Tribunal was not correct in stating that if the Revenue wants that the value of the assets should be revised upwards to the extent of its market value, then it would require also an upward revision of the value of the share as such. Therefore, according to learned standing counsel, the company is not entitled to return more than Rs. 790 per share. Since Rs. 32,07,764 was transferred without adequate consideration, there is deemed gift as per the provisions of section 4(1)(a) of the Gift-tax Act, 1958. According to learned standing counsel, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, there is no inadequate consideration, warranting application of section 4(1)(a) of the Gift-tax Act. In order to support his contention, learned senior counsel appearing for the assessee relied upon the decision of the Bombay High Court in CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390. According to learned senior counsel for the assessee, the decision in CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390 (Bom), would apply on all fours to the facts arising in this case. Therefore, according to learned counsel for the assessee, when the share capital was reduced, there is no transfer and even if there is transfer, it is for adequate consideration. Accordingly, the learned senior counsel for the assessee supported the order passed by the Tribunal. We have heard learned standing counsel appearing for the Department as well as learned senior counsel appearing for the assessee. The fact remains that the assessee is a private limited company and its shareholders are all descendants of the late Shri Kasturi Rangan Iyengar and other members of his family. Originally, the shares of this company had a face value of Rs. 1,000 each. In 1962, the company reduced the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , return of the capital to the share holders because of the reduction in the capital amount cannot amount to a transfer so as to fall within the scope of section 4(1)(a) of the Gift-tax Act. For this proposition, reliance was placed upon the decision of the Bombay High Court in CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390, wherein it was held that when property is received by the shareholders in the course of the reduction of share capital of a company in which they are shareholders, such a transaction cannot amount to a transfer of property and cannot, therefore, fall within the ambit of section 4(a) of the Act. While coming to this conclusion, the Bombay High Court pointed out that in order to fall within the terms of section 4(a) of the Gift-tax Act, there must, in the first instance, be a transfer of property. The opening words of section 2 of the Act, viz., " unless the context otherwise requires " permit the court to take into consideration the basic principle regulating the reduction of the share capital of a company, and does not compel the court to apply the definition of " transfer of property " in clause (xxiv) of that section to a case in which, having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no material on record to show that the shareholders agreed to take shares at the book value as against a higher amount due to them. On the contrary, the assessee had revalued the shares at the market value and credited the difference to the capital reserve before discharging the liability to the shareholders of equal value and, hence, the surplus realised over and above the book value should be treated as capital gains. While considering the decisions of the Supreme Court in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 and CIT v. R. M. Amin [1971] 82 ITR 194 of the Gujarat High Court, this court pointed out that those cases arose at the stage of the winding up of the company and the distribution of assets among the shareholders at that stage. The principle applicable to cases of distribution of assets at the stage of winding up may not apply to a case like the present one where on the reduction of share capital, the company becomes liable to pay the shareholders certain sums and to discharge that liability some property belonging to the company, which is a going concern, is transferred to the shareholders. It was also noticed that the decision rendered by the Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel, the company is bound by its resolution and it cannot revalue the shares upwards after the shareholders agreed to value the shares at Rs. 1,000 per share, in the resolution passed by the general body. In fact, the immovable properties were not transferred by valuing the same as per market value. On the other hand, the immovable properties were transferred only according to the book value. Therefore, according to learned standing counsel what was paid or returned over and above Rs. 790 per share would come under the purview of deemed gift under section 4(1)(a) of the Act. The Tribunal pointed out that when the paid up capital is reduced an equivalent amount is reduced by taking out certain assets and distributing the same to the shareholders at the book value. If the Revenue wants that the value of the assets should be revised upwards to the extent of its market value, then it would require also the upward revision of the value of the shares as such. As already pointed out, revaluing the share in an upward manner is not possible in the present case, since by a resolution the value was fixed for each share. In order to equalise the amount paid and the market value of the properti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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