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TMI Blog1985 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of the face value of Rs. 100 each had been issued and were fully paid and subscribed. On December 30, 1953, additional shares amounting to 4,311 of the face value of Rs. 100 each were issued to five shareholders and in respect of each of these shares, only a sum of Rs. 10 was called for and paid. Thus, as on December 30, 1953, the subscribed capital of the company was Rs. 16,96,610 made up of 16,535 fully paid-up shares of Rs. 100 each and 4,311 shares of Rs. 100 each, but Rs. 10 being paid-up. As on December 31, 1953, the reserve had accumulated to Rs. 16,00,000. Thus, the aggregate of the subscribed capital and the reserves as on December 30, 1953, was Rs. 32,96,610. On December 30, 1954, the board of directors of the company by a resolution called for the balance amount of Rs. 90 per share in respect of the 4,311 subsequently issued shares. It is not in dispute that this amount was later on paid by the shareholders. The shareholders were members of a family and in a partial partition of the family of T. S. Srinivasa Iyer, whose business of distribution, exhibition and exploitation of cine pictures was taken over by the private limited company, Balasubramanian was allotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54. Rs. 32,96,610 x 30,050/16,96,610 = 58,388 Less: 15% thereof 8,758 ------------ 49,630 Value of capital subscribed after 31-12-1953 in respect of 1,055 shares 94,950 ----------------- Total cost of shares 1,44,580 " ----------------- The Income-tax Officer made a further reduction of 15 per cent. of the total value in view of the fact that the shares were of a private limited company. Originally, in order to ascertain the value as on January 1, 1954, he had added the call money which was paid after December 31, 1953. As a result of the adoption of this formula, the capital gains in the case of Srinivasa Iyer was computed at Rs. 1,11,670 for the assessment year 1965-66 and Rs. 56,706 for the assessment year 1966-67. In the case of Balasubramaniam, the capital gains was computed at Rs. 16,045 for the assessment year 1966-67. The appeals filed by the assessee were rejected by the Appellate Assistant Commissioner. When the matter was taken further to the Tribunal in appeal, the Tribunal relying on a decision of the House of Lords in Birch v. Cropper [1889] 14 AC 525, took the view that the fact that on January 1, 1954, some of the shares sold by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was placed by the Tribunal, would not be of assistance in ascertaining the value of the share where it is not fully paid-up but is only partly paid. On the other hand, the learned counsel for the assessee has argued that no distinction can be made with regard to the Tights of the holder of a share which is fully paid-up and the holder of a share which is partly paid-up and, in support of this proposition, the learned counsel wanted to rely on the decision of the House of Lords in Birch v. Cropper [1889] 14 AC 525. It is argued before us that when a company is wound up, the right of all the shareholders are the same notwithstanding the fact that some of them were holding fully paid-up shares and some of them were partly paid-up holders. The learned counsel contended that once the holder of partly paid-up shares was called upon to remit the balance of call money, then all the equity shareholders were entitled to be treated equally when they were sharing the assets of the company in liquidation. Now, it is common ground that for the purpose of the computation of capital gains when the cost of acquisition was to be enquired into, the assessee had exercised his option as was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to dividends, all dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid, but if and so long as nothing is paid upon any of the shares in the company, dividends may be declared and paid according to the amounts of the shares. " Article 88(1), therefore, clearly authorises the company that the dividends can be declared and paid only according to the amounts paid or credited as paid on the shares in respect of which the dividend is to be paid. From a reading of section 93 and article 88, it appears obvious that the dividend which is claimable or payable to a shareholder holding fully paid-up shares is not the same as the dividend payable to a holder of a partly paid-up share. Section 93 and the articles, therefore, make a distinction between the treatment and the rights of persons holding fully paid-up shares and persons holding partly paid-up shares. It is true that the company can at any time make a call for the balance of the amount in respect of the value of the share. We are in this case, however, concerned with the position as it stood as on January 1, 1954. The position as on January 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital and the reserves by the total value of the shares whether they are totally paid-up shares or not. Once this formula is adopted, then by multiplying the result by the total amount invested, we will get the total value of relevant shares. It is this method which has been adopted by the Income-tax Officer and which, on facts, it appears to us, is the only equitable method. Now when we come to the view taken by the Tribunal, it appears to us that the Tribunal lost sight of the fact that the question which fell for consideration before the House of Lords in Birch v. Cropper [1889] 14 AC 525, was not identical to that which arises in the instant case. In that decision, there were two kinds of shares. There were equity shareholders and there were preference shareholders. The Bridge Water Navigation Company was taken over by another company, the Manchester Ship Canal Company and the facts show that after satisfaction of debts and liabilities of the Bridge Water Navigation Company and after adjusting the rights of the shareholders inter se and after payment of costs of the liquidation and repayment to the shareholders, of the capital respectively paid on their shares, a surplu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, there must be some provision to this effect in the documents under which they are issued. Until quite recently it was thought that this presumption of equality should be carried so far that an express provision for preference should not derogate from a right to equal participation after the preference had been obtained; in other words, that preference shares were presumed to be participating in both capital and income. This, indeed, appeared to be the inevitable conclusion to be drawn from the decision of the House of Lords in Birch v. Cropper [1889] 14 AC 525. However, Birch v. Cropper [1889] 14 AC 525, left the law in a state of some confusion. The learned author then refers to the later decision of House of Lords in Will v. United Lankat Plantations [1914] AC 11, the decision of the Court of Appeal in Re William Metcalfe Ltd. [1933] Ch 142 (CA) and then the later decision of the House of Lords in Scottish Insurance Corporation v. Wilsons and Clyde Coal Co. [1949] AC 462. After referring to these decisions, the law, as it stands at present, is stated thus, by the learned author (p. 415) " The present position, therefore, as stated, in the subsequent judgments of the Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 20,846. Now, so far as the second question is concerned, it can hardly be disputed that the shares of a private company have inherent restriction in the matter of transfer. As observed by Gower in his book Gower's Principles of Modern Company Law (fourth edition, page 256), in the case of private companies, restrictions on the right to transfer shares are at present essential, and these obviously diminish their market value. Once the value of the shares of the company is determined in accordance with the break-up method, some deductions have to be made because of the restrictions in the matter of transfer. Such shares are not easily transferable and will, therefore, have restricted buyers. The Tribunal has observed that the Income-tax Officer has deducted 15 per cent. on the value arrived at by him, but had given no reasons. The Tribunal further observes that presumably he was guided by rule ID of the Wealth-tax Rules. This has no application and we are of opinion that no such deduction should be made. The Tribunal does not seem to have applied its mind to the fact that the shares of a private limited company have a restricted market. There are constraints on their transfer whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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