Case: Anarkali Sarabhai, Shahibag House, Ahmedabad Vs. Commissioner of Income Tax, Ahmedabad

Section 45 of the Income Tax Act.I shall not refer to the various cases that were cited at the bar. In the case of Commissioner of Income Tax, Gujarat v. R.M. Amin, the company went into voluntary liquidation. The assessee as a shareholder received an amount from the liquidator which was in excess o f the amount that he had paid for those shares. It was held that there was no transfer of any capital asset within the mewing of Section 2(47) of the Income Tax. Act. When a shareholder receives money representing totality of rights in the property. In the third case, there may be reduction of the exclusive interest in the totality of the rights of the original owner into a joint or a share interest with others. An exclusive interest in property was a larger interest than a share in that property. To the extent to which the exclusive interest was reduced to share interest, there was a transfer of property. 12. This again, has no bearing on the question whether redemption of preference shares will come within the mischief of Section 2(47) of the Income Tax Act. The Bombay High Court in Sath Gwaldas Mathuradas Mohata Trust v. Commissioner of Income Tax, dealt with the question which has now arisen in this case. There the question was whether the amount received by the assessee on redemption of preference shares was liable to tax under the head "capital gains". After referring to the meaning given to "transfer" by Section 2(47) of the Income Tax Act, the Court held: "Here, a regular "sale" itself has taken place. That is the ordinary concept of transfer. The company paid the price for the redemption of the shares out of its fund to the assessee and the transaction was clearly a purchase. As rightly observed by the Tribunal, if the company had purchased 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 companys 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". 13. 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 redemption of capital both involved a return of capital by the company. The reduction of share capital or redemption of shares is an exception to the rule contained in Section 77(1) that no company limited by shares shall have the power to buy its own shares. When it redeems its preference shares, what in effect and substance, it does is to purchase preference shares. Reliance was placed on the passage from Buckley on the Companies Acts, 14th Edn., Vol. , at p. 181: "Every return of capital, whether to all shareholders or to one, is pro tanto a purchase of the shareholders rights. It is illegal as a reduction of capital, unless it be made under the statutory authority, but in the latter case is perfectly valid." * 14. Reference was also made to Penningtons company Law, 4th Edn., p 192: "The general rule is that a company cannot issue shares on terms that it shall or may redeem them at an agreed future date, because the redemption would amount to a purchase by the company of its own shares, which is illegal." * 15. We are of the view that the High Court has come to a right decision in this case. The redemption of preference shares in the facts of this case will squarely come within the meaning of the phrase "sale, exchange or relinquishment of the asset".We were also referred to a decision of Madras High Court which was a case of reduction of share capital and also the decision in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal (HUF), 177 IIR 198, which again was a case of amalgamation of two companies. In the facts of that case, it was held that there was neither any exchange nor any relinquishment of an asset by t he assessee. Consequently, there was no transfer within the meaning of Section 12B of the Indian Income Tax Act, 1922. 16. The case of Vania Silk Mills P. Ltd. v. Commissioner of Income Tax, is also not of any assistance for the purpose of this case. That was a case where insurance money was paid for loss of machinery. It was held that the amount received in replacement of machinery could not be treated as capital gain because payment of insurance claim was not in consideration for machinery taken over. This was not a case of extinguishment of right in the property on account of destruction or loss of asset. 17. Mr. Ganesh also strenuously argued that this is not a case where the extinguishment of any right in the preference shares had taken place. The preference share itself stood extinguished by redemption. Therefore, clause (ii) of Section 2(47) could not be invoked in the facts of this case to bring the surplus amount received by the assessee to tax as capital gains under Section 45 of the Income Tax Act. 18. In court vies, the

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]We are of the view that the High Court has come to a right decision in this case. The redemption of preference shares in the facts of this case will squarely come within the meaning of the phrase "sale, exchange or relinquishment of the asset".We were also referred to a decision of Madras High Court which was a case of reduction of share capital and also the decision in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal (HUF), 177 IIR 198, which again was a case of amalgamation of two companies. In the facts of that case, it was held that there was neither any exchange nor any relinquishment of an asset by t he assessee. Consequently, there was no transfer within the meaning of Section 12B of the Indian Income Tax Act,case of Vania Silk Mills P. Ltd. v. Commissioner of Income Tax, is also not of any assistance for the purpose of this case. That was a case where insurance money was paid for loss of machinery. It was held that the amount received in replacement of machinery could not be treated as capital gain because payment of insurance claim was not in consideration for machinery taken over. This was not a case of extinguishment of right in the property on account of destruction or loss of asset.The preference share itself stood extinguished by redemption. Therefore, clause (ii) of Section 2(47) could not be invoked in the facts of this case to bring the surplus amount received by the assessee to tax as capital gains under Section 45 of the Income Tax Act.