1. This is a reference under the Gift-tax Act at the instance of the Commissioner which relates to assessment year 1958-59, for which the previous year is the year ended 31st March, 1958. The assessee is a private limited company which consists of only six shareholders, and originally had a paid-up capital of Rs. 1,80,18,000. By a special resolution passed on the 10th of January, 1958, the company decided to reduce its share capital from the said amount to only Rs. 18,01,800, and by that resolution, the reduction of Rs. 1,62,16,200 was proposed to be returned to the shareholders in the form of certain shares of other companies as well as certain securities in which the funds of the assessee-company were invested, as also by the transfer of an immovable property and/or payment in cash. The said resolution for reduction of capital was duty confirmed by the High Court by its order dated 21st February, 1958. The shares and securities which the shareholders were to receive in accordance with the said scheme of reduction of capital were valued at Rs. 97,75,539 as per the market rates prevailing on the 10th of January, 1958, which was the date of the said special resolution for reduction of capital. Even after that resolution was confirmed by the High Court, it however, took some time to go through the formalities consequent on the order of that court, with the result that it was only on the 20th March, 1958, that the said shares and securities were handed over by the company to the respective shareholders, presumably, along with the relative transfer forms. In the meantime, the market value of the said shares and securities had appreciated, with the result that the market value thereof as on the 20th of March, 1958, was Rs. 1,04,63,157. The Gift-tax Officer took the view that the difference between the market value of the said shares and securities as on the 20th of March, 1958, viz., Rs. 1,04,63,157 and Rs. 97,75,539, being their market value as on 10th January, 1958, which was the date of the passing by the company of the special resolution for reduction of capital, amounting to Rs. 6,87,618, was a gift by the company to the shareholders within the meaning of section 4(a) of the Gift-tax Act, because the shareholders had received Rs. 6,87,618 more than what was decided upon by the company the special resolution, and he, therefore, brought that amount to tax. The Appellate Assistant Commissioner, on appeal, confirmed that order of the Gift-tax Officer, but, on further appeal to the Tribunal, those orders were set aside on the ground that the shares and securities in question were transferred in specie to the shareholders on 10th January, 1958, and the gift-tax authorities were not really required by law to ascertain the market value thereof as 20th March, 1958 'when the formal transfer took place'. The Tribunal, therefore, held that it could not be said that anything was given to the shareholders without adequate consideration, and, there was, therefore, no gift within the meaning of section 4(a) of the Gift-tax Act, or otherwise. The present reference has arisen out of that order the Tribunal, and the question of law what has been referred to us at the instance of the Commissioner is as follows :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,87,618, being the appreciation in the value of the shares between January 10, 1958, and March 20, 1958, was deemed gift within the meaning of section 4(a) of the Gift-tax Act, 1958 ?'
2. Section 4(a) of the Gift-tax Act, 1958 is in the following terms :
'4. Gifts to include certain transfers. - For the purposes of this Act, - (a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor.'
3. It is clear, on a plain reading of section 4(a), that in order to fall within the terms thereof, there must, in the first instance, be a transfer of property. The expression 'transfer of property' has been defined in section 2(xxiv) of the Act, the material portion of which is in the following terms :
'2. Definitions. - In this Act, unless the context otherwise requires,..........
(xxiv) 'transfer of property', means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes........' (The rest of that clause is not material for the purpose of the present case). It was sought to be contended by Mr. Joshi on behalf of the revenue that once there was a delivery of the share certificates by the company to the shareholders, there was a 'transfer of property' within the meaning of that expression in section 2(xxiv) of the Act, and that took place on the 20th of March, 1958, on which date the market value of the said shares and securities, being in excess or the consideration for the reduction of capital by the sum of Rs. 6,87,618, there was a deemed gift of that amount by the company to its shareholders within the meaning of section 4(a) of the Act. In answer to that contention of Mr. Joshi, Mr. Kolah on behalf of the assessee-company pointed out that the definition of 'transfer of property' in section 2(xxiv) is prefaced by the words 'unless the context otherwise requires', and that in the context of the reduction of the share capital of the company, there is no scope for applying the definition of 'transfer of property' in section 2(xxiv) of the Act. It was the contention of Mr. Kolah that when a company reduces its capital or is being would up, what the shareholders get is what they are entitled to in satisfaction of the right which they have by virtue of their holding shares in the said company, and that such a transaction cannot be called a transfer at all. In support of that contention, Mr. Kolah relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Madurai Mills Co. Ltd. : 89ITR45(SC) in which the question was, whether the distribution of the assets of a company in liquidation amounted to a sale, exchange, relinquishment or transfer within the terms of section 12B of the Indian Income-tax Act, 1922, so as to give rise to capital gains to the shareholders of the company therefrom. The Supreme Court took the view (at page 49) that the act of the liquidators in distributing the assets of the company which had gone into voluntary liquidation did not result in the creation of new rights, but merely entailed the recognition of legal rights which were in existence prior to the distribution and that when a shareholder receives money representing his of 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 transition which amounts to sale, exchange, relinquishment or transfer. It was, therefore, held that the assessee-company was not liable to pay tax on capital gains in respect thereof under section 12B of the Indian Income-tax Act, 1922. In my opinion this contention of Mr. Kolah is clearly right. The opening words of section 2 of the Gift-tax 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 company, and dose not compel the court to apply the definition of 'transfer property' in clause (xxiv) of that section to a case to which, having regard to those basic principle, it cannot apply. It is true that a company is, in law, a separate legal entity from its shareholders, but when the assets of the company are distributed amongst its shareholder, either on a deduction of capital or in the course of the winding-up of that company, new rights are not created so as to amount to a transfer of property, an ingredient which is implicit in the very concept of transfer, as clearly appears from the decision of the Supreme Court in Madurai Mills' case : 89ITR45(SC) . What happens on a reduction of the share capital of a company is much the same as what happens in the case of the winding-up of a company, as in Madurai Mills' case : 89ITR45(SC) 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. If it cannot amount to a transfer, it cannot fall within the concept of the deemed gift artificially created by section 4(a) of the Gift-tax Act. Reliance was placed by Mr. Joshi on another decision of the Supreme Court, and that was in the case of Mrs. Bacha F. Guzdar v. Commissioner of Income-tax : 27ITR1(SC) in which it was observed (at page 5) that though a shareholder acquires a right to participate in the profits of the company, it is not possible to accept the position that the shareholder acquires any interest in the assets of the company, or any right in the property of the company, and that the company, being a juristic person, distinct from its shareholders, it cannot be said that the property which the company owns is owned by the shareholders. These propositions are, indeed, too well-established to need authority, but Bacha F. Guzdar's case  27 ITR 1 can be easily distinguished in so far as it deals with the will-settled legal position that ordinarily entails in the case of a company which is not effecting a reduction of capital, or is not being wound up, in which case different factors come into play and different considerations arise for the court's decision. I, therefore, accept Mr. Kolah's contention and hold that when property is received by shareholders in the course of reduction of the share capital of a company in which they are shareholders, such a transaction does not amount to a transfer of property and cannot, therefore, fall within the ambit of section 4(a) of the Gift-tax Act.
4. If I am wrong in the view which I have taken above, I would hold that the transfer of the shares was for adequate consideration, having regard to the market value of the shares as on 10th January, 1958, and section 4(a) would, therefore, in any event, not be attracted. The Tribunal rightly took the view that the market value of the said shares as on the 20th of March, 1958, has no relevance for the purpose of considering the liability to gift-tax under section 4(a) in the present case. In that connection, there are three possible dates which need consideration, and the questions is, whether regard must be had to the market value of the shares as on the 10th of January, 1958, which is the date of the special resolution passed by the company; or as on the 21st of February, 1958, which is the date of the High Court's order confirming that special resolution; or as on the 20th of March, 1958, which is the date on which is the date on which the share certificates were actually handed over by the company to the shareholders, presumably, along with the transfer forms, as already stated above. It will be necessary in that connection to refer to the relevant provisions of the Companies Act, 1956, relating to the procedure for the reduction of the share capital of a company. Section 100 of that Act lays down various modes in which the company can, by special resolution, reduce its share capital. Section 101 enacts that where a company has passed such a resolution, it has to apply to the court for an order confirming the reduction of share capital. Section 102(1) lays down that the court, if satisfied with respect to the matters stated therein, 'may make an order confirming the reduction on such terms and conditions, as it thinks fit', and sub-section (1) of section 103 provides that the Registrar of Companies is to register the court's order and minute and sub-section (2) thereof enacts 'on the registration of the order and minute, and not before, the resolution for reducing share capital as confirmed by the order, shall take effect'. As Mr. Kolah has rightly submitted, these statutory provisions relating to reduction of capital clearly show that what is effective for the purpose thereof is the special resolution itself, and that what the court does is merely to confirm that resolution with or without modifications, or to refuse to confirm the same. If the resolution is confirmed by the court, whether it be confirmed, with or without any modification, it is the resolution which takes effect for purpose of reducing the share capital of the company, and that is clear, particularly from the language of sub-section (2) of section 103 of the Companies Act, to which I have already referred, read along with sub-section (1) of section 102 thereof. It may, in this connection, be pointed out that the language of sub-section (1) of section 102 clearly shows that even when the court makes a variation in regard to the terms and conditions relating to the reduction of share capital, what it does is to confirm the resolution, subject to the alterations which it makes. The legislature has, perhaps, advisedly not used language to the effect that the court may confirm or vary the terms and conditions of the special resolution, but has couched sub-section (1) of section 102 in language which makes it quite clear that the court, unless it decides not to confirm the reduction of share capital, must confirm the resolution whereby that reduction is effected, whether such confirmation be on the same terms and conditions or with such modifications as the court considers necessary. In this connection, it is pertinent to note the difference in the language which the legislature has used in the same Act in connection with the confirmation of alterations in the memorandum of association with which section 17 of the Act deals. In that case also, the company has to pass a special resolution which has to come up before the court for confirmation, but it may be noted that sub-section (2) of section 17 which deals with confirmation thereof by the court is in the following terms :-
'(2) The alteration shall not take effect until, and except in so far as, it is confirmed by the court on petition.'
5. It is, therefore, clear that in the case of alterations in the memorandum of association, overriding effect is given to the court's order, and the special resolution can take effect only to the extent to which it is confirmed by the court on petition. In that view of the matter, for the reasons stated above, in my opinion, the view taken by the Tribunal on the point as to the date on which the market value of the share of the company has to be taken into consideration for the purpose of judging the adequacy of consideration under section 4(a) is correct, and I hold that date should be the 10th of January, 1958. From the view taken by me above, viz., that since the court merely confirms the special resolution, what is effective for the purpose of reduction of share capital is the resolution, when confirmed by the court, it must follow that the date of the court's order which was 21st of February, 1958, is not the material date for the purpose of taking the market value of the shares received by the shareholders from the company. As far as the third date, viz., the 20th of March, 1958, which was taken by the Wealth-tax Officer and the Appellate Assistant Commissioner, is concerned, in my opinion, that date is of no consequence as, in the case of a reduction of share capital, what is effective is the special resolution of the company for the reduction of share capital, and what follows is merely in the nature of formalities. In that connection, Mr. Joshi referred to the decision of the Rajasthan High Court in the case of Commissioner of Income-tax v. Smt. Suraj Bai in which, after referring to two decisions of the Supreme Court and a decision of the Madras High Court, the view taken was (at pages 777-778) that what the beneficial interest in the shares is transferred by the donor to the donee by the delivery of share certificates, a gift must be held to be complete within the terms of the Gift-tax Act. In my opinion, the two Supreme Court decisions on which reliance was placed by the learned judges of the Rajasthan High Court in Suraj Bai's case do not justify the conclusion at which that High Court arrived. I do not agree with the view taken by the Madras High Court in the decision in the decision of that High Court with was following in Suraj Bai's case and hold that on this point, Suraj Bai's case itself is wrongly decided.
6. If I am wrong in the view which I have taken above, on both the points on which I have held in favour of the assessee, and if the view taken is that there was a gift within the meaning of section 4(a) of the Gift-tax Act and that the market value of the shares in question as on the 20th of March, 1958, must be taken account for the purpose of the present case, as held by the Wealth-tax Officer and the Appellate Assistant Commissioner, I would still hold that the difference in the market value of the said shares as on the 20th March, 1958, viz., Rs. 1,04,63,157, and their value as on the 10th of January, 1958, viz., 97,75,539 amounting to Rs. 6,87,618, is in relation to the reduction of share capital which was to the tune of Rs. 1,62,16,200, not so disproportionate as would lead to the conclusion that the transfer must be deemed not to have been for adequate consideration. In my opinion, the expression 'adequate consideration' has to be construed in a broad sense, and merely because there may be some difference between the consideration for a transfer, and the true value of the property transferred, the same world not attract the applicability of section 4(a) of the Act. In order that the court may hold that a particular transfer is not for adequate consideration, the difference between the true value of the property transferred, and the consideration that passed for the same, must be appreciable in the context of the facts and figures of the particular case. It may be that in a given case a few hundred rupees would lead to the conclusion of inadequacy of consideration, whereas in another case, a few lakhs of rupees may not lead to such conclusion. The expression 'adequate consideration' cannot be construed with precision but, as already stated above, it must be construed in relation to the facts and figures of each particular case. In that view of the matter, I would hold that, even on the footing that the 20th of March, 1958, is a date relevant for the purpose of considering the true market value of the shares and securities in the present case, the present case does not fall within section 4(a) of the Gift-tax Act.
7. In any view of the matter, therefore, I would answer the question referred to us in favour of the assessee.
S.K. Desai, J.
8. I agree. In my opinion, there was a return consequential upon a reduction of capital which would not constitute a transfer of property at all. I would, therefore, hold that the provisions contained in section 4(a) of the Gift-tax Act 1958, as it stood prior to its amendment by Finance (No. 2) Act, 1971, were not applicable. Accordingly, the question must be answered in favour of the assessee.
9. BY THE COURT. - Question answered in the negative and in favour of the assessee. The Commissioner must pay the assessee's costs of the reference.