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

The facts of the case, as stated in the judgment of the High Court, are asassessee 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 M/s. Universal Corporation Private Limited a company incorporated under the Companies Act (hereinafter referred to as theThe face value of such 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, 68, 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 he 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 contending that redemption of her preference shares by the Company would not amount to transfer within the meaning of Section 2(47) of the Act and consequently the difference between the value received by her from the Company on redemption of shares and the price which she had paid for the shares was not exigible to tax. In other words, according to the assessee even if there was any profit or gain, as a result of redemption on shares by the Company, such profit or gain could not be said to have arisen from the transfer of a capital asset. The Income Tax Office, however, rejected the contentions raised on behalf of the assessee and brought capital gains arising out of the redemption of the shares to tax."Appellate Assistant Commissioner as well as the Tribunal upheld the view taken by the Income Tax Officer.

Court's reasoning:
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.