1. At the instance of the revenue, the following two questions have been referred to this court for its opinion by the ITAT :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to capital gains tax on the sum of Rs. 54,181 for the asst. yr. 1974-75
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that there was no transfer in the transaction by which the assessee transferred its investments in discharge of its liability to the share holders at a profit consequent on the reduction of share capital is sustainable in law ?'
2. The assessee company held an extraordinary general meeting on 9-2-1973 to consider and pass a special resolution for reducing its share capital. At the meeting of the share holders held on the said date, the following resolution was passed :
'Resolved that subject to sanction by court, the paid up share capital of the company consisting of 4,515 shares of Rs. 100 each be reduced to 2,500 shares of Rs. 100 each from 1st January, 1973 and the balance of 2,015 shares be re-paid to the shareholders by way of reduction of share capital and Shri C. R. Ramaswamy, Chairman be and is hereby authorised to make the necessary application to the court for reduction of the share capital.'
Thereafter a petition u/s. 191 of the Companies Act, 1956 for confirming the reduction of share capital was filed before the Original Side of this court and this court by its order dt. 28-6-1973 confirmed the reduction of the share capital effected by the said special resolution with the following observation :
'In view of the assurance given by the counsel for the petitioner that in case of the any share holders to whom by reason of the share capital amounts have to be paid, refuse to receive in lieu of cash fully paid up shares in other companies held by the petitioner company as investments, the petitioner company would sell those shares and pay the shareholders in cash, it is not necessary to give individual notice all the shareholders, this court doth order as follows.'
Thereafter the Asstt. Registrar of Companies Tamilnadu had given certificate of registration of the order of the High Court confirming reduction of capital on 8-8-1973. As per the direction made by this court while permitting the reduction in the share capital assessee company has either to sell the shares held by it in other companies by way of investment any pay the shareholders in cash or it may transfer those shares to the shareholders in lieu of cash payment for the amount payable to them as arising from the reduction in share capital. Thus as a result of the reduction in share capital and as a result of the order of this court sanctioning the reduction in share capital, the company become liable to pay a sum of Rs. 2,02,500 to the shareholders. To discharge that liability, the assessee company had distributed its 6,316 shares in Kumbakonam Electric Supply Corporation Limited, 2714 in The Nagapattinam Electric Supply Company Ltd, and 6,400 in The Indian Steel Rolling Mills Limited to its shareholder. At the time of the distribution of the shares to the shareholders to discharges its liability in sum of Rs. 2,01,500 the assessee revalued those shares and the adjustment was made in accordance with the said valuation. It was found that the assessee itself has in its balance sheet as on 31-12-1973 has found the difference between the book value of the said shares and their revalue to be Rs. 56,414 and this amount has been shown in the balance sheet as a capital reserve arising on revaluation on investment at market value as on 16-8-1973 as per Schedule 'B'. In Schedule 'B' a copy of which was attached to the balance sheet, the investment of the assessee company by way of fully paid ordinary shares in the aforesaid companies had been revalued at market value as on 16-8-1973 and the difference between their book value and the market value was shown as Rs. 56,414. Treating the difference between the market value as on 16-8-1973 of the shares and their book value, the CIT exercising his revisional powers u/s. 263 of the IT Act brought it to charge under the head 'Capital gains' on the ground that the ITO has omitted to assess the said sum under the aforesaid head arising out of the appreciation of the value of the shares held by the assessee company which were transferred to the shareholders during the year of account. The CIT, therefore, directed the assessing authority to bring to tax capital gains of Rs. 54,181. In pursuance of the said direction, the ITO brought to charge the sum of Rs. 54,181 under capital gains.
3. The assessee took the matter in appeal to the Tribunal contending that as there has been no transfer at all of the shares, there is no question of capital gains and that the Commissioner was not correct in having brought the sum of Rs. 54,181 to tax as capital gains. The assessee has placed reliance before the Tribunal on the decision in Commissioner of Income-tax v. Madura Mills Ltd. : 89ITR45(SC) and the decision in Commissioner of Income-tax v. R. M. Amin (1971) 82 ITR 184. The Tribunal in its order proceeded to consider whether there was any transfer of shares by the company to its shareholders and ultimately from the assessee company to its shareholders and as such there is no liability to pay tax on the sum of Rs. 54,181 on the part of the assessee.
4. Aggrieved by the decision of the Tribunal, the revenue has come up before us by way of this reference.
5. After due consideration of the matters, we are of the view that on the facts and circumstances of this case, the so-called distribution by the assessee company of its share to the shareholders to discharge its liability of Rs. 2,01,500 arising out of the reduction in share capital will clearly amount to a transfer and we are not in a position to agree with the Tribunal that there is no transfer involved in the distribution of shares by the assessee company to the shareholders. Admittedly the assessee company has owned the shares by way of investment in the Kumbakonam Electric Supply Corporation Limited, the Nagapatnam Electric Supply Company Limited and the Indian Steel Rolling Mills Limited. To discharge the assessee's liability to its shareholders in a sum of Rs. 2,01,500 arising out of the reduction of the share capital, the assessee had effected the so called distribution of shares to the shareholders and the book value of the shares so distributed has been found from the assessee's own records to be Rs. 1,47,100 only and the difference between Rs. 2,01,281 (after deducting the sum of Rs. 219) paid in cash from Rs. 2,01,500 and the book value of the share transferred, Rs. 1,47,100 has been taken as the capital gains by the CIT in this case. Though the Tribunal has used the expression 'Distribution' when it refers to the mode by which the ownership of the shares had been transferred from the assessee company to its shareholders, the nature of the so called distribution is nothing but a transfer. Admittedly the shares were held by the assessee company and the shareholders had no other interest in those shares except as shareholders of the assessee company. After the so called distribution made by the company for discharging a liability of Rs. 2,01,281 out of the total liability of Rs. 2,01,500 the shareholder came to own the shares distributed. Thus the ownership of the shares had been transferred by the assessee to the shareholders for a consideration and we do not see how the transaction cannot be taken to be a transfer.
6. It cannot be disputed that any transaction under which the ownership or right to a property is transferred from one person to another for consideration, the transaction can only be taken to be a transfer by way of a sale. Therefore, on the materials on record the Tribunal is not right in holding that there was no transfer at all from the assessee company to the shareholders and, therefore, there is no question of any capital gains accruing to the company.
7. Mr. Ramamani, the ld. Counsel appearing for the assessee is not in a position to support the order of the Tribunal when it says that there is no transfer of shares at all from the assessee company to the shareholders. However, he seeks to justify the ultimate conclusion of the Tribunal that no capital gains have arisen from the transaction by contending that in this case there is only transfer of shares at the book value and there is no question of those shares being transferred at the market value and only if the shares had been transferred at the market value the question of capital gains arising out of the transfer will arise. Thus the contention of the learned counsel for the assessee is that in this case the transfer of shares has been done only for the book value and there is no transfer on the market value. According to the learned counsel for the assessee, the shareholders took the shares at the book value by foregoing a portion of the amount due to them arising as a result of the reduction of the share capital and so long as the shareholders are willing to accept certain share at the book value in lieu of the amount of Rs. 2,01,281 due to them, the transaction will not attract the levy of capital gains tax, for, there has been no actual transfer of the shares at the market value. However, on the facts of this case, we are not in a position to accept this contention advanced by the ld. counsel for the assessee that there was transfer of shares from the company to its shareholders at the book value and the shareholders at the book value and the shareholders were willing to accept shares of the book value of Rs. 1,47,100 as against the amount of Rs. 2,01,281 due to them. Two factors are present in this case which militate against the said contention put forward by the learned counsel for the assessee. One is that there is no material on record to show that the shareholders agreed to take shares of the book value Rs. 1,47,100 as against the sum of Rs. 2,01,281 and to forego the difference. The other factor is that the assessee itself has revalued the shares before its actual transfer of the shares to the shareholders and as per the revaluation, the shares transferred are said to be the market value of Rs. 2,01,281. In fact, the assessee in its balance sheet as on 31-12-1973 had shown the difference between the book value of the shares and their market value at Rs. 54,181 and it has shown this amount under the head, 'Capital gains'. Thus the assessee's own records make it clear that the assessee, before it effected the transfer of shares to the shareholders, took the market value of the shares into account and transferred shares whose market value is Rs. 2,01,281 to the share-holders but whose book value was Rs. 1,47,100. Thus the entires made by the assessee in its books of account make it clear that the assessee transferred its shares to discharge its liability of Rs. 2,01,281 and the book value of the shares so transferred was only Rs. 1,47,100. Thus, the assessee transferred shares whose book value was only Rs. 2,01,281, which means, the assessee had transferred shares whose book value was Rs. 1,47,100 for a value of Rs. 2,01,281. Thus it is clear that by transfer of shares by the company to its shareholders, the assessee has realised a sum of Rs. 54,161 over and above the book value and this has rightly been treated as capital gains arising out of the transfer of shares.
8. As already stated, the Tribunal having held that the transaction does not amount to a transfer of shares by the company to its shareholders, proceeded to deal with the other question such as whether there was a relinquishment or release by the shareholders and other like questions. However, as we have held that the transaction amounts to a transfer and that transfer attracts the provision relating to capital gains, it is unnecessary for us to deal with the other questions which have been dealt with by the Tribunal in its order. Yet we would like to touch on one aspect. The Tribunal has referred to the decisions in CIT v. Madura Mills Ltd. : 89ITR45(SC) and CIT v. R. M. Amin 1971 82 ITR 184 support of its view. But, there are cases which arose at the stage of the winding up of the company and the distribution of assets between the shareholder on 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 at a result of the reduction of the share capital, the company becomes liable to pay the shareholders.
9. We have to therefore answer the questions referred in the negative and in favour of the revenue. The revenue will get the costs from the assessee. Counsel's fee Rs. 500 (one set).