Commissioner of Gift Tax vs Kasturi Estate (P) Ltd.

Thanikkachalam, J.—In compliance with the order of this Court dt. 5th April, 1983, the Tribunal referred the following questions, for the

opinion of this Court under s. 26(3) of the GT Act, 1958 :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the assessment of deemed gift under s. 4(1)

(a) of the GT Act on the ground that there was no transfer involved when the company reduced its capital and that the assets were given to the

shareholders for adequate consideration ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of s. 4(1)(a) of the GT Act,

1958, could not be invoked in the assessee''s case ?

The assessee was a private limited company having capital of rupees twenty-four lakhs divided into 2,400 shares of Rs. 1,000 each. By a

resolution under an extraordinary general body meeting held on 30th November, 1961, the company reduced its capital to Rs. 5,04,000 divided

into 2,400 shares of Rs. 210 each. Consequent to such reduction, the company was to return to the shareholders in cash or in kind paid-up capital

to the extent of Rs. 790 per share. This was approved by the High Court, by order dt. 20th April, 1962. In giving effect to this reduction of capital

the company had to pay to the shareholders difference of Rs. 18,96,000 between paid-up share capital of rupees twenty four lakhs and reduced

share capital of Rs. 5,04,000. The company actually paid Rs. 10,78,806 in cash and transferred immovable properties of the book value for the

balance of Rs. 8,17,194. According to the Department, the market value of the immovable properties was actually of Rs. 40,20,956, and

therefore, the excess value over the book value of Rs. 8,17,194 equivalent to Rs. 32,07,764 was assessable as deemed gift under s. 4(1)(a) of the

GT Act. Sec. 4(1)(a) deals with the difference between the market value and the consideration stated to be a gift where the property is transferred,

otherwise than for adequate consideration. Both the AO as well as the AAC held that there is deemed gift according to the facts arising in this case

and consequently levied gift-tax. The assessee went in appeal before the Tribunal. The Tribunal found that when the paid-up capital is reduced, an

equivalent amount is reduced by taking out certain assets and distributing the same to the shareholders at book value, and therefore, if the value of

the assets should be revised upwards, it would also require an upward revision of the value of the shares. Consequently, the transfer was not

otherwise than for adequate consideration. In the alternative, the Tribunal also noticed that as per the decision of the Bombay High Court in CGT

vs. Cawasji Jehangir Co. (P) Ltd. (1976) 106 ITR 390 : TC 35R.758, the reduction in the capital did not amount to a transfer at all, and therefore,

s. 4(1)(a) of the GT Act had no application. The Tribunal accordingly cancelled the assessment to gift-tax.

Before us, the learned standing counsel appearing for the Department submitted that when the share capital was reduced from Rs. 1,000 to Rs.

210, the company is liable to return the balance amount of Rs. 790 per share. This reduction was made in accordance with the resolution passed in

the general body meeting and this was also approved by this Court, by order dt. 20th April, 1962. Thus, for reduction of share capital, the

assessee-company obtained the sanction from this Court as per the relevant provisions of the company law. Therefore, each sharer is entitled to

receive only Rs. 790 per share and nothing more. In the present case, the assessee-company is liable to return Rs. 18,96,000, which is the

difference between the paid up share capital and reduced share capital. Instead of paying Rs. 18,96,000 the assessee-company had actually paid

Rs. 10,78,806. For the difference of Rs. 8,17,194 the assessee-company transferred immovable properties in favour of the shareholders. The

market value of such immovable property transferred would come to Rs. 40,24,958. At that time the assessee was having liquid sum, but cash was

not paid to the extent of Rs. 18,96,000. But for a sum of Rs. 8,17,194 immovable properties worth Rs. 40,24,958 were transferred. The

difference between Rs. 8,17,194 and Rs. 40,24,958 was deemed to be a gift under s. 4(1)(a) of the GT Act. The reduction of the share capital

and the return of the sum of Rs. 790 per share was in accordance with the resolution passed by the company in its general body meeting.

Therefore, there is no room for re-valuing the shares once again. It is not the resolution for return of share value to the extent of Rs. 790 per share,

but the return was only a sum of Rs. 790 simpliciter. Therefore, adding further value to Rs. 790 per share would not arise on the facts of this case.

Therefore, the Tribunal was not correct in stating that if the Revenue wants that the value of the assets should be revised upwards to the extent of

its market value, then it would require also an upward revision of the value of the share as such. Therefore, according to the learned standing

counsel, the company is not entitled to return more than Rs. 790 per share. Since Rs. 32,07,764 was transferred without adequate consideration,

there is deemed gift as per the provisions of s. 4(1)(a) of the GT Act, 1958.

According to the learned standing counsel when the share capital was reduced and the difference was paid by the company, there is transfer and

that transfer is for adequate consideration. Therefore, the Tribunal was not correct in cancelling the gift-tax assessment made in the present case. In

order to support his contention, the learned standing counsel appearing for the Department relied upon the decision of the Supreme Court in

Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., , Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal

representative of the Late Chunibai Amin), , Commissioner of Income Tax Vs. India Company Private Limited, and Shantha Rangarajan and

others Vs. Commissioner of Income Tax, .

On the other hand, the learned senior counsel appearing for the assessee submitted that when the share capital was reduced, there is no transfer.

According to the learned senior counsel, even assuming if there is transfer, it is for adequate consideration. The company decided to reduce the

share capital from Rs. 1,000 to Rs. 210 per share as per the resolution passed by the general body meeting with prior sanction of this Court. As a

result of reduction of share capital the assessee-company paid Rs. 790 per share, which is difference between Rs. 1,000 and Rs. 210. The

shareholders lost their interest in the company assets to the extent of Rs. 790 out of Rs. 1,000. The assessing authority pointed out that the loss of

the share on account of reduction was in the ratio of 21/100, which is equivalent to rupees forty lakhs. If that is so, the total asset would come to

over Rs. 12 crores. Therefore, according to the learned senior counsel, what was transferred by the company at the rate of Rs. 790 per share

would really amount to transferring interest of the shareholder to the extent of 21/100 in the total value of the assets of the company. Under such

circumstances, payment of Rs. 10,78,806 plus immovable properties worth about Rs. 40,24,958 would really constitute the loss incurred by the

shareholders in the company from and out of the total asset. Thus, according to the senior counsel, on reduction of the share capital of the

company, the shareholders parted with 21/100 of the value of their share and get back in the same proportion from the assets of the company.

Thus, the actually paid-up amount of Rs. 10,78,806 and transfer of the immovable property with Rs. 40,24,958 are taken together, that would

satisfy 21/100 loss incurred by the shareholders in the total company assets. Hence, there is no inadequate consideration, warranting application of

s. 4(1)(a) of the GT Act. In order to support his contention, the learned senior counsel appearing for the assessee relied upon the decision of the

Bombay High Court in CGT vs. Cawasji Jehangir Co. Pvt. Ltd. (supra). According to the learned senior counsel for the assessee, the decision in

(1976) 106 ITR 390 : TC 35R.758 would apply on all fours to the facts arising in the case. Therefore, according to the learned counsel for the

assessee, when the share capital was reduced, there is no transfer and even if there is transfer, it is for adequate consideration. Accordingly, the

learned senior counsel for the assessee supported the order passed by the Tribunal.

We have heard the learned standing counsel appearing for the Department as well as the learned senior counsel appearing for the assessee. The

fact remains that the assessee is a private limited company and its shareholders are all descendants of late Shri Kasturi Rangan Iyengar and other

members of his family. Originally the share of this company had a face value of Rs. 1,000 each. In 1962, the company reduced the value of the

share to Rs. 210. This was done on 26th May, 1962 with the prior sanction of this Court. The late Shri Kasturi Rangan Iyengar had acquired

some properties in Madras and Kambakonam and those properties had been transferred to the company. On the reduction of the company''s

capital, sum of Rs. 790 per share had to be refunded to the shareholders. As a result of the reduction of share capital, the company had to pay to

the shareholders the difference of Rs. 18,96,000 between paid up share capital of rupees twenty four lakhs and reduced share capital of Rs.

5,04,000. The company actually paid Rs. 10,78,806 in cash and transferred immovable properties of the book value for the balance of Rs.

8,17,194. According to the Department, the market value of the immovable properties transferred was actually worth about Rs. 40,24,958, and

therefore, the excess value over the book value of Rs. 8,17,194 equivalent to Rs. 32,07,764 is assessable as deemed gift under s. 4(1)(a) of the

GT Act, 1958.

Two points arise in this case for consideration :

Whether there is any transfer while the company reducing the share capital and paying the difference to its shareholders and;

If there is transfer, whether the transfer is for adequate consideration.

Under s. 100 of the Companies Act -

(1) 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 its shares accordingly.

In accordance with the abovesaid provision, the assessee-company reduced its share capital with the sanction granted by this Court. According

to the assessee return of the capital to the shareholders because of the reduction in the capital amount cannot amount to a transfer so as to fall

within the scope of s. 4(1)(a) of the GT Act. For this proposition, reliance was placed upon the decision of the Bombay High Court in (1976) 106

ITR 390 : TC 35R.758 cited supra, wherein it was held that when property is received by shareholders in the course of reduction of share capital

of a company in which they are shareholders, such a transaction cannot amount to a transfer of property and cannot, therefore, fall within the ambit

of s. 4(1)(a) of the Act. While coming to this conclusion, the Bombay High Court pointed out that in order to fall within the terms of s. 4(1)(a) of

the GT Act, there must, in the first instance, be a transfer of property. The opening words of s. 2 of the Act, viz., ""unless the context otherwise

requires"" permit the Court to take into consideration the basic principle regulating the reduction of the share capital of a company, and does not

compel the Court to apply the definition of ""transfer of property"" in cl. (xxiv) of that section to a case in which, having regard to those basic

principles, it cannot apply. Therefore, according to the Bombay High Court when the assets of a company are distributed amongst the

shareholders, either on a reduction of capital or in the course of the winding up of the company, new rights are not, created, which is an ingredient

implicit in the very concept of transfer, as laid down in the decision of the Supreme Court in the case of CIT vs. Madurai Mills Co. Ltd. (supra).

Therefore, what happens on the reduction of the share capital of a company, in so far as what the shareholders get, is only what they are entitled to

by the very fact of their being shareholders of that company and such a transaction cannot amount to a transfer.

In CIT vs. Madurai Mills Co. Ltd. (supra) the Supreme Court held that 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 by operation of any transaction, which amounts to sale, exchange, relinquishment or transfer. The Supreme Court was

concerned with a case where there was liquidation. The Supreme Court was not concerned with a case where there was reduction of share

capital. Therefore, the Bombay High Court was not correct in stating that the decision of the Supreme Court in Commissioner of Income Tax,

Madras Vs. Madurai Mills Co. Ltd., is an authority for the proposition that when the company had distributed either on a reduction of capital or in

the course of the winding up of the company, new rights are not created, which is an ingredient implicit in the very concept of transfer. According

to the learned counsel appearing for the assessee-company, the definition of ""transfer of property"" in s. 2(xxiv) is prefaced by the words ''unless the

context otherwise require''s and that in the context of the share capital of the company, there is no scope for applying the definition of ''transfer of

property'' in s. 2(xxiv) of the Act. However, while considering this aspect, this Court in CIT vs. India Co. (P) Ltd. (supra) held that there was a

transfer involved in the distribution of the shares by the assessee-company to its shareholders, because in order to discharge its liability to its

shareholders, shares of that value had been given to the shareholders. There was no material on record to show that the shareholders agreed to

shares at the book value as against a higher amount due to them. On the contrary, the assessee had revalued the shares at the market value and

credited the difference to the capital reserve before discharging the liability to the shareholders of equal value and hence, the surplus realised over

and above the book value should be treated as capital gains. While considering the decisions of the Supreme Court in Commissioner of Income

Tax, Madras Vs. Madurai Mills Co. Ltd., of Gujarat High Court, this Court pointed out that these cases arose at the stage of the winding up of the

company and the distribution of assets among the shareholders at that stage. The principle applicable to cases of distribution of assets at the stage

of winding up may not apply to a case like the present one where on the reduction of the share capital, the company becomes liable to pay the

shareholders certain sums and to discharges that liability some property belonging to the company, which is a going concern, is transferred to the

shareholders. It was also noticed that the decision rendered by the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. R.M.

Amin. (Legal representative of the Late Chunibai Amin), was confirmed by 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, .

In Santha Rangarajan vs. CIT (supra), the assessee, who is also one of the shareholders of the assessee-company in the present case, while

considering the levy of capital gains under s. 45 of the IT Act, 1961, this Court held that in a case where a company having decided to reduce its

paid-up share capital transfers a part of its assets in lieu of the amount to which it has become liable to its shareholders, a transfer would

necessarily be involved and would attract the capital gains tax. Thus, in view of the above cited two decisions of this Court in Commissioner of

Income Tax Vs. India Company Private Limited, and Shantha Rangarajan and others Vs. Commissioner of Income Tax, we held that there is

transfer in the present case while there is distribution of shares in the form of assets by the assessee-company to its shareholders in order to

discharge its liability to the shareholders on account of reduction of share capital.

It remains to be seen that while refunding the difference between Rs. 1,000 and Rs. 210, amounting to Rs. 790, even though cash was

available the entire liability was not discharged by payment of cash. The assessee-company paid a sum of Rs. 10,78,806. For the balance of Rs.

8,17,194 the assessee-company transferred immovable properties, which are the assets of the company. The Department valued the value of such

immovable properties at Rs. 40,24,958 as on the date of transfer, according to the market value. The difference between Rs. 8,17,194 and Rs.

40,24,958 was considered to be deemed gift under s. 4(1)(a) of the Act. Therefore, according to the Department, there was transfer otherwise

than for adequate consideration. According to the assessee, the property and a sum of Rs. 10,78,806 were distributed since the shareholders have

forgone their rights in the ratio of 21/100. Therefore, what is equivalent to 21/100 was returned to the shareholders, the value of the same would

be Rs. 10,78,806 plus market value of the immovable property transferred. The learned standing counsel submitted that the shares were valued at

Rs. 1,000 per share as per the resolution passed by the general body. Therefore, further revaluation of the shares in an upward manner is not

possible in the present case. According to the learned standing counsel, the company is bound by its resolution and it cannot revalue the shares

upward after the shareholders agreed to value the shares at Rs. 1,000 per share, in the resolution passed by the general body. In fact, the

immovable properties were not transferred by valuing the same as per market value. On the other hand, the immovable properties were transferred

only according to the book value. Therefore, according to the learned standing counsel what was paid or returned over and above Rs. 790 per

share would come under the purview of deemed gift under s. 4(1)(a) of the Act. The Tribunal pointed out that when the paid-up capital is reduced

an equivalent amount is reduced by taking out certain assets and distributing the same to the shareholders at the book value. If the Revenue wants

that the value of the assets should be revised upwards to the extent of its market value, then it would require also the upward revision of the value

of the shares as such. As already pointed out, revaluing the share in an upward manner is not possible in the present case, since by a resolution the

value was fixed for each share. In order to equalise the amount paid and the market value of the properties transferred, it cannot be said that what

was lost by the shareholders in the company was in the ratio of 21/100. When the company transferred properties worth more than Rs. 8,17,194,

the Revenue, by applying the provisions of s. 4(1)(a) of the GT Act, initiated the gift-tax proceedings. Under such circumstances, the assessee-

company cannot plead that if the value of the shares is valued in an upward manner, that would equalise the amount paid and the immovable

property transferred to the share-holders. When the resolution by the general body meeting states that what was payable by the company was only

Rs. 790 per share, the shareholders are entitled to nothing more than that. It is not the case here that what was transferred by the company to the

shareholders was portion of the share difference or the value of the shares. Hence, the Tribunal was not correct in its approach while stating that if

the shares are valued in an upward manner, that would show that the consideration is adequate.

Further, the assessee has not submitted any valuation of the market value of the immovable property transferred. It was also not shown as to

what would be the market value of the shares as on the date of transfer. No attempt was made on this aspect to show that the liquid cash paid plus

the market value of the immovable property transferred would be equal to the market value of the shares as on the date of transfer.

In Commissioner of Income Tax Vs. C.C. Subbarayudu, , the Andhra Pradesh High Court pointed out that the Tribunal should have

determined the market value upon relevant data, compared it with the sale consideration specified in the sale deed and then should have come to a

proper conclusion as to whether there was inadequate consideration or adequate consideration, either for attracting or for not attracting the

provisions of s. 4(1)(a) of the GT Act, 1958. This was not done in the present case. In view of the foregoing reasons, we are coming to the

conclusion that the Tribunal was not correct in holding that there is no transfer in this case, and even if there is transfer, the transfer is for adequate

consideration. Accordingly, we answer the questions referred to us in the negative and in favour of the Department, with costs of Rs. 1,000

(Rupees one thousand only).