KARTIKEYA V. SARABHAI versus COMMISSIONER OF INCOME TAX

Citation: [1997] SUPP. 3 S.C.R. 746 · Decided: 04-09-1997 · Supreme Court of India · Bench: B.N. KIRPAL · Disposal: Dismissed

Judgment (excerpt)

A 
KARTIKEYA V. SARABHAI 
v. 
COMMISSIONER OF INCOME TAX 
SEPTEMBER 4, 1997 
B 
[B.N. KIRPAL AND K.T. THOMAS, JJ.] 
Income Tax Act, 1961-Sections 2 (47) and 45. 
Capital gains-Transfer of capital asset-Reduction in face value of 
C shares-Amounts received by holder of such shares on reduction-Held, is 
transfer within the meaning of S. 2( 47) and taxable as capital gains. 
D 
Companies Act 1956-Sections 87(2)(c) and lOo-Reduction in face 
value of shares-Amounts received by the holder of such shares 011 reduction 
is subject to capital gains. 
The Appellant had purchased 90 non-cumulative preference shares 
of a Company, each of the face value of Rs. 1,000 at a price of Rs. 420 per 
share. Earlier in 1965, a sum of Rs. 500 per share was paid off to the 
assessee upon a reduction of the share capital of the company under 
E Section lOO(l)(c) of the Companies Act. 
In the year 1966, there was a further reduction of the face value of 
the shares and in the Extra-ordinary general meeting of the company, by 
a special resolution passed, liability of the company was reduced from Rs. 
500 per share to Rs. 50 per share by paying off in cash a sum of Rs. 450 
F per share. The receipt of a sum of Rs. 450 per share received by the 
assessee was held to be subject to capital gains by the Income Tax Officer 
but however this finding was set aside by the Appellate Assistant Commis-
sioner. On appeal, the Income Tax Appellate Tribunal restored the order 
of the Income Tax Officer, which stood affirmed by the order of the High 
G Court. 
In the present appeal preferred by the assessee, the contention of the 
"' 
appellant was that there could be no capital gains tax as the reduction in 
the face value of the share from Rs. 500 to Rs. 50 per share did not amount 
to extinguishment of any right and therefore, could not be:, regarded as 
H transfer within the meaning of Section 2(47) of the Act. It was also inter 
746 
KARTIKEYA V. SARABHAI v. C.l.T. 
747 
alia submitted that the appellant continued to be a shareholder of the A 
company and that Section 45 of the Act was not applicable as the appellant 
had not made any sale and that the money was only received by him against 
the surrender of the shares. 
Dismissing the appeal, this Court 
HELD : 1.1. The High Court was right in coming to the conclusion· 
that capital gains tax was payable by the appellant in the instant case, as 
a result of reduction in the face value of the preference shares. [754-D] 
B 
1.2. Reduction of right on the capital asset would amount to transfer 
within the meaning of the expression in Section 2(47) of the Income Tax C 
Act, 1961. [753-H] 
1.3. Section 2 ( 47) of the Act defining 'transfer' in relation to a capital 
asset is an inclusive definition which inter-alia provides that relinquishment 
of an asset or extinguishment of any right therein amounts to a transfer of D 
a capital asset. Sale is only one of the modes of transfer envisaged by 
> 
Section 2(47) of the Act. It is not necessary that for a capital gain to arise, 
there must be ·a sale of a capital asset. Relinquishment of the asset or 
extinguishment of any right in it, which may not amount to a sale, can also 
be considered as a transfer and any profit or gain which arises from the 
transfer of a capital asset is liable to be taxed under Section 45 of the Act. E 
[751-D-EJ 
2.1. By virtue of Section lOO(l)(c) of the Companies Act 1956, a 
company has a right to reduce the share capital and one of the modes that 
could be adopted is to reduce the face value of the preference shares. 
[753-BJ F 
2.2. On the reduction in face value of the shares, the voting right of 
the holder of such shares on a poll stands reduced in view of section 
87(2)(c) of the Companies Act, even though he continues to remain a 
shareholder. Also the right of the preference shareholder to dividends on 
his share capital and the right to share in the distribution of the net assets G 
upon liquidation is extinguished proportionately to the extent of reduction 
in the captial. [753-G, 751-F] 
Anarkali Sarabhai Ltd. v. CIT, (1997) 224 ITR 422 (SC), relied on. 
Anarkali Sarabhai v. CIT, Gujarat, (138) ITR 437, referred to. 
H 
748 
SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R. 
A 
CIT v. R.M. Amin, (106) ITR 368, distinguished. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1098 of 
1982. 
From the Judgment and Order dated 6.8.81 of the Gujarat High 
B Court in l.T.R. No. 68 of 1976. 
S. Ganesh, Mrs. AK. Verma for M/s. J.B.

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