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TMI Blog1982 (6) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... whereby the assessee is a sole beneficiary for the year under reference ? (3) If the answer to question No. 2 above is in the affirmative, whether the Tribunal was justified in law in holding that while working out the capital gains in respect of the said transaction relief u/s. 80T should not be allowed to determine capital gains of the trust and relief only once determining taxable capital gains in the assessment of the assessee where the capital gains were finally taxed ? " Out of the three questions referred to us question No. (2) is directly covered by a decision of this court in Kum. Pallavi S. Mayor v. CIT [1981] 127 ITR 701. Following the said decision," this question shall have to be answered in the negative and against the Revenue. We, therefore, answer question No. (2) accordingly, In view of our answer to question No. (2), question No. (3) does not survive and, therefore, it need not be answered. This leaves question No. (1) for our consideration. The facts so far as this question is concerned, briefly stated, are as follows. The assessee is an individual and the assessment year under reference is assessment year 1969-70, the year of account being the calendar year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rially different from the case of R. M. Amin. It was pointed out that in R. M. Amin's case the assessee had received money in satisfaction of his right to receive money on realisation of the assets of the company in liquidation and receipt of such money did not represent any consideration received by the assessee as a result of extinguishment of his right in the shares. Referring to the decision of the Supreme Court in R. M. Amin's case [1977] 106 ITR 368, it was pointed out that distribution of the assets of a company which had gone into liquidation would not amount to a sale, exchange, relinquishment or transfer of any capital asset by a shareholder. The assessee in the present case, however, had not received any money upon liquidation of the company. The assessee had been paid the face value of her shares by the company as a result of the extinguishment of her rights in the shares. This, according to the Tribunal, would amount to a transfer of capital within the meaning of s. 2(47) of the Act. In reaching this conclusion the Tribunal sought to derive support from its earlier decision in the case of Kartikey V. Sarabhai. It may be mentioned that the case of Kartikey V. Sarabhai w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no transaction involving " transfer " within the meaning of s. 2(47) of the Act. In support of this contention, strong reliance was placed by the assessee on the decision of this court in R. M. Amin's case [1971] 82 ITR 194 and the decision of the Supreme Court in that very case in the appeal carried against the decision of this court: (CIT v. R. PI. Amin [1977] 106 ITR 368). On the other hand it was urged on behalf of the Revenue that the above question is directly covered by the decision of this court in Kartikey V. Sarabhai v. CIT [1982] 138 ITR 425. It was urged that the question which was involved in the case of Kartikey V. Sarabhai was whether there was a "transfer" within the meaning of s. 2(47), when as a result of reduction of share capital of the company, the assessee in that case received money in respect of the shares of the company held by him proportionate to the reduction of the share capital by the company and this court held that there was such transfer. It was urged that it would not make any difference whether the shareholder received money in respect of the shares held by him or her, on account of a reduction of the share capital of the company, or as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1966). The question which this court was called upon to answer was whether the transaction in question was one falling within the definition of " transfer " as embodied in s. 2(47), read with s. 45 of the Act. The contention which was raised on behalf of the assessee in that case was similar to the one which is raised in the instant case. The contention of the assessee in that case was that s. 45 was not attracted inasmuch as there was no extinguishment of the assessee's right as contended by the Revenue and that accordingly there was no " transfer " within the meaning of the aforesaid provision. It was argued that it merely constituted repayment of what was due to the assessee and the transaction in question would not, therefore, amount to an extinguishment so as to bring it within the definition of " transfer ". There also, the assessee placed reliance on the decisions of this court and the Supreme Court in R. M. Amin's case [1971] 82 ITR 194 and [1977] 106 ITR 368 (SC). This court, after discussing the decisions of this court and the Supreme Court in R. M. Amin's case, held that the reasonings in that case would not apply to the case of the assessee. In R. M. Amin's case, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to share in distribution. It was, therefore, a clear case of extinguishment of his right in the capital assets, namely, the shares held by him. Consequently, there was a " transfer " within the meaning of s. 2(47) attracting the application of s. 45 of the Act. The ratio decidendi of the case of Kartikey V. Sarabhai [1982] 138 ITR 425 (Guj) will, in our opinion, govern the case before us. We are unable to see how the case before us could be distinguished from the case of Kartikey V. Sarabhai. It is beyond our comprehension as to how there would be an extinguishment of the rights of a shareholder to the extent he is paid off the face value of the shares held by him as a result of the reduction of share capital by the company in which he held shares, while there would be no extinguishment of any right of a shareholder at all when he is paid off the entire face value of the preference shares held by him and he ceases to be shareholder of the company in which he held such shares consequent upon reduction of share capital of the company brought about by redemption of redeemable preference shares, There are two kinds of share capital as defined in s. 85 of the Companies Act, 1956- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares, and (ii) those which are not redeemable. Redeemable preference shares may be redeemable on a specified date, or at the option of the company. In the present case, the preference shares held by the assessee were redeemable at the option of the company. Apart from the redemption of its preference shares, a company can reduce its share capital as provided in ss. 100 to 104. Sub-section (1) of s. 100 provides: " Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets ; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares, what it does is to purchase back its shares. Therefore, reduction of share capital or redemption of shares involves sale transaction. A shareholder in case of redemption of his shares, sells back his shares to the company. Reduction of share capital amounts to purchase of its own shares by the company. Therefore, when a company redeems its preference shares, the shares stand transferred or sold to the company. In any case rights of the holders of such shares in the said shares will come to be extinguished. The, House of Lords in Scottish Insurance Corporation Ltd. v. Wilsons and Clyde Coal Co. Ltd. [1949] AC 462 ; [1949] 1 All ER 1068; 19 Comp Cas 202 (HL) has referred to the consequence of return of capital to the holder of preference shares as amounting to " extinguishment ". Therein, it is observed as under (see the speech of Lord Morton at pp. 498 and 499-see also p. 1086 of [1949] 1 All ER p. 224 of 19 Comp Cas): " My Lords, the respondent-company (hereafter called ' the company') seeks to effect a reduction of its capital, by returning to the holders of its pounds 40,000 first preference stock and pounds 10,000 second preference stock capital to the full extent of poun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of this court in that case will govern the present case also. Therefore, for the reasons recorded in the judgment of this court in Kartikey V. Sarabhai's case, we have no doubt in our mind that there was an extinguishment of the rights of the assessee when the company in which she held preference shares redeemed them. We are unable to see any force in the argument advanced on behalf of the assessee that when the company redeems preference shares, the holder of such, shares receives money from the company in satisfaction of his right to claim back his capital on redemption. There is no such separate or independent right in the shareholder as contended by the assessee. His right to receive money from the company on redemption of his shares flows from or is founded on his holding the shares. In other words, it is because the company buys back his capital asset that he is paid money. Moneys paid back to him represent the face value of the shares and the premium, if any, payable on such redemption. It is, therefore, not correct to say that when his shares are redeemed, " what the shareholder gets back is always what belonged to him. He might have purchased shares at a price w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions made on behalf of the assessee. The observations on which reliance is placed are only passing observations. This court was not dealing with a case of redeemable preference shares. Again, it was not highlighted before the court that whether it was a case of reduction of share capital under the provisions of ss. 100 to 104 of the Companies Act, or reduction of share capital as result of redemption of preference shares, the resultant position was the same, namely, return of capital by the company. We are unable to accede to the submission that the holder of a redeemable preference share is in a position of creditor once the company decides to redeem the shares. It may be that redeemable preference shares have some features which are common with the debentures but legally they are shares. In this connection we may usefully refer to the following commentary at p. 356 of Vol. I of Palmer's Company Law (22nd Edn.) under the caption: Redeemable preference shares ". " From the financial point of view, redeemable preference shares are a hybrid form of shares and debentures, incorporating features of both, and being closer to the latter than other preference shares, but from the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason of the extinguishment of any of his rights and that no question of transfer or capital gains could arise in that view of the matter. The basis of the reasoning was that a shareholder has three distinct rights in his capacity as the shareholder of a company, namely, (1) the right to dividend out of the profits of the company; (2) the right to attend and vote at the meetings and thereby indirectly participate in the management of the company; and (3) the right to share in the distribution of the net assets on the winding up of the company. The amount paid to the assessee was paid in the context of his right which fell under category No. (3), i.e., the right to share in the distribution of the net assets on the winding up of the company. Since the company had gone into voluntary liquidation, the only right that the assessee had, was the right to share in the distribution of the net assets. Since there was a surplus and some assets were available for distribution amongst shareholders, the same were distributed in the course of winding up by the official liquidator. In the context of these facts, the Division Bench concluded that the moneys received by the erstwhile shareholder w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court observed that the observations made in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC), though in the context of s. 12B of the Act of 1922, would also cover a case of extinguishment of rights in capital assets. The Supreme Court did not hold that in a case where there is an extinguishment of rights in a capital asset there would be no " transfer " within the meaning of s. 2(47) of the Act. It was in the context of the facts of the case that the Supreme Court held that the assessee did not receive money on account of a transaction extinguishing his rights in the capital asset. The above observations, therefore, do not carry the case of the assessee any further. As already pointed out above, the situation arising in the context of redemption of shares is different and the above reasonings in R. M. Amin's case cannot be pressed into service to submit that there is no " transfer ". The present case would be squarely covered by the decision of this court in the case of Kartikey V. Sarabhai [1982] 138 ITR 425. The next case on which reliance was placed on behalf of the assessee is CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj). In that case, the assessee and 7 other per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits from time to time during the subsistence of the partnership, and, on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership ...... His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners... We must, therefore, hold it to be clear beyond doubt that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45, there was, in the present case, no transfer of interest of any assessee in the goodwill within the meaning of section 2(47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior charges and it was receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of any of the assessees in the goodwill of the firm and no part of the amount received by any of the assessees was assessable to capital gains tax under s. 45. As observed by this court in CIT v. Vania Silk .Mills (P.) Ltd. [1977] 107 ITR 300, these two decisions, namely, the decision in the case of R.M. Amin [1971] 82 ITR 194 (Guj) and the decision in Mohanbhai Pamabhai [1973] 91 ITR 393, read superficially, might seem to support the assessee's contention, but on a closer examination it would be apparent that their ratio must be confined to a very limited class of cases, and further that they are clearly inapplicable on the facts and in the circumstances of the present case. In the present case, the assessee had received money on account of her holding preference shares and not on account of any independent or separate right conferred on her. The situation in this case is, therefore, not comparable with that obtaining in those two cases, where admittedly, moneys were received in realisation of or working out of rights which inhered in the concerned assessee in his capacity as a shareholder in one case and as a partner in the other. The assessee in the present case was not pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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