KARTIKEYA vs. SARABHAI versus COMMISSIONER OF INCOME TAX

CIVIL APPEAL No. 1098/1982Supreme Court1997 INSC 64204 September 1997Bench: 2 JudgesAuthor: B.N. KIRPAL, K.T. THOMAS KARTIKEYA V. SARABHAI9 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in concluding that capital gains tax was payable. The reduction in the face value of preference shares, leading to a payment of Rs. 450 per share, amounted to a transfer within the meaning of Section 2(47) of the Income Tax Act, 1961. The Court reasoned that Section 2(47) is an inclusive definition, and 'relinquishment of an asset' or 'extinguishment of any right therein' constitutes a transfer, not necessarily a sale. The reduction in face value diminished the shareholder's rights, including voting rights and rights to dividends and assets on liquidation, proportionately. This extinguishment of rights is a transfer under Section 45. The Court relied on its previous decision in Anarkali Sarabhai Ltd. v. CIT. The appeal was dismissed.

What were the facts?

The assessee, Kartikeya V. Sarabhai, purchased 90 non-cumulative preference shares of Sarabhai Limited at Rs. 420 per share, with a face value of Rs. 1,000 each. In 1965, the company reduced its share capital under Section 100(1)(c) of the Companies Act, paying Rs. 500 per share and reducing the face value to Rs. 500. In 1966, there was a further reduction, with the company paying Rs. 450 per share and reducing the face value to Rs. 50. The Income Tax Officer held this Rs. 450 receipt taxable as capital gains. The Appellate Assistant Commissioner set this aside, but the Income Tax Appellate Tribunal restored the ITO's order. The High Court affirmed the Tribunal's decision. The assessee appealed to the Supreme Court.

What were the issues?

1. Whether the reduction in the face value of preference shares, resulting in a payment of Rs. 450 per share to the assessee, constitutes a 'transfer' of a capital asset within the meaning of Section 2(47) of the Income Tax Act, 1961, making the amount received exigible to capital gains tax under Section 45 of the Act. Assessee's contentions: The reduction in face value did not amount to extinguishment of any right and therefore was not a 'transfer' under Section 2(47). The assessee continued to be a shareholder, and Section 45 was not applicable as there was no sale, only receipt of money against surrender of shares. Revenue's contentions: The reduction in face value and consequent payment amounted to a transfer of a capital asset, attracting capital gains tax. The revenue relied on the Tribunal's order and the High Court's decision.

Which sections of the Income-tax Act were involved?

Section 2(47),Section 45,Section 100(1)(c),Section 87(2)(c)

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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 s

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