The judgment of the court was delivered by
SUHAS C. SEN J. --- In this case the question of law is
(see [1982] 138 ITR 437, 438) :
" Whether, on the facts and in the circumstances of
the case, the Tribunal was justified in holding that the assessee was liable to
pay tax in respect of capital gains on receipt of the amount equal to the face
value of the preference shares of Universal Corporation Pvt. Ltd., on the
company redeeming its preference shares ?"
The High Court answered the question in the affirmative
and against the assessee. The High Court granted a certificate of fitness for
appeal under section 261 of the Income-tax Act in view of the fact that they had
taken a view contrary to the view adopted by the Madras High Court on 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 contending that the redemption of her preference shares by
the company would not amount to a 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 the redemption of the 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 were any profits or gains, as a result of the redemption
of the 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 Officer, however,
rejected the contentions raised on behalf of the assessee and brought the
capital gains arising out of the redemption of the shares to tax. "
The Appellate Assistant Commissioner as well as the
Tribunal upheld the view taken by the Income-tax Officer.
It has been contended by Mr. Ganesh, appearing on behalf
of the appellant, that there is no question of applicability of section 45 of
the Income-tax Act in this case because no "transfer" of the
preference shares had taken place because of the redemption of the shares. The
capital received by the company had been returned to the shareholder. The money
was not paid by the company to the shareholder because of any sale, exchange or
relinquishment of the capital asset or extinguishment of any rights therein. Our
attention was invited to the definition of "transfer" and it was
contended that redemption of shares did not come within the mischief of section
2(47).
Sections 2(47) and 45(1) are as follows :
" 2. (47) 'transfer', in relation to a capital asset,
includes,---
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ;
or
(iv) in a case where the asset is converted by the owner
thereof into, or is treated by him as, stock-in-trade of a business carried on
by him, such conversion or treatment ; or
(v) any transaction involving the allowing of the
possession of any immovable property to be taken or retained in part performance
of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member
of, or acquiring shares in, a co-operative society, company or other association
of persons or by 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 far the argument advanced by Mr. Ganesh
is sustainable in law.
Clause (47) of section 2 gives an inclusive definition to
"transfer". This is not an exhaustive definition. Clause (i) of
sub-section (47) of section 2 speaks of "sale, exchange or relinquishment
of the asset". This implies parting with any capital asset for gain which
will be taxable under section 45. In the instant case, what has happened is that
the assessee had purchased the preference shares at less than face value. When
the shares were redeemed by the company, she received more than what she had
paid for the shares. In order to get this amount the assessee had to give up or
abandon or surrender the shares held by her. The meaning of the word
"relinquish" as given in Webster's Comprehensive Dictionary,
International edition, 1984, is "1. To give up ; abandon ; surrender. 2. To
cease to demand ; renounce ; to relinquish a claim. 3. To let go (a hold or
something held)." The assessee in this case has given up the shares and has
received in lieu thereof a sum of money. This, in our view, comes clearly within
the mischief of section 2(47)(i).
That apart, in our view, the transaction amounts to
"sale".
Under the provisions of the Companies Act, 1956, the share
capital of a company limited by shares may be of two kinds---(a) equity share
capital, and (b) preference share capital. Section 85 of the Companies Act has
defined "preference share capital" to mean that part of the share
capital of the company which fulfils both the following requirements :
(a) as respects dividends, it carries or will carry a
preferential right to be paid a fixed amount or an amount calculated at a fixed
rate, which may be either free of or subject to income-tax ; and
(b) with regard to capital, it carries or will carry, on a
winding up or repayment of capital, a preferential right to be repaid the amount
of the capital paid up or deemed to have been paid up, whether or not there is a
preferential right to the payment of either or both of the following amounts,
namely :---
(i) any money remaining unpaid, in respect of the amounts
specified in clause (a), up to the date of the winding up or repayment of
capital ; and
(ii) any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company.
Section 85(2) of the Companies Act has defined
"equity share capital" to mean "all 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 consists
of such shares, the earliest and latest dates on which the company has power to
redeem them, whether they must be redeemed in any event or are liable to be
redeemed at the option of the company, and whether any (and, if so, what)
premium is payable on redemption. The other provision of the Companies Act which
is important in this connection is section 77 which is as under :
" 77. Restrictions on purchase by company, or loans
by company for purchase, of its own or its holding company's shares. --- (1) No
company limited by shares and no company limited by guarantee and having a share
capital, shall have power to buy its own shares, unless the consequent reduction
of capital is effected and sanctioned in pursuance of sections 100 to 104 or of
section 402. . . .
(5) Nothing in this section shall affect the right of a
company to redeem any shares issued under section 80 or under any corresponding
provision in any previous companies law. "
This section clearly implies that redemption of its
preference shares by a company would have come within the bar of purchasing its
own shares by a company. This specific provision of sub-section (5) was
necessary to get over the bar. The company redeemed its preference shares only
by paying the preference shareholders the value of the shares and taking back
the preference shares. In effect, the company has bought back the preference
shares from shareholders. It may have been done at a date set by the terms of
the issue. When a preference share is redeemed by a company, what a shareholder
does in effect is to sell the shares to the company. Such a transaction is
nothing but sale of the preference shares by the shareholders to the company.
That is why after specifically laying down in section 77(1) that no company
shall have the power to buy its own shares, it was necessary to specify in
sub-section (5) that this provision shall not affect the right of a company to
redeem any shares issued under section 80. If redemption of preference shares
did not amount to sale, it would not have been necessary to specifically provide
that the restriction imposed upon a company in respect of buying its own shares
will not apply to redemption of shares issued under section 80.
Therefore, in my judgment, the redemption of preference
shares by the company will squarely come within the phrase "sale, exchange
or relinquishment of the 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 virtue of his holding the shares and not by
operation of any transaction which amounted to sale, exchange or relinquishment
of the capital asset or extinguishment of any right in the capital asset.
This was a case dealing with distribution of assets on
liquidation of a company among the contributors which is not the case here.
In the case of Sunil Siddharthbhai v. CIT and Kartikeya V.
Sarabhai v. CIT [1985] 156 ITR 509, this court held that where a partner of a
firm made over capital assets which were held by him to a firm as his
contribution towards capital, there was a transfer of a capital asset within the
meaning of section 45 of the Income-tax Act, 1961, because an exclusive interest
of the partner in personal assets was reduced into a shared interest. It was
pointed out in that case that in a general sense, the expression "transfer
of property" meant the passing of rights in property from one person to
another. In one case, there may be a passing of the entire bundle of rights from
the transferor to the transferee. In another case, the transfer may consist of
one of the estates only out of all the estates comprising the totality of rights
in the property. In the third case, there may be a reduction of the exclusive
interest in the totality of the rights of the original owner into a joint or
shared 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 a shared interest, there was a transfer of property.
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. CIT [1987] 165 ITR 620, 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 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
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 the preference shares. Reliance was
placed on the passage from Buckley on the Companies Acts, 14th edition, Volume
I, at page 181 :
" Every return of capital, whether to all
shareholders or to one, is pro tanto a purchase of the shareholder's 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. "
Reference was also made to Pennington's Company Law, 4th
edition, at page 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. "
We are of the view that the High Court has come to the
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 the Madras High
Court which was a case of reduction of share capital and also the decision in
CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 (SC), 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 the
assessee. Consequently, there was no transfer within the meaning of section 12B
of the Indian Income-tax Act, 1922.
The case of Vania Silk Mills P. Ltd. v. CIT [1991] 191 ITR
647 (SC), 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 the insurance claim was not in consideration for machinery
taken over. This was not a case of extinguishment of rights in the property on
account of destruction or loss of the asset.
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.
In our view, the case squarely comes within clause (i) of
section 2(47). Therefore, it is not necessary to express any opinion on the last
contention of Mr. Ganesh.
The appeal is dismissed. The judgment under appeal dated
August 18, 22, 1992, is affirmed. There would be no order as to costs.
