The Supreme Court held that redemption of preference shares amounted to ‘sale, exchange or relinquishment of asset’ within meaning of section 2(47)(i)
Facts of the Case
The assessee is an individual and the assessment year under reference is AY 1969-70. The assessee held 297 redeemable preference shares of Universal Corporation Private Limited a company incorporated under the Companies Act (the ‘Company”). The face value of such 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. 2,68,550. The assessee received Rs. 2,97,000 being face value of the shares. Thus, there was capital gain of Rs. 30,450.
The ITO held that the difference is capital gains taxable under section 45 of the Act. The assessee contended that the 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 gain was not exigible to tax. The ITAT and HC held in favour of Revenue.
Decision of SC
The SC observed that section 2(47)(i) speaks of ‘sale, exchange or relinquishment of the asset’. This implies parting with any capital asset for gain which will be taxable under section 45. In the instant case, what has happened is that the assessee had purchased the preference shares at less than face value. When the shares were redeemed by the company, she received more than what she had paid for the shares. In order to get this amount, the assessee had to give up or abandon or surrender the shares held by her. The meaning of the word ‘relinquish’ as given in Webster’s Comprehensive Dictionary, International Edition 1984, is (1) to give up; abandon; surrender. (2) to cease; to demand; renounce; to relinquish a claim. (3) to let go (a hold or something held). The assessee in this case has given up the shares and has received in lieu thereof a sum of money. The SC held that this, comes clearly within the mischief of section 2(47)(i).
The SC further held that the transaction amounts to ‘sale’. The company redeemed its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. In effect, the company has bought back the preference shares from the shareholders. The SC observed that “when a preference share is redeemed by a company, what a shareholder does in effect is to sell the share to the company. Such a transaction is nothing but sale of the preference shares by the shareholders to the company.”
The SC concluded that redemption of preference shares in the facts of this case will squarely come within the meaning of the phrase ‘sale, exchange or relinquishment of the asset’. The excess amount received by the shareholder on redemption of these shares will have to be treated as capital gain in view of the provisions of section 2(47) read with section 45.