Sarabhai,Shahibag House, Ahmedabad Vs. Commissioner of Income Tax, Ahmedabad
 INSC 66 (24
AGRAWAL, SUHAS C. SEN SEN,
this case the question of law is:
on the facts and in the circumstances of the case, the Tribunal was justified
in holding that the assessee was liable to pay tax in respect of capital gains
on receipt of the amount equal to the fact value of the preference shares of
M/s. Universal Corporation Pvt. Ltd. on the company redeeming its preference
shares? The High Court answered the question in the affirmative and against the
assessee. The High Court granted a certificate of fitness for appeal under
Section 261 of the Income Tax Act in view of the fact that they had taken a
view contrary to the view adopted by the Madras High Court on this question.
facts of the case, as stated in the judgment of the High Court, are as under:-
"The assessee is an individual and the assessment year under reference is
assessment year 1969-70, the year of account being the calendar year 1968. The assessee
held 297 redeemable preference shares of M/s. Universal Corporation Private
Limited a company incorporated under the Companies Act (hereinafter referred to
as the "Company"). The face value of such of these preference shares
was Rs. 1,000/- and, therefore, the total face value of these shares came to
Rs.2,97,000/-. The assessee had purchased these shares for Rs.2,68,550/-.
Company decided to redeem the preference shares and the assessee received Rs.2,97,000/-
face value of the shares held by her in the year of account relevant to the
assessment year under reference. Thus the value of the shares received by the assessee
exceeded the value which he had paid for these shares by Rs.30,450/-. The
Income Tax Officer, assessing the assessee sought to tax this amount of
difference as capital gains under Section 45 of the Act. The assessee resisted
the action proposed by the Income Tax Officer by contending that redemption of
her preference shares by the Company would not amount to transfer within the
meaning of Section 2(47) of the Act and consequently the difference between the
value received by her from the Company on redemption of shares and the price
which she had paid for the shares was not exigible to tax. In other words,
according to the assessee even if there was any profit or gain, as a result of
redemption on shares by the Company, such profit or gain could not be said to
have arisen from the transfer of a capital asset. The Income Tax Office, however,
rejected the contentions raised on behalf of the assessee and brought capital
gains arising out of the redemption of the shares to tax." The Appellate
Assistant Commissioner as well as the Tribunal upheld the view taken by the
Income Tax Officer.
been contended by Mr. G. Ganesh appearing on behalf of the appellant that there
is no question of applicability of Section 45 of the Income Tax Act in this
case because no `transfer' of the preference shares had taken place because of
the redemption of the shares. The capital received by the Company had been
returned to the shareholder. The money was not paid by the Company to the
shareholder because of any sale, exchange or relinquishment of the capital
asset or extinguishment of any right therein.
was invited to the definition of `transfer' and it was contended that
redemption of shares did not come within the mischief of Section 2(47).
2(47) and 45(1) are 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 (iii) the
compulsory acquisition thereof under any law; or (iv) in a case where the asset
is converted by the owner thereof into, or is treated by him as, stock-in-trade
of a business carried on by him, such conversion or treatment; or (v) any
transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract of the nature referred
to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi)
any transaction (whether by way of becoming a member of, or acquiring shares
in, a co-operative society, company or other association of persons or by way
of any agreement or any arrangement or in any other manner whatsoever) which
has the effect of transferring, or enabling the enjoyment of, any immovable
- For the purposes of sub-clauses (v) and (vi), `immovable property' shall have
the same meaning as in clause (d) of section 269UA;
to get this amount the assessee had to give up abandon or surrender the shares
held by her. The meaning of the word `relinquish' as given in Webster's
Comprehensive Dictionary, International Edition 1984, is "1. To give up;
surrender. 2. To cease to demand; renounce; to relinquish a claim. 3. To let go
(a hold or something held)." The assessee in this case has given up the
shares and has received in lieu thereof a sum of money. This, in our view,
comes clearly within the mischief of Section 2(47)(i).
apart, in court view the transaction amounts to "sale".
the provisions of the Companies Act, 1956 the share capital of a company
limited by shares may be of two kinds - (a) equity share capital and (b) preference
share capital. Section 85 of the Companies Act has defined "preference
share capital" to mean that part of the share capital of the company which
fulfils both the following requirements:- (a) as respects dividends, it carries
or will carry a preferential right to be pair a fixed amount or an amount
calculated at a fixed rate, which may be either free of or subject to
income-tax; and (b) with regard to capital, it carried or will carry, on a
winding up or repayment of capital, a preferential right to be repaid the
amount of the capital paid up or deemed to have been paid up, whether or not
there is a preferential right to the payment of either or both of the following
amounts namely:- (i) any money remaining unpaid, in respect of the amounts
specified in clause (a), up to the date of the winding up or repayment of
(ii) any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company.
85(2) of the Companies Act has defined "equity share capital" to mean
"all share capital which is not preference share capital." Section 80
of the Companies Act lays down that a company limited by shares may, if so authorised
by its articles, issue preference share which are, or at the option of the
company are to be liable, to be redeemed. This section, however, lays down that
preference shares must not be redeemed except out of profits of the company
which would otherwise be available for dividend or out of the proceeds of a
fresh issue of shares made for the purposes of the redemption. They cannot be
redeemed unless they are fully paid. The premium, if any, payable on redemption
must have been provided for out of the profits of the company or out of the
company's share premium account before they are redeemed.
other provisions in Section 80 which are not necessary for the purpose of this
case. But, it has to be noted that it has been specifically provided in
sub-section (3) that the redemption of preference shares shall not be treated
as reduction of the amount of the authorised share capital. The balance sheet
of the company which has issued redeemable preference shares must specify any
part of the issued capital of the company that consists of such shares, the
earliest and latest dates on which the company has power to redeem them,
whether they must be redeemed in any event or are liable to be redeemed at the
option of the company, and whether any (and, if so, what) premium is payable on
other provision of the Companies Act which is important in this connection is
Section 77 which is as under:- "77. Restrictions on purchase by company,
or loans by company for purchase, of its own or its holding company's shares.-
(1) No company limited by shares, and no company limited by guarantee and
having a share capital, shall have power to buy its own shares, unless the
consequent reduction of capital is effected and sanctioned in pursuance of
sections 100 to 104 or of section 402 (2) ... ...
Nothing in this section shall affect the right of a company to redeem any
shares issued under Section 80 or under any corresponding provision in any
previous companies law." This section clearly implies that redemption of
its preference shares by a company would have come within the bar of purchasing
its own shares by a company. This specific provision of sub-section (5) was
necessary to get over the bar. The company redeemed its preference shares only
by paying the preference shareholders the value of the shares and taking back the
preference shares. In effect, the company has bought back the preference shares
from the shareholders. It may have been done at a date set by the terms of the
issue. When a preference share is redeemed by a company, what a shareholder
does in effect is to sell the share to the company,. Such a transaction is
nothing but sale of the preference shares by the shareholders to the company.
That is why after specifically laying down in Section 77(1) that no company
shall have the power to buy its own shares, it was necessary to specify in
sub-section (5) that this provision shall not affect the right of a company to
redeem any shares issued under Section 80. If redemption of preference shares
did not amount to sale, it would not have been necessary to specifically
provide that the restriction imposed upon a company in respect of buying its
own shares will not apply to redemption of shares issued under Section 80.
in my judgment, the redemption of preference shares by the company will
squarely come within the phrase "sale, exchange or relinquishment of the
can be no dispute that the shares held by a member in a company is movable
property transferable in the manner provided in the Article of Association of
the company. There can also be no dispute that the shares can be held by a
member as stock-in-trade or capital assets. In the instant case, the preference
shares were held as capital assets. The excess amount received by the
shareholder on redemption of these shares will have to be treated as capital
gain in view of the provisions of Section 2(47) read with Section 45 of the
Income Tax Act.
shall not refer to the various cases that were cited at the bar.
case of Commissioner of Income Tax, Gujarat v. R.M. Amin, 106 ITR 368, the company went into voluntary liquidation.
The assessee as a shareholder received an amount from the liquidator which was
in excess of the amount that he had paid for those shares. It was held that
there was no transfer of any capital asset within the mewing of Section 2(47)
of the Income Tax. Act. When a shareholder receives money representing totality
of rights in the property. In the third case, there may be reduction of the
exclusive interest in the totality of the rights of the original owner into a
joint or a share interest with others.
exclusive interest in property was a larger interest than a share in that
property. To the extent to which the exclusive interest was reduced to share
interest, there was a transfer of property.
again, has no bearing on the question whether redemption of preference shares
will come within the mischief of Section 2(47) of the Income Tax Act.
Bombay High Court in Sath Gwaldas Mathuradas Mohata Trust v. Commissioner of
Income Tax, 165 ITR 620, dealt with the question which has now arisen in this
case. There the question was whether the amount received by the assessee on
redemption of preference shares was liable to tax under the head "capital
gains". After referring to the meaning given to "transfer" by
Section 2(47) of the Income Tax Act, the Court held:
a regular "sale" itself has taken place. That is the ordinary concept
of transfer. The company paid the price for the redemption of the shares out of
its fund to the assessee and the transaction was clearly a purchase. As rightly
observed by the Tribunal, if the company had purchased a valuable right, the assessee
had sold a valuable right. "Relinquishment" and
"extinguishment" which are not in the normal concept of transfer but
are included in the definition by the extended meaning attached to the word are
also attracted in the transaction. The shares were assets and they were
relinquished by the assessee and thus relinquishment of assets did take place.
The assessee by virtue of his being a holder of redeemable cumulative
preference shares had a right in the profits of the company, if and when made,
at a fixed rate of percentage.
obviously, this was a valuable right and this right had come to an end by the
company's redemption of shares. Thus, the transaction also amounted to
"extinguishment" of right. Under the circumstances, viewed from any
angle, there is no escape from the conclusion that section 2(47) was attracted
and that the amount of Rs.50,000 received by the assessee was liable to be
taxed under the head "Capital gains".
view taken by the Bombay High Court accords with the view taken by the Gujarat
High Court in the judgment under appeal. In the judgment under appeal, it was
pointed out that the genesis of reduction or redemption of capital both
involved a return of capital by the company. The reduction of share capital or
redemption of shares is an exception to the rule contained in Section 77(1)
that no company limited by shares shall have the power to buy its own shares.
When it redeems its preference shares, what in effect and substance, it does is
to purchase preference shares. Reliance was placed on the passage from Buckley
on the Companies Acts, 14th Edn., Vol. , at p. 181:
return of capital, whether to all shareholders or to one, is pro tanto a
purchase of the shareholder's rights. It is illegal as a reduction of capital,
unless it be made under the statutory authority, but in the latter case is
perfectly valid." Reference was also made to Pennington's company Law, 4th
Edn., p 192:
general rule is that a company cannot issue shares on terms that it shall or
may redeem them at an agreed future date, because the redemption would amount
to a purchase by the company of its own shares, which is illegal." We are
of the view that the High Court has come to a right decision in this case. The
redemption of preference shares in the facts of this case will squarely come
within the meaning of the phrase "sale, exchange or relinquishment of the
were also referred to a decision of Madras High Court which was a case of
reduction of share capital and also the decision in Commissioner of Income Tax,
Bombay v. Rasiklal Maneklal (HUF), 177 IIR 198, which again was a case of
amalgamation of two companies. In the facts of that case, it was held that
there was neither any exchange nor any relinquishment of an asset by the assessee.
Consequently, there was no transfer within the meaning of Section 12B of the
Indian Income Tax Act, 1922.
case of Vania Silk Mills P. Ltd. v. Commissioner of Income Tax, 191 ITR 647, is
also not of any assistance for the purpose of this case. That was a case where
insurance money was paid for loss of machinery. It was held that the amount
received in replacement of machinery could not be treated as capital gain
because payment of insurance claim was not in consideration for machinery taken
over. This was not a case of extinguishment of right in the property on account
of destruction or loss of asset.
also strenuously argued that this is not a case where the extinguishment of any
right in the preference shares had taken place. The preference share itself
stood extinguished by redemption. Therefore, clause (ii) of Section 2(47) could
not be invoked in the facts of this case to bring the surplus amount received
by the assessee to tax as capital gains under Section 45 of the Income Tax Act.
court vies, the case squarely comes within clause (i) of Section 2(47).
Therefore, it is not necessary to express any opinion on the last contention of
appeal is dismissed. The judgment under appeal dated 18/22-8-1992 is affirmed.
There would be no order as to costs.