Case Note & Summary
The dispute arose from an income-tax assessment concerning the taxability of capital gains on the redemption of redeemable preference shares. The assessee, an individual, held 297 redeemable preference shares of M/s. Universal Corporation Private Limited, each with a face value of Rs 1,000, totalling Rs 2,97,000. The shares had been purchased for Rs 2,68,550. In the accounting year relevant to assessment year 1969-70, the company redeemed the preference shares and paid the assessee the face value of Rs 2,97,000, resulting in an excess of Rs 30,450 over the cost of acquisition. The Income Tax Officer treated this excess as capital gains under Section 45 of the Income Tax Act, 1961. The assessee objected, contending that redemption of preference shares did not constitute a 'transfer' within the meaning of Section 2(47) of the Income Tax Act, and therefore the profit could not be taxed as capital gains. The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal upheld the Income Tax Officer's view. On further appeal, the High Court answered the question in favour of the Revenue and against the assessee, holding that redemption of preference shares fell within the definition of transfer. The High Court granted a certificate of fitness for appeal to the Supreme Court under Section 261 of the Income Tax Act because its view was contrary to that of the Madras High Court. Before the Supreme Court, the appellant argued that redemption did not involve any sale, exchange, relinquishment, or extinguishment of a capital asset; the capital was merely returned by the company. The Revenue supported the lower authorities' interpretation. The Supreme Court analysed the definition of 'transfer' in Section 2(47), which includes sale, exchange, relinquishment, extinguishment of rights, and certain other transactions. The Court observed that to receive the redemption amount, the assessee had to give up, abandon or surrender the shares, which fell squarely within 'relinquishment'. The Court further held that the transaction amounted to a 'sale' because, under the Companies Act, 1956, redemption of preference shares is effectively a purchase by the company of its own shares. The Court referred to Section 80 of the Companies Act, which permits a company to redeem preference shares, and Section 77(5), which carves out an exception from the general prohibition on a company buying its own shares; this exception would have been unnecessary if redemption did not amount to a sale. The Court also noted that redemption results in extinguishment of the shareholder's valuable rights to dividends and capital repayment. The Supreme Court relied on the Bombay High Court decision in Sath Gwaldas Mathuradas Mohata Trust v. Commissioner of Income Tax, which held that redemption of preference shares attracts Section 2(47) and the amount received is taxable as capital gains. The Court distinguished the Gujarat High Court decision in CIT v. R.M. Amin, which involved liquidation, not redemption. Ultimately, the Supreme Court dismissed the assessee's appeal and affirmed the High Court's judgment, holding that the excess amount received on redemption of preference shares was taxable as capital gains under Section 45 read with Section 2(47) of the Income Tax Act, 1961.
Headnote
A) Income Tax - Capital Gains - Transfer Definition - Redemption of Preference Shares - Income Tax Act, 1961 Sections 2(47), 45 - The assessee held redeemable preference shares and received face value upon redemption, exceeding cost by Rs 30,450. The Income Tax Officer taxed the excess as capital gains, and the assessee contended redemption was not a transfer. The Supreme Court held that redemption of preference shares involves the shareholder giving up, abandoning or surrendering shares, which falls within the expanded meaning of 'transfer' under Section 2(47), specifically 'sale, exchange or relinquishment of the asset'. The excess amount was therefore liable to tax as capital gains under Section 45. (Paras 1-7) B) Company Law - Redemption of Preference Shares - Nature of Transaction - Companies Act, 1956 Sections 77, 80, 85 - The Court examined the scheme of redeemable preference shares under the Companies Act, 1956, noting that Section 80 permits redemption, and Section 77(5) exempts such redemption from the general bar on a company buying its own shares. This indicated that redemption is effectively a sale by the shareholder to the company. The Court held that when a preference share is redeemed, the shareholder in effect sells the share to the company, and the transaction amounts to both relinquishment and extinguishment of rights. (Paras 1-7)
Issue of Consideration
Whether redemption of redeemable preference shares by a company amounts to a 'transfer' within the meaning of Section 2(47) of the Income Tax Act, 1961, and consequently whether the excess amount received by the shareholder over the cost of acquisition is taxable as capital gains under Section 45.
Final Decision
Appeal dismissed. The Supreme Court held that redemption of preference shares by a company amounts to 'sale, exchange or relinquishment' under Section 2(47) of the Income Tax Act, 1961, and the excess received over the purchase price is taxable as capital gains under Section 45. The High Court's judgment was affirmed.
Law Points
- Redemption of preference shares amounts to 'sale
- exchange or relinquishment' under Section 2(47) of the Income Tax Act
- 1961
- excess received over cost is capital gains taxable under Section 45
- Section 77(5) of Companies Act
- 1956 clarifies that redemption is a purchase by the company of its own shares
- extinguishment and relinquishment of shareholder's rights occur upon redemption
