1998 (6) TMI 79 - HC - Income Tax

Capital reorganization deemed share transfer for tax purposes; court rules in favor of assessee

The court held that the reorganization of capital by passing a resolution constituted a transfer of shares under section 2(47) of the Income-tax Act. It ... Capital Gains, Short-term Capital Gains, Equity Shares, Preference Shares, Exchange Issues Involved:1. Whether the reorganization of capital by passing a resolution constitutes a transfer of shares u/s 2(47) of the Income-tax Act.2. Whether the capital loss on the sale of irredeemable cumulative preference shares constitutes a short-term capital loss to the assessee.Summary:Issue 1: Reorganization of Capital as Transfer of Shares u/s 2(47)The court examined whether the reorganization of capital by passing a resolution on September 30, 1971, constitutes a transfer of shares within the meaning of section 2(47) of the Income-tax Act. The Tribunal held that the exchange of equity shares for new equity shares and preference shares on September 30, 1971, amounted to a transfer. The Tribunal concluded that the irredeemable preference shares were acquired on September 30, 1971, and not before, as they did not exist prior to that date. The court supported this view, referencing sections 85 to 90 of the Companies Act, which distinguish between equity and preference shares, indicating different rights and liabilities. The court also cited the Andhra Pradesh High Court's decision in Nizam's Second Supplementary Family Trust [1976] 102 ITR 248, supporting the notion that conversion of shares constitutes a transfer.Issue 2: Capital Loss on Sale of Irredeemable Cumulative Preference SharesThe court addressed whether the capital loss on the sale of irredeemable cumulative preference shares constitutes a short-term capital loss. The assessee argued that the shares were acquired on September 30, 1971, and sold within 60 months, thus qualifying as a short-term capital loss. The Revenue contended that the shares should be deemed acquired on the date of the original equity shares in 1965. The court noted that the preference shares were distinct from the equity shares due to different rights and liabilities, and thus, were acquired on September 30, 1971. The court referenced the Supreme Court's decision in Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163, which held that reduction of rights in a capital asset constitutes a transfer. Consequently, the court upheld the Tribunal's decision that the capital loss of Rs. 68,236 was a short-term capital loss.Conclusion:The court answered both questions in the affirmative, favoring the assessee, and disposed of the reference with no order as to costs.