TMI Blog1997 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... this question. The facts of the case, as stated in the judgment of the High Court (see [1982] 138 ITR 437, 439), 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 Universal Corporation Private Limited, a company incorporated under the Companies Act, 1956 (hereinafter referred to as "the company"). The face value of each 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. 2,66,550. The 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 she 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. Capital gains. --- (1) Any profits or gains arising from the transfer of a 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. " The contention of Mr. Ganesh is that redemption of preference shares cannot be treated as sale, exchange or relinquishment of the asset. It cannot also be regarded as "extinguishment of any rights therein" as contemplated in clause (ii) of section 2(47). "Therein" implies the continuing existence of the asset in which the right of the assessee has been extinguished. Various case laws were cited in support of this contention, But before dealing with the case laws, we shall examine the section itself and see how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares 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. There are 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset". There can be no dispute that the shares held by a member in a company are movable property transferable in the manner provided in the articles 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. I shall now refer to the various cases that were cited at the Bar. In the case of CIT v. R. M. Amin [1977] 106 ITR 368 (SC), 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 meaning of section 2(47) of the Income-tax Act. When a shareholder receives money representing his share on the distribution of net assets of the company in liquidation, he receives that money in satisfaction of the right which belonged to him by virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased 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. Quite 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'. " The 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 redemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
