TMI Blog1974 (10) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ? and (ii) If the answer to the above question is in the negative, whether the surplus of Rs. 3,04,639 derived by the assessee on the sale of 30,000 ordinary shares of Hindustan Motors Ltd. was short-term capital gains ?" The facts leading to the reference are these: The assessee, the trustees of the H.E.H. the Nizam's Second Supplement Family Trust, was assessed in the status of association of persons. For the assessment year 1963-64, the assessee submitted its return of income admitting an amount of Rs. 3,04,679 as income from long-term capital gains. The assessee purchased on September 11, 1958, 6,000 preference shares of Rs. 100 each of Hindustan Motors Ltd. The terms and conditions attached to the issue of the said shares are su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made by the assessee on December 27, 1961, which according to him amounted to a change of the preference shares into ordinary shares and the capital gains arising thereon were liable for assessment in the year of conversion. He took the date of conversion, i.e., December 27, 1961, as the crucial date, as that date fell in the previous year of assessment 1962-63. The Appellate Assistant Commissioner held that the market value of the ordinary shares received by the assessee between December 14, 1961, and January 29, 1962, should be taken as the value of the consideration received by the assessee and that the capital gains should be calculated oil that basis and when so calculated, there was short-term capital loss of Rs. 10,921 for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not include what is specified in clauses (i) to (iv) of section 2(14). The word "transfer" defined in section 2(47), "in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law". It is an inclusive definition. The expression "exchange" is not defined in the Act. In Black's Law Dictionary, de luxe fourth edition, at page 671, the expression "exchange" is defined to mean "to barter; to swap; to part with, give or transfer for an equivalent." It is an act of giving or taking one thing for another. The criterion in determining whether a transaction is a sale or an exchange is whether there is a determination of va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made by exhibition of films therein. At a meeting of its board of directors, it was resolved that the managing director, the Raja of Bobbili, may be authorised to negotiate with the zamindar of Chikkavaram or his nominee for the sale of the entire concern with all its equipment and machinery, fittings, etc., for a consideration of Rs. 1,20,000. An agreement was concluded to effect a sale and this was confirmed by the assessee-company at an extraordinary general body meeting held on October 4, 1955. Pursuant thereto, a deed called the "exchange deed" was brought into existence on February 21, 1956, and the consideration was received by the assessee-company in the shape of transfer of 5 percent. tax-free cumulative preference shares in Sri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax. The Supreme Court dismissed the appeal preferred by the Commissioner of Income-tax holding that the question has been rightly answered by the High Court in favour of the assessee-company. In so holding, the learned judges construed the scope of section 118 of the Transfer of Property Act in these terms: "The definition of exchange in section 118 of the Transfer of Property Act is not limited to immovable property but it extends also to barter of goods. It is clear, therefore, that both under the Sale of Goods Act and Transfer of Property Act, sale is a transfer of property in the goods or of the ownership in immovable property for money consideration. But in exchange there is a reciprocal transfer of interest in the immovable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any by giving notice of three calendar months. This is a case where there were unsubscribed ordinary shares and the company allowed exchange of such shares with the preference shares in accordance with the terms and conditions attached to the issue of preference shares. In view of the authoritative pronouncement of the Supreme Court, we hold that the conversion of preference shares into ordinary shares is a transfer by way of "exchange" within the meaning of section 45 of the Income-tax Act, 1961. Therefore, the first question is answered in the affirmative and in favour of the assessee. Since the first question has been answered in the affirmative, the second question does not arise for consideration. The reference is answered accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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