Companies Act Case Law Shri Kartikeya V.Sarabhai Vs The Commissioner Of Income Tax

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
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
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
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
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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