KARTIKEYA V SARABHAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 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 gains 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 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.