1996 (8) TMI 39 - HC - Income Tax

Court rules transfer in share capital reduction lacked adequate consideration, favors Department, awards costs.

The court held that there was a transfer involved in the reduction of share capital and that the transfer was not for adequate consideration. The court ... Adequate Consideration, Deemed Gift, Immovable Property, Market Value, Movable Property Issues Involved:1. Whether there is any transfer while the company reduces its share capital and pays the difference to its shareholders.2. If there is a transfer, whether the transfer is for adequate consideration.Issue-wise Detailed Analysis:1. Whether there is any transfer while the company reduces its share capital and pays the difference to its shareholders:The court examined the reduction of share capital by the assessee-company. The assessee-company reduced its share capital from Rs. 24 lakhs to Rs. 5.04 lakhs, returning Rs. 790 per share to the shareholders. The company paid Rs. 10,78,806 in cash and transferred immovable properties valued at Rs. 8,17,194 to cover the balance. The Department argued that the market value of these properties was Rs. 40,24,958, resulting in a deemed gift of Rs. 32,07,764 under section 4(1)(a) of the Gift-tax Act. The Appellate Tribunal had earlier found no transfer involved, citing the Bombay High Court decision in CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390, which stated that reduction in capital did not amount to a transfer. However, the High Court disagreed, citing CIT v. India Co. (P.) Ltd. [1984] 149 ITR 548 (Mad) and Shantha Rangarajan v. CIT [1995] 215 ITR 104 (Mad), which held that a transfer occurs when a company distributes assets to shareholders to discharge liability on account of share capital reduction.2. If there is a transfer, whether the transfer is for adequate consideration:The court analyzed whether the transfer was for adequate consideration. The Department's position was that the transferred properties were valued at market rates, resulting in a deemed gift. The assessee argued that the transfer was for adequate consideration, as the shareholders received assets equivalent to the reduction in their share value. The Tribunal had supported the assessee's view, stating that if the assets' value were revised upwards, the share value should also be revised. However, the court found this argument flawed, emphasizing that the resolution fixed the share value at Rs. 1,000, and no further revaluation was possible. The court noted that the assessee failed to provide market valuations for the transferred properties or shares. The Andhra Pradesh High Court's decision in CIT v. C. C. Subbarayadu [1988] 171 ITR 310 was cited, emphasizing the need for determining market value to assess adequate consideration. The court concluded that the Tribunal erred in its approach and ruled in favor of the Department.Conclusion:The court held that there was a transfer involved in the reduction of share capital and that the transfer was not for adequate consideration. The questions referred were answered in the negative and in favor of the Department, with costs of Rs. 1,000.