Shri Kartikeya V. Sarabhai. Vs. The Commissioner of Income Tax [1997] INSC 711 (4 September 1997)

B.N. KIRPAL, K.T. THOMAS

ACT:

HEADNOTE:

THE 4TH DAY OF SEPTEMBER ,1997 PRESENT:

Hon'ble Mr. Justice B.N. Kirpal Hon'ble Mr. Justice K.T. Thomas S. Ganesh, Mrs. A.K. Verma, Advs. for M/S. J.B.D. & Co, Advs. for the appellant S. Rajappa and B.K. Prasad, Advs. for the Respondent

The following Judgment of the Court was delivered:

KIRPAL, J.

The only question which arises for consideration in this appeal, under certificate having been granted by the High Court, is whether on reduction of share capital with the company paying a part of the capital by reducing face value of its share, results in extinguishment of right in the shares held by the share-holder so that the amount paid on reduction of shares capital would be exigible to capital gain tax.

The appellant had purchased 90 non-cumulative preference shares, each of the face value of Rs. 1,000/- at a price of Rs. 420/- share, of a company called Sarabhai limited. In 1965, a sum of Rs. 500/- per preference share was paid off to the assessee upon a reduction of a share capital of the company under Section 100(1)(c) of the Companies act. This was done by reducing the face value of each share from Rs. 500/- in cash. As a result thereof the appellant became a holder in respect of 90 non-cumulative preference shares of the value of Rs. 1,000/- per share.

In the present case, we are concerned with the further reduction of the face value of the shares which took place in the year 1966. In the Extra-Ordinary General Meeting of Sarabhai Limited held on 10.1.1966, a special resolution was passed by the Company by virtue of which it reduced its liability on the preference shares from Rs. 500/- per share to Rs. 50/- per share by paying off in cash a sum of Rs. 450/- per share. Thus the share held by the appellant which was originally of the face value of Rs. 1,000/- became a share of the face value of Rs. 50/- only. This reduction had taken place in two stages, firstly when the face value was reduced from Rs. 1,000/- to Rs. 500/- per share and secondly when the face value was reduced from Rs. 500/- per share to Rs. 50/- per share.

The appellant had originally purchased the preference shares of the face value of rs. 1000/- per share at a price of Rs. 420/- per share. At the time of first reduction, he got back Rs. 500/- per share in cash. At the time of second reduction, with which we are concerned in this case, the appellant got a further sum of Rs. 450/- per share in cash.

The Income Tax Officer was of the opinion that a sum of Rs. 450/- per share, which was now received by the assessee , was liable to be subject to levy of capital gain tax. The appellant, however, contended that such reduction of the face value did not result in extinguishment of the assessee's right and there was no transfer within the meaning of that expression as contained in Section 2(47) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') and, secondly no tax could be imposed thereon. The Income-Tax officer did not accept the appellant's contention and taxed the said amount.

The appeal of the appellant before the Appellate Assistant Commissioner succeeded and sum of Rs. 23,490/-, which had been included as capital gains, was held not be liable to tax. The Revenue, however, filed a second appeal and the Income Tax Appellate Tribunal set aside the order of the Appellate Assistant Commissioner and restored the order of the Income Tax Officer. At the instance of the appellant, the Income Tax Tribunal referred the following question of law to the High Court of Gujarat.

"Whether, on the facts of the case, the Tribunal rightly held that the assessee had made capital gains on the reduction of preference share capital which was exigible to capital gains tax?" The high court considered the matter in its entirely and came to the conclusion that the Tribunal had rightly held that the appellant had made capital gains on the reduction of preference share capital and the same was exigible to capital gains tax. Therefore, at the request of the appellant, the High Court granted leave to appeal.

hence, this appeal.

on behalf of the appellant, it wads vehemently contended by Mr. Ganesh, learned counsel that no capital gains tax could be levied in the present case. It was submitted that reduction of the face value of the share from Rs. 500/- to Rs. 50/- per share did not amount to extinguishment of any right and, therefore, could not be regarded as transfer within the meaning of Section 2(47) of the Act and the appellant continued to be a share can be no transfer where share-holders get back money from the company and in this connection, he relied upon the decision in the R.M. Amin, 106 ITR 368. Lastly, it was submitted that Section 45 of the act was not applicable as the applicable as the appellant had not made any scale. It was submitted that as a result of the Company's Special Resolution, the appellant got the money against surrender of shares and this would not amount to a scale.

It is not possible to accept the contention of Shri Ganesh, learned counsel that reduction does not amount to a transfer of the capital asset. Section 2(47) of the Act reads as follows:

"2(47) 'transfer' in relation to a capital asset, includes,- i. the scale, exchange or relinquishment of the asset; or ii. the extinguishment of the any rights therein; or iii. the compulsory acquisition thereof under any law; or iv. in a case where the asset in converted by the owner thereof into, or it is treated by him as, stock-in-trade or 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 property:

Explanation-For the purposes of sub-clauses (v) and (vi), `immovable property' shall have the same meaning as in clause (d) of Section 269UA." Section 45 of the Act reads as follows:

"Capital gains- (1) Any profits or gains arising from the transfer of capital asset effected in the previous year shall, save as otherwise, provided in sections 53, 54, 54B, 54D, 54E, 54F and 54G, be chargeable to income-tax under the head 'capital gains' and shall be deemed to be the income of the previous year in which the transfer took place." Section 2(47) which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While, it is no doubt true that the appellant continuous of a share capital but it is not possible to accept the contention that there has been no extinguishment of any part of his right as a share holder qua the company. It is not necessary that for a capital asset. Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act.

When as a result of the reducing face value of the share, the share capital is reduced, the right of the preference share holder to the divided or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Whereas the appellant had a right to dividend on a capital of Rs. 500/- per share that stood reduced to his receiving dividend on Rs. 50/- per share. Similarly, if the liquidation was to take place whereas he originally had a right to Rs. 50/- per share only. Even though the appellant continues to remain a share holder his right as a holder of those shares clearly stands with the reduction in the share capital.

The Gujarat High Court had in another case reported as 138 I.T.R. 437 followed the judgement under appeal. That was a case where there had been redemption of preference share capital by the company and money had money was paid to the share-holders. It was held therein that different between the face value received by the Share-holder and the price paid for preference share was exigible to capital gains tax. In coming to this conclusion, the Gujarat High Court had followed the Judgement under appeal in the present case.

The aforesaid decision of the Gujarat High Court in Anarkali's (supra) was challenged and this Court in the 422 upheld the High Court's decision. It had been contended in Anarkali's case (supra) on behalf of the assessee that reduction of preference share was not a sale or relinguishment of asset and, therefore, no capital considered the definition of word "transfer" occurring in Section 2(47) of the Act and reading the same along with Section 45, it came to the conclusion that when a preference share is redeemed by a company, what the share holder does in effect is to sell the share to the company. The company redeems its preference shares only by paying the preference shares. It was observed that in effect the company buys back the preference shares from the share-holders. Further, referring to the provisions of the Companies Act, it held that the reduction of preference shares by a company was a sale and would squarely come within the phrase "sale, exchange or relinquishment" of an asset under Section 2(47) of the Act. It was also held that the definition of words "transfer" under Section 2(47) of the Act was not an exhaustive definition and that subsection (1) of clause (47) of Section 2 implies that parting with any capital asset for again would be taxable under Section 45 of the Act. In this connection, it was noted that when preference shares are redeemed by the company, the share-holder has to abandon or surrender the shares, in order to get the amount of money in lieu thereof.

In our opinion, the aforesaid decision of this Court in Anarkali's (supra) is applicable in the instant case. The only different in the present case and Anarkali's case(supra) preference shares were redeemed in entirety, in the present case, there has been a reduction in the share capital inasmuch as the company had redeemed its preference share of Rs. 500/- to the extent of Rs. 450/- per share.

The liability of the company in respect of the preference share which was previously to the extent of Rs. 500/- now stood reduced to Rs. 50/- per share The company under Section 100(1 )(c) of the Companies Act has a right to reduce the share capital and one of the modes, which can be adopted, is to reduce the face value of the preference shares. This is preciously what has been done in the instant case. Instead of there being a 100% extinction of the right which was there in the Anarkalis's cases (supra), here the right as a preference share holder of the appellant stands reduce from Rs. 500/- to Rs. 50/- per share has been paid by the company to the appellant on account of the extinguishment of his right to the aforesaid extent.

Yet another right which is apparently effected as a consequence of this reduction is with regard to the vote right. Accordingly to Section(87)(2) of the companies Act, a holder of a preference share has right to vote only a resolution placed before the company which directly affect the rights attached to his preference shares. In the case of cumulative preference share, if dividend remains unpaid for not less than even a preference share holder, by virtue of Section(2)(b) of the Companies Act, ger right to vote on every resolution placed before the company at any meeting like a member holding equity shares. What is important for our purpose is the provisions of section 87(2) (c) which, inter alia, provides:

"Where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of its sub-section, his voting right on a poll, as the holder of such share, shall, subject to the provisions of Section 89 and sub-section (2) of Section 92, be in the same proporation as the capital paid up in respect of the preference share bears to the total paid-up equity capital of the company." Therefore, with the reduction in the face of the share from Rs. 500/- per share to Rs. 50/- per share, the value of the vote of the appellant in the event of there being a poll would stand considerably reduced. Such reduction of the right in the capital asset would clearly amount to a transfer within the meaning of that expression in Section 2(47) of the Act.

The decision in R.M. Amin's case (supra) can be of no help to the appellant. In that case, the company had gone into voluntary liquidation and the assessee had received a sum in cash of the amount which he had paid for the share.

It was held that when share holder receives money representing his share on the distribution of the net assets of a company in liquidation, he receives that money in satisfaction of the right which belongs to him by virtue of his holding the share and not by any operation of any transaction which amounted to sale, exchange, relinquishment, transfer of a capital asset or extinguishment of any right in capital assets. The payment received by the contributories on the liquidation of the company would not amount to a transfer and it is for this reason that R.M. Amin's case (supra) was distinguished by this Court in Anarkali's case.

In our opinion, the High Court was right in coming to the conclusion that the appellant was liable to pay capital capital gains tax on the capital gains of Rs. 28710/- as a result of reduction in the preference share in Sarabhai Limited. This appeal is, accordingly dismissed with costs.

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