Anarkali Sarabhai vs Commissioner of Income Tax

Mankad, J.—The Appellate Tribunal, has at the instance of the assessee, referred to us for our opinion following questions u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was liable to pay tax in respect of capital gains on receipt of the amount equal to the face value of the preference shares of Universal Corporation (P.) Ltd. on the company redeeming its preference shares?

Whether, on the facts and in the circum stances of the case, the Tribunal was justified in law in holding that the assessee was liable to be taxed to capital pains arising on sale of the shares of Swastic Oil Mills (P.) Ltd., by Anarkali Trust No. 1 whereby the assessee is a sole beneficiary for the year under reference?

If answer to Question No. 2 above is in the affirmative, whether the Tribunal was justified in law in holding that while working out the capital gains in respect of the said transaction relief u/s 80T should not be allowed to determine capital gains of the trust and relief only once determining taxable capital gains in the assessment of the assessee where the capital gains were finally taxed?

Out of the three questions referred to us Question No. 2 is directly covered by a decision of this Court in Pallavi S. Mayor Vs. Commissioner of Income Tax, Gujarat, . Following the said decision, this question shall have to be answered in the negative and against the revenue. We, therefore, answer Question No. 2 accordingly. In view of our answer to Question No. 2, Question No. 3 does not survive and, therefore, it need not be answered.

This leaves Question No. 1 for our consideration. The facts so far as this question is concerned, briefly stated are as follows. The assessee is an individual and the assessment year under reference is the assessment year 1969-70, the year of account being the calendar year 1968. The assessee held 297 redeemable preference shares of Universal Corporation (P.) Ltd. (''the company''), a company incorporated under the Companies Act. The face value of each of these preference shares was Rs. 1,000 and, therefore, the total face value of these shares came to Rs. 2,97,000. The assessee had purchased these shares for Rs. 2,66,550. The company decided to redeem the preference shares and the assessee received Rs. 2,97,000 face value of the shares held by her in the year of account relevant to the assessment year under reference. Thus, the value of the shares received by the assessee exceeded the value which she had paid for these shares by Rs. 30,450.

The ITO, assessing the assessee sought to tax this amount of difference as capital gains u/s 45 of the Act. The assessee resisted the action proposed by the ITO by contending that redemption of her preference shares by the company would not amount to ''transfer'' within the meaning of section 2 (47) of the Act and consequently the difference between the value received by her from the company on redemption of shares and the price which she had paid for the shares was not exigible to tax. In other words, according to the assessee even if there was any profit or gains, as a result of redemption as shares by the company, such profit or gain could not be said to have arisen from the transfer of a capital asset. The ITO, however, rejected the contentions raised on behalf of the assessee and brought capital gains arising out of the redemption of the shares to tax.

The AAC, having confirmed the view taken by the ITO, the assessee carried the matter in appeal before the Tribunal. Relying on the decision of this Court in the case of Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), , it was urged on behalf of the assessee before the Tribunal that no transfer within the meaning of section 2 (47) of the Act was involved when on redemption of her shares the assessee was paid back her capital by the company. It was further urged that what was paid to the assessee did not represent consideration received by her as a result of sale, exchange of relinquishment of the capital asset or extinguishment of any right therein. The Tribunal, however, did not accede to the submissions made before it on behalf of the assessee as in its view the case of the assessee was materially different from the case of R.M. Amin (supra). It was pointed out that in R.M. Amin''s case (supra) the assessee had received money in satisfaction of his right to receive money on realisation of the assets of the company in liquidation of receipt of such money did not represent any consideration received by the assessee as a result of extinguishment of his right in the shares. Referring to the decision of the Supreme Court in The Commissioner of Income Tax, Gujarat II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, , it was pointed out that distribution of the assets of a company which had gone into liquidation would not amount to sale, exchange, relinquishment or transfer of any capital asset by a shareholder. The assessee in the present case, however, had not received any money upon liquidation of the company. The assessee had been paid the face value of her shares by the company as a result of extinguishment of her rights in the shares. This, according to the Tribunal, would amount to transfer of capital within the meaning of section 2 (47) of the Act. In reaching this conclusion the Tribunal sought to derive support from its earlier decision in the case of Kartikeya V. Sarabhai v. CIT [1982] 8 Taxman 214 (Guj.) . It may be mentioned here that the case of Kartikeya V. Sarabhai was subject of a reference before this Court and this Court had upheld the view taken by the Tribunal in Kartikeya V. Sarabhai v. CIT (supra) We will discuss that judgment of this Court at a later stage. In the view which it took the Tribunal upheld the decision of the AAC. It is in the background of these facts that the instance of the assessee, Question No. 1 has been referred to us for our opinion.

Section 45 of the Act is a charging section so far as capital gains are concerned. It lays down that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided fn sections 53, 54, 54B, 54D and 54E, be charge able to income tax under the head ''Capital gains'' and shall be deemed to be the income of the previous year in which the transfer took place. It is not in dispute that the preference shares held by the assessee were ''capital assets'' as defined in section 2 (14) of the Act. The contention of the assessee, however, is that there was no transfer of capital assets when the company redeemed the preference shares held by her and consequently the profits and gains arising from such redemption cannot be brought to tax as capital gains.

Section 2 (47) of the Act defines ''transfer'' as follows:

''transfer'', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law;

The contention of the assessee is that there is no transaction when the company redeems its preference shares. When preference shares are redeemed, what shareholders get back is what belongs to them, namely, the capital which they had invested in the shares. Once the company decides to redeem its preference shares, the holders of the preference shares are in the same position as that of creditors of the company. Therefore, when the company pays the face value of the shares to the holders of preference shares, it pays back what belongs to the shareholders. Once the company decides to redeem its preference shares, the holders of preference shares have a right to claim back their capital and it is in satisfaction of that right that they receive face value of the shares of the company. There is no consideration for such payment. It is, urged that under these circumstances, there was no transaction involving ''transfer'' within the meaning of section 2 (47) of the Act. In support of this contention, strong reliance was placed by the assessee on the decision of this Court in R.M. Amin''s case (supra) and the decision of the Supreme Court in that very case in the appeal carried against the decision of this Court- CIT v. R.M. Amin (supra). On the other hand it was urged on behalf of the revenue that the above question is directly covered by a decision of this Court in Kartikeya V. Sarabhai''s case (supra). It was urged that the question which was involved in the case of Kartikeya V. Sarabhai (supra) was whether there was ''transfer'' within the meaning of section 2 (47), when as a result of reduction of share capital of the company the assessee in that case received money in respect of the shares of the company held by him proportionate to the reduction of the share capital by the company and this Court held that there was such transfer. It was urged that it would not make any difference whether the shareholder received money in respect of the shares held by him or her on account of reduction of share capital of the company, or as a result of redemption of shares by the company. In either case, there was ''transfer'' within the meaning of section 2 (47) attracting the provisions of section 45 of the Act.

If, as urged by the revenue, the question is directly covered by the decision of this Court in the case of Kartikeya V. Sarabhai (supra), Question No. 1 shall have to be answered in the affirmative and against the assessee. It is, however, urged on behalf of the assessee that the said decision has no application to the facts of the present case. In order to find out the true ratio of the decision of this Court in the case of Kartikeya V. Sarabhai (supra), it is necessary to state a few facts of that case, which are as follows: The assessee in that case had purchased 90 non-cumulative preference shares of the face value of Rs. 1,000 at a price of Rs. 420 per share in a company carrying on its business under the name and style of Sarabhai Ltd. In 1965, a sum of Rs. 500 per preference share was paid off to the assessee upon a reduction of the share capital of the company u/s 100(1)(c) of the Companies Act, 1956. The reduction of the share capital was effected by reducing the face value from Rs. 1,000 to Rs. 500 per share and by paying off Rs. 500 in cash. Thus, the assessee in that case, became a holder in respect of 90 non-cumulative preference shares of the value of Rs. 500 in place of the holder of shares of the face value of Rs. 1,000. In 1966, a further reduction was effected under the same provision pursuant to an order confirming the reduction of capital passed by the competent court. By virtue of the reduction so effected, the company reduced its liability on the preference share from Rs. 500 to Rs. 50 by paying off in cash a sum of Rs. 450 per share. Thus the shares held by the assessee which were originally of the face value of Rs. 1,000 became shares of the face value of Rs. 50 only. The Court in that case was not concerned with the first reduction effected in 1965 from Rs. 1,000 to Rs. 500. The question before the court was in connection with the second reduction in 1966, whereby the face value was reduced from Rs. 500 to Rs. 50. It may be recalled that the assessee in that case had purchased shares at Rs. 420 per share and as a result of the said reduction, the assessee had got back Rs. 950 in all (Rs. 500 per share in 1965 and Rs. 450 per share in 1966). The question which this Court was called upon to answer was whether the transaction in question was one falling within the definition of ''transfer'' as embodied in section 2 (47) read with section 45. The contention which was raised on behalf of the assessee in that case was similar to the one which is raised in the instant case. The contention of the assessee in that case was that section 45 was not attracted inasmuch as there was no extinguishment of the assessee''s right as contended by the revenue and that accordingly there is, no ''transfer'' within the meaning of the aforesaid provision. It was argued that it merely constituted repayment of what was due to the assessee and the transaction in question would not, therefore, amount to extinguishment so as to bring it within the definition of ''transfer''. There also, the assessee placed reliance on the decision of this Court and the Supreme Court in R.M. Amin''s case (supra). This Court, after discussing the decisions of this Court and the Supreme Court in R.M. Amin''s case (supra), held that the reasonings in that case would not apply to the case of the assessee. In R.M. Amin''s case (supra) what was paid to the assessee was by reason of and on account of realisation of assets of the company in liquidation, and thus in satisfaction of his right, which belonged to him, namely, the right to share in the net assets of the company upon being taken into liquidation. The rationale of the conclusion in R.M. Amin''s case (supra) that a payment made to a shareholder upon the distribution of the assets upon winding up does not constitute extinguishment of any right rested on the circumstances that the distribution was made not because any right belonging to the shareholder was extinguished but by reason of the fact that he had such a right, namely, the right to share in the distribution of the net assets. This Court observed that this reasoning would not apply to a situation arising in the context of the reduction of share capital. When the share capital is reduced by paying off a part of the capital by reducing the face value of the share, the share remains, but the right of the shareholder to dividends on his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of the reduction in capital. Till the reduction took place, the shareholder had a right to dividend on a capital of Rs. 1,000 per share. He also had a right to distribution in the net assets of the company in case of liquidation on the footing that his capital was Rs. 1,000 pet share. Upon a reduction pf the face value of the share from Rs. 1,000 to Rs. 500 and later on to Rs. 50, his right in the share in question stood extinguished to the proportionate extent. Instead of the right to receive dividend on Rs. 1,000, all that he retained was a right to dividend on Rs. 500 upon the first reduction and a right to receive dividend on Rs. 50 upon the second reduction. The only right that he had in his capacity as a shareholder of the company was to a share in the distribution of the net assets in case the company went into liquidation. That right was also extinguished to the proportionate extent in the sense that instead of being entitled to share in the distribution of the net assets on the footing that his capital was Rs. 1,000, he would get a share on the footing that his capital was only Rs. 50. Therefore, there had been an extinguishment of his right to the aforesaid extent in two respects, namely, (i) in respect of the right to dividend, and (ii) in respect of the right to share in distribution. It was, therefore, clearly a case of extinguishment of his right in the capital asset, namely, the shares held by him. Consequently, there was a ''transfer'' within the meaning of section 2(47) attracting application of section 45.

The ratio decidendi of the case of Kartikeya V. Sarabhai (supra), will, in our opinion, govern the case before us. We are unable to see how the case before us could be distinguished from that case. It is beyond our comprehension as to how there would be extinguishment of the rights of a shareholder to the extent he is paid off face value of the shares held by him as a result of reduction of share capital of the company in which he held shares while there would be no extinguishment of any right of a shareholder at all when he is paid off the entire face value of the preference shares held by him and he ceases to be shareholder of the company in which he held such shares consequent upon reduction of share capital of the company brought about by redemption of redeemable preference shares.

There are two kinds of share capital as defined in section 85 of the Companies Act, 1956, (i) preference share capital, and (ii) equity share capital. As laid down by section 85(1), ''preference share capital'' means, with reference to any company limited by shares, whether formed before or after the commencement of the Companies Act, that part of the share capital of the company which fulfils both the following requirements, namely, (a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income tax; and (b) that as respects capital, it carries, or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely, (i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. ''Equity share capital'' means, with reference to any such company, all share capital which is not preference shared capital. Section 77 of the Companies Act, imposes restrictions on purchase by company, or loans by company for purchase, of its own or its holding company''s shares. Sub-section (1) of section 77 lays down that no company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402. Sub-section (5) of section 77, however, provides: "Nothing in this section shall effect the right of a company to redeem any shares issued u/s 80 or under any corresponding provision in any previous companies law." Section 80 of the Companies Act empowers a company limited by shares, if so authorised by its articles, to issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Such power is to be exercised subject to the provisions contained in that section. It is not necessary to set out in detail these provisions as they are not relevant for the purpose of this reference. It would thus appear that there are two kinds of preference shares-(i) redeemable shares, and (ii) those which are not redeemable. Redeemable preference shares may be redeemable on a specified date, or at the option of the company. In the present case, the preference shares held by the assessee were redeemable at the option of the company. Apart from redemption of its preference shares, a company can reduce its share capital as provided in sections 100 to 104. Sub-section (1) of section 100 provides:

Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power may:

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company;

and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

Section 101 provides for application to Court for confirming order, objections by creditors and settlement of list of objecting creditors. Provisions contained in section 101 are mainly to safeguard the interest of the creditors. Section 102 provides amongst other things that, if the Court is satisfied with respect to every creditor of the company who u/s 101 is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit. It would thus appear that the company can reduce its share capital by redeeming its preference shares which are redeemable or by reduction of its share capital by following the procedure laid down in sections 100 to 104 and 402 of the Companies Act. In either case, what company does is to return its capital to its shareholders. In other words, the genesis of reduction of capital or redemption of shares is the same, namely, return of capital by the company. Methodology differs, but the object which is achieved is the same, namely, reduction of share capital. Reduction of share capital or redemption of shares is an exception to the rule contained in section 77(1), that no company limited by shares shall have power to buy its own shares. When a company redeems its preference shares, what in effect and substance it does is to purchase back its shares. In Buckley on the Companies Act, 14th edition Volume 1, at page 181 the learned author has commented: "Every return of capital whether to all shareholders or to one, is pro tanto a purchase of the shareholders'' rights. It is illegal as a reduction of capital unless it be made under the statutory authority, but in the latter case it is perfectly valid." In Pennington''s Company Law, 3rd edition at page 188, under caption ''Redeemable preference shares'', the learned author has observed: "The general rule is that a company cannot issue shares on terms that it shall or may redeem them at an agreed future date, because the redemption would amount to a purchase by the company of its own shares, which is illegal". There is, therefore, no doubt that when a company redeems shares, what it does is to purchase back its shares. Therefore, reduction of share capital or redemption of shares involves sale transaction. A shareholder in case of redemption of his shares, sells back his shares to the company. Reduction of share capital amounts to purchase of its own shares by the company. Therefore, when a company redeems its preference shares, the shares stand transferred or sold to the company. In any case rights of holders of such shares in the said shares will come to be extinguished. The House of Lords in Scottish Insurance Corporation Ltd. v. Wilson & Clude Coal Co. Ltd. [1948] AC 462, has referred to the consequence of return of capital to the holder of preference shares as amounting to ''extinguishment''. Therein it is observed as under (see the Speech of Lord Morten at pages 498 and 499):

My Lords, the respondent-company (hereafter called the ''company'') seeks to effect a reduction of its capital, by returning to the holders of its 40,000 � 1 first preference stock and 10,000 �1 second preference stock capital to the full extent of �1 in respect of each �1 of such stock held by them respectively and thereby extinguishing these two stocks, and by returning to the holders of its 66,75,000 � 1 issued ordinary stock capital to the extent of �1 in respect of each � 1 of such stock held by them respectively. This reduction can only be carried out subject to confirmation by the Court and the Court will not confirm the reduction unless it is fair and equitable.

Therefore, there is no doubt that when redemption of preference shares takes place, there is extinguishment of the shares or in any case rights of the shareholders therein. We are unable to see how the case of redemption of shares stands on a different footing than the case of reduction of share capital dealt with by this Court in the case of Kartikeya V. Sarabhai (supra). If there is extinguishment of right of the shareholders in case of reduction of share capital, it would be much more so in the case of redemption of shares. In case of reduction of share capital, the shareholders'' right got extinguished to the extent the value of the shares is reduced. In case of redemption of shares, none of the rights of the shareholder survives. In other words, all the rights which he possessed in the preference shares come to an end or stand extinguished as a result of redemption of shares. Preference shareholder has three rights, namely, (i) right to receive dividend, (ii) right to attend the meetings and vote, where any decision affecting his right is taken, and (iii) right to receive back his capital. All these three rights come to an end when the shares held by him are redeemed by the company. If the preference shares are not redeemable on a specified date or at the option of the company, the procedure laid down in sections 100 to 104 has to be followed for reduction of such preference share capital. However, whether the preference shares are redeemed or whether there is reduction of preference share capital by following the procedure laid down in sections 100 to 104, the result or consequence which follows is the same. In either case, what results is return of capital. In our opinion, the present case cannot in any way be distinguished from the case of Kartikeya V. Sarabhai (supra) which was in connection with reduction of share capital and the ratio of the decision of this Court in that case will govern the present case also. Therefore, for the reasons recorded in the judgment of this Court in Kartikeya V. Sarabhai''s case (supra), we have no doubt in our mind that there was extinguishment of the rights of the assessee when the company in which she held preference shares redeemed them. We are unable to see any force in the argument advanced on behalf of the assessee that when company redeems preference shares, the holder of such shares receives money from the company in satisfaction of his right to claim back his capital on redemption. There is no such separate or independent right in the shareholder as contended by the assessee. His right to receive money from the company on redemption of his shares flows from or is founded on his holding the shares. In other words, it is because the company buys back his capital asset that he is paid money. Moneys paid back to him represent the face value of the shares and the premium, if any, payable on such redemption. It is, therefore, not correct to say that when his shares are redeemed, ''what the shareholder gets back is always what belonged to him''. He might have purchased shares at a price which is less than the face value or he might be paid premium, if it is payable to him on redemption. It is, therefore, not true to say ''what he gets back is always what belonged to him'' as contended on behalf of the assessee. In any case, there is no doubt that he is paid the face value or face value plus premium as the case may be in consideration of extinguishment of his rights in the preference shares on the redemption of the shares. In other words, his capital asset, namely, the preference shares, stand extinguished. Once capital asset is extinguished, rights therein would be extinguished. Therefore, what is paid to the shareholder is consideration for the extinguishment of his capital asset or his rights therein. Therefore, having regard to the definition of ''transfer'' in section 2(47) we have no doubt in our mind that when there is redemption of shares by the company, ''transfer'' is involved and such transfer attracts application of section 45. The argument that no consideration is paid for such transfer is also devoid of any substance. The shareholder is paid the face value or the face value together with premium for the extinguishment of his capital asset or his rights therein. Payment of face value or face value plus premium is a valuable consideration for the extinguishment of capital asset or the shareholders'' rights therein.

The assessee sought to rely on the following observations, namely: (1) ''the shares held by him were not redeemable preference shares'', and (2) ''it is not as if in his capacity as a preference shareholder he stood in the position of a creditor vis-a-vis the company'' made in the case of Kartikeya V. Sarabhai (supra) to support her contention. It was contended that this Court itself had distinguished the case of shareholder holding redeemable preference shares from the case of shareholder, value of whose shares is reduced as a result of reduction of share capital. It was contended that the above observations support the assessee''s contention that holders of redeemable preference shares stand on the same footing as the creditors of the company. It was relying on the above observations that the assessee sought to contend that once the company decided to redeem her shares, she was in position of a creditor of the company. We are unable to accede to the submissions made on behalf of the assessee. The observations on which reliance is placed are only passing observations. This Court was not dealing with a case of redeemable preference shares. Again, it was not highlighted before the Court that whether it was a case of reduction of share capital under the provisions of sections 100 to 104 of the Companies Act, or reduction of share capital as a result of redemption of preference shares, the resultant position was the same, namely, return of capital by the company. We are unable to accede to the submission that holder of a redeemable preference shares is in a position of creditor once the company decides to redeem the shares. It may be that redeemable preference shares have some features which are common with the debentures but legally they are shares. In this connection we may usefully refer to the following commentary at page 356 of Volume I of Palmer''s Company Law (22nd Edition) under the caption: Redeemable preference shares'': "From the financial point of view, redeemable preference shares are a hybrid form of shares and debentures, incorporating features of both and being closer to the latter than other preference shares, but from the legal point of view they are shares, and are treated as such." As observed by the learned author in Pennington''s Company Law, 3rd edition at page 188, if redemption would make the company insolvent, the company may not be allowed to redeem preference shares because repayment of preference capital would be a fraud upon its creditors. This would clearly indicate that holder of preference shares is not in the same position as that of the creditor. The learned author has further observed: "If a company defaults in redeeming redeemable preference shares by the date or the last date fixed for redemption, the holder of the shares cannot compel it to do so by suing in debt for the return of his capital or by seeking a mandatory injunction. It would seem, however, that he would succeed with a petition to wind up the company on the ground that its default makes it just and equitable to put it into liquidation so that his capital may be realised This observation also negatives the contention that once the company decides to redeem its preference shares, the holder of preference shares would be in a position of creditors. In our opinion, therefore, the observations made by this Court in the context of the case of reduction of share capital do not in any way help the assessee in the present case. No decision, which binds this Court is rendered by this Court. The observations as pointed out above are merely passing observations and of no consequence.

In R.M. Amin''s case (supra) on which strong reliance is placed by the assessee, the facts were as follows: The assessee in that case was a shareholder of a company which went into liquidation. The liquidator sold the assets of the company in due course. As there was surplus, the assessee became entitled to receive a particular amount as written off capital in respect of the shares which were held by his in the company which was taken into liquidation. It was in that context that the question arose whether the payment made to the assessee could be treated as ''transfer'' within the meaning of section 2 (47) and whether the profits arising from the said transaction were exigible to tax under the head ''Capital gains''. A Division Bench of this High Court speaking through P.N. Bhagwati, CJ., as he then was, has taken the view that the moneys received by the assessee were not paid to him by reason of the extinguishment of any of his rights and no question of transfer or capital gains could arise in that view of the matter. The basis of the reasoning was that a shareholder has three distinct rights in his capacity as a shareholder of a company, namely, (1) the right to dividend out of the profits of the company, (2) the right to attend and vote at the meetings and thereby indirectly participate in the management of the company; and (3) the right to share in the distribution of the net assets on the winding up of the company. The amount paid to the assessee was paid in the context of his right which fell under Category No. (3), i.e., the right to share in the distribution of the net assets on the winding up of the company. Since the company was taken into voluntary liquidation, the only right that the assessee had was the right to share in the distribution of the net assets. Since there was a surplus and some assets were available for distribution amongst shareholders, the same were distributed in the course of winding up by the official liquidator. In the context of these facts, the Division Bench concluded that the moneys received by the erstwhile shareholder were not on account of any extinguishment of his right in the shares held by him. The amount was paid to him because that was the only right that he had as a shareholder consequent to the winding up of the company. The Supreme Court confirmed this view and held in the case of R.M. Amin (supra) as follows:

...When a shareholder received money representing his shares on the distribution of the net assets of the company in liquidation, he received that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by any operation of any transaction which amounted to sale, exchange, relinquishment, transfer of a capital asset or extinguishment, of any rights in capital assets...." (p. 368)

The Supreme Court referred to the following observations made by it in the case of Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., :

When a shareholder receives money representing his share on distribution of the net assets of the company in liquidation, he receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not the operation of any transaction which amounts to sale, exchange, relinquishment or transfer." (p. 45)

The Supreme Court after quoting the above observations, observed: "The above observations, though made in the context of section 12B of the 1922 Act which related to capital gains in respect of profits or gains arising from sale, exchange, relinquishment or transfer of capital assets, in our opinion, would also cover the case of extinguishment of any rights in capital assets." Strong reliance was placed on behalf of the assessee on these last observations and it was urged that these observations indicate that in a case where rights in a capital asset are extinguished, there would be no ''transfer'' within the meaning of section 2 (47). This argument, in our opinion, proceeds on wrong reading of the decision of the Supreme Court. What is held by the Supreme Court is that the assessee had received moneys in satisfaction of his right which belonged to him by virtue of his holding shares and not by virtue of sale, exchange, relinquishment or extinguishment of rights. The expression ''extinguishment of rights'' in capital assets, which is used in section 2 (47), did not find place in section 12B of the 1922 Act. It was, therefore, that the Supreme Court observed that the observations made in Madurai Mills Co. Ltd. (supra) though in the context of section 12B of the 1922 Act would also cover a case of extinguishment of rights in capital assets. The Supreme Court did not hold that in a case where there is extinguishment of rights in a capital there would be no ''transfer'' within the meaning of section 2 (47). It was in the context of the facts of the case that the Supreme Court held that the assessee did not receive money on account of transaction extinguishing his rights in the capital asset. The above observations, therefore, do not carry the case of the assessee any further. As already pointed out above situation arising in the context of redemption of shares is different and the above reasonings in R.M. Amin''s case (supra) cannot be pressed into service to submit that there is no ''transfer''. The present case would be squarely covered by the decision of this Court in the case of Kartikeya V. Sarabhai (supra).

The next case on which reliance was placed on behalf of the assessee is Commissioner of Income Tax, Gujarat Vs. Mohanbhai Pamabhai, . In that case, the assessee and seven other persons carried on business in partnership, but as a result of some disputes, the assessee retired from the firm leaving the other seven as continuing partners of the firm. According to the terms and conditions of retirement which were recorded in a document, each assessee received certain amount in respect of his share in the partnership and this amount was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liabilities and prior charges. The amount so received included in its break-up, an amount representing his proportionate share in the value of the goodwill which constituted one of the assets of the partnership. It is this latter amount which was brought to tax as capital gains u/s 45 by the ITO and the assessment was confirmed in appeal by the AAC. The Tribunal, however, disagreeing with the view of the lower authorities, held that since the goodwill was a self-created asset which had cost nothing to the firm and its partners in terms of money, ''transfer'' thereof was not within the ambit of section 45, and, therefore, the proportionate share in the value of the goodwill received by each assessee was not taxable as capital gain. On a reference, the Tribunal''s view did not find favour with this Court. However, it was contended before the Court on behalf of the assessee in support of the decision of the Tribunal that the proportionate share in the value of the goodwill was received by each assessee as part of the amount representing his share in the net partnership assets after deduction of liabilities and prior charges and this last mentioned amount having been received by him in satisfaction of his share in the partnership and not byway of consideration for transfer of his interest in the goodwill or other assets of the firm, there was no transfer of capital asset which would attract liability to capital gains tax. It was in the context of this submission that reference was made to the well settled legal position as regards the nature of interest of a partner in a partnership and the legal consequences which flow when a partner retires from the firm. It was observed:

These decisions clearly establish that the interest of a partner in the partnership is not interest in any specific item of the partnership property... it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership... His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners... We must, therefore, hold it to be clear beyond doubt that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45, there was, in the present case, no transfer of interest of any assessee in the goodwill within the meaning of section 2 (47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior charges and it was received in satisfaction of his share in the partnership; each of them realised his share in the partnership when the amount coming to his share was paid over to him..." (pp. 402-404)

The decision, was however, not rested on this point alone and an alternative finding was also given, proceeding on the assumption that when a partner retires from the partnership, his interest in the partnership assets is extinguished and there was, therefore, in that case ''transfer'' of interest of each of the assessees in the goodwill when the assessee retired from the firm. In that context reference was made to R.M. Amin''s case (supra) and it was pointed out that where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment for then only it would be transfer exigible to capital gains tax. It was then observed in the case of Mohanbhai Pamabhai (supra).

...When a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is paid to him, what he receives is his share in the partnership which is worked out and realised and it does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. Moreover, it is not possible to say, in such a case, that any amount is received by the retiring partner as his share in any particular asset of the firm so that it may be said that a particular part of the amount was received as consideration for the extinguishment of the interest of the retiring partner in a particular partnership asset. What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement... It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular partnership asset..." (p. 405)

On both these grounds, it was held in that case that when the assessees retired from the firm, there was no transfer of interest of any of the assessees in the goodwill of the firm and no part of the amount received by any of the assessees was assessable to capital gains tax u/s 45.

As observed by this Court in Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., these two decisions, namely, decision in the case of R.M. Amin (supra) and decision in Mohanbhai Pamabhai (supra), read superficially, might seem to support the assessee''s contention, but on a closer examination it would be apparent that their ratio must be confined to a very limited class of cases, and further that they are clearly inapplicable on the facts and in the circumstances of the present case. In the present case, the assessee had received money on account of her holding preference shares and not on account of any independent or separate right conferred on her. The situation in this case is, therefore, not comparable with that obtaining in those two cases, where admittedly, moneys were received in realisation of or working out of rights which inhered in the concerned assessee in his capacity as a shareholder in one case and as a partner in the other. The assessee in the present case was not paid money in satisfaction of any statutory right conferred on her.

As observed in Vania Silk Mills'' case (supra), the expression ''extinguishment of any rights therein'' is of wide import. It covers every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset, whether such asset was corporeal or incorporeal. In the present case, as already pointed out above, there is extinguishment of redeemed shares which were capital assets held by the assessee. In any case on payment of their face value by the company to the assessee, the assessee''s right in the shares came to an end. Therefore, even if redemption of shares by the company is not held to sale by the assessee in favour of the company, as urged on behalf of the assessee, there is no doubt whatsoever that there is extinguishment of capital asset or in any case assessee''s rights therein bringing the transaction within the definition of ''transfer'' contained in section 2 (47).

In the light of the above discussion, we have no doubt that when the company redeemed preference shares held by the assessee, there was ''transfer'' within the meaning of section 2 (47) of the Act which would attract section 45. In our opinion, the Tribunal was justified in holding that the assessee was liable to pay tax in respect of the capital gains on receipt of the amount equal to the face value of the preference shares of the company, held by her. We, therefore, answer Question No. 1 in the affirmative and against the assessee.

Reference answered accordingly with costs.

The learned counsel for the assessee makes an oral request for a certificate of fitness for appeal to the Supreme Court as envisioned by section 261. In view of the fact that we are taking a view different from the view taken by the Madras High Court, we are of the opinion that this is a fit case for appeal to the Supreme Court. Certificate is, therefore, granted.