LexANARKALI SARABHAI, :SHAHIBAG HOUSE, AHMEDABAD versus COMMISSIONER OF INCOME TAX, AHMEDAHAD
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ANARKALI SARABHAI, SHAHIBAG HOUSE, AHMEDABAD
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v.
COMMISSIONER OF INCOME TAX, AHMEDAHAD
. JANUARY 24, 1997
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[S.C. AGRAWAL AND SUHAS C. SEN, JJ.}
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Income Tax Ac~ 1961-Sections 2( 47), 45-Capital gains-Redemption
of preference shares by a private limited company-Falls within the phrase
"Sale, exchange or relinquishment of asset-Amounts to transfer within the
c meaning of Section 2 (47)-Resultant profit or gain to the erstwhile individual
shareholder taxable as capital gain.
Companies Act, 1956-Sections 85, iO, 77(1)(5) Redemption of
preference shares-Squarely comes within the phrase-"Sale, exchange or
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relinquishment" of the asset.
The assessee-appellant held some redeemable pr~ference shares of a
private limited company. During the accounting year relevant to the as·
sessment year 1969-70, the company redeemed the preference shares and
the value of the shares consequent.ly received by the appellant exceeded the
E amount which she bad paid for them. The Income tax Officer sought to
tax this amount of difference as capital gains under Section 45 of the
Income Tax Act. The assessee-appellant protested contending that
redemption of her preference !ihares by the company would not amount to
transfer within the meaning of section 2(47) of the Act and consequently
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. the dill'en!nce between the value received by her from the company on
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redemption of the shares and the price she had paid for the shares was
not exigible to tax. The contention was rejected by the Income Tax Officer
as well as the Appellate Assistant Commissioner an~ the tribunal. The
High Court also coruarmed the same. Hence this appeal by the assessee.
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Dismissing the appeal, this court
HELD 1. The excess amount received by the shareholder on redemp·
lion of preference shares was rightly treated as capital gain and exigible
to tax accordingly. Section 2(47) of the Income Tax Act, 1961 gives an
inclusive defmition to "transfer". Clause (i) of sub-section (47) of Section
H 2 speaks of "Sale, exchange or re~inquishmeot of asset•. This implies
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ANARKALI SARABHAI, SHAHIBAG v. C.I.T.
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parting with any capital asset for gain which will be taxable under Section A
45. In the instant case, when the shares were redeemed by the, company,
the assessee 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. This comes clearly within the mischief of section 2
(47) (i). [504-H; 505-A-8]
2.1 Moreover, the transaction amounts to sale. In view of the
provisions of sections 85, 80 and 77 (i) and (5) of the Companies Act, when
a preference share is redeemed by a company, what a shareholder does in
effect is to sell the share to the company, such a transaction is nothing but
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sale of preference shares by the shareholders to the company. That is why C
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 D
will not apply t.o redemption of shares under section 80. Therefore, redemp-
tion of preference shares by the company will squarely come within the
phrase "Sale, exchange or rclin<Juishment" of the asset. [507-B-D; 510-B)
2.2 The shares held by a member in a company is movable property E
transferable in the manner provided in the Articles of Association of the
Company and the shares can be held by a member as stock-in-trade or
capital assets. In the instant case, the preference shares were rightly held
as capital assets in view of the pr:ovisions of section 2( 47) read with Section
45 of the Income Tax Act. -[507-F]
Salh Gwaldas Malhurdas Tmst v. Commissioner of Income Tax, 165
ITR 620, approved.
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Commissioner of Income Tax, Gujarat V. R.M. Amin, 106 ITR 368;
Sunil Siddltarathblzai v. Commissioner of Income Tax, Ahmedabad a11d G
Kartikeya v. Sarabhai v. Commissioner of Income Tax, 156 ITR 509; Com-
missioner of Income Tax, Bombay v. Rasikla/ Maneklal (IiUF), 177 ITR
(198) and Vanita Silk Mills P. Ltd. v. Commissioner of Income Tax, 191 ITR
647, referred to.
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