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PETITIONER: SHRI KARTIKEYA V.SARABHAI.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX.

DATE OF JUDGMENT:       04/09/1997

BENCH: B.N. KIRPAL, K.T. THOMAS

ACT:

HEADNOTE:

JUDGMENT:           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                       J U D G M E N T      The following Judgment of the Court was delivered:                       J U D G M E N T      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

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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 case reported  as Commissioner  of Income-tax,  Gujarat  Vs. 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

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    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

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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 Anarkali Sarabhai  Vs. Commissioner  of Income-Tax,  Gujarat 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 Anarkali Sarabhai Vs. Commissioner of Income-Tax, 224 I.T.R. 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

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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.