IMPORTANT POINT
On a reduction of share capital with the company paying a part of the capital by reducing face value of its share, results in extinguishment of right in the shares held by the share-holder so that the amount paid on reduction of share capital would be exigible to capital gain tax.

JUDGMENT

Kirpal, J.-The only question which arises for consideration in this appeal, under certificate having been granted by the High Court, is whether on a reduction of share capital with the company paying a part of the capital by reducing face value of its share, results in extinguishment of right in the shares held by the share-holder so that the amount paid on reduction of share capital would be exigible to capital gain tax.

2. The appellant had purchased 90 non-cumulative preference shares, each of the face value of Rs. 1,000/- at a price of Rs. 420/- per 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.1,000/- to Rs. 500/- and by paying off Rs. 500/- in cash. As a result thereof the appellant became a holder in respect of 90 non-cumulative preference shares of the value of Rs. 500/- per share, in place of being the holder of shares of the face value of Rs. 1000/- per share.

3. In 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 the Extra-Ordinary 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 share to Rs. 50/- per share by paying off in cash a sum of Rs. 450/- per share. 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/- per share and secondly when the face value was reduced from Rs.500/- per share to Rs.50/- per share.

4. The appellant had originally purchased the preference shares of the face value of Rs. 1000/- per share at a price of Rs. 420/- per share. At the time of first reduction, he got back Rs. 500/- per share in cash. At the time of second reduction, with which we are concerned in this case, the appellant got a further sum of Rs. 450/- per share in cash.

5. The Income Tax Officer was of the opinion that a sum of Rs. 450/- per share, which was now received by the assessee, was liable to be subjected to levy of capital gain tax. The appellant, however, contended that such reduction of the face value did not result in extinguishment of the assessee s 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. The IncomeTax Officer did not accept the appellant s contention and taxed the said amount.

6. The appeal of the appellant before the Appellate Assistant Commissioner succeeded and a sum of Rs. 23,490/-, which had been included as capital gains, was held not to 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 orders 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 preference share capital which was exigible to capital gains tax?"

7. The High Court considered the matter in its entirety and came to the conclusion that the Tribunal had rightly held that the appellant had made capital gains on the reduction of preference share capital and the same was exigible to capital gains tax. Thereafter, at the request of the appellant, the High Court granted leave to appeal. Hence, this appeal.

8. On behalf of the appellant it was vehemently contended by Mr. Ganesh, learned c