Case: Shri Kartikeya V.Sarabhai Vs. The Commissioner Of Income Tax

The appellant had purchased 90e 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 90e preference shares of the value of Rs. 1, 000/per shareIn 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 they 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 shareto Rs. 50/per shareby paying off in cash a sum of Rs. 450/pershare.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/pershare andsecondly when the face value was reduced from Rs. 500/pershare toRs. 50/pere appellant had originally purchased the preference shares of the face value of rs. 1000/pershareat a price of Rs. 420/per. At the time of first reduction, he got back Rs. 500/persharein cash. At the time of second reduction, with which we are concerned in this case, the appellant got a further sum of Rs. 450/persharein cashThe Income Tax Officer was of the opinion that a sum of Rs. 450/per, 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 assessees 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. Thex officer did not accept the appellants contention and taxed the said amountThe appeal of the appellant before the Appellate Assistant Commissioner succeeded and sum of Rs. 23,, 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 preferencesharecapital 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 preferencesharecapital and the same was exigible to capital gains tax. Therefore, at the request of the appellant, the High Court granted leave to appeal. hence, thisn 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 thesharefrom Rs. 500/to Rs.50/persharedid 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 asharecan be no transfer wheres get back money from the company and in this connection, he relied upon the decision in the case reported as Commissioner of, Gujarat Vs. R.M. Amin. 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 Companys Special Resolution, the appellant got the money against surrender ofs and this would not amount to a scale.

Court's reasoning:
Therefore, with the reduction in the face of thesharefrom Rs. 500/pershareto Rs.50/per, 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 ActThe decision in R.M. Amins 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 sumin cashof the amount which he had paid for the. It was heldthat whenshareholder receives money representing hisshareon 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 theshareandnot by anyn 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 transferandit is for this reason that R.M. Amins case (supra) was distinguished by this Court in Anarkalis caseSection 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 asharecapital but it is not possible to accept the contention that there has been no extinguishment of any part of his right as ashareholder 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 transferandany profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act.