1987 (1) TMI 78 - HC - Income Tax

Redemption of preference shares taxed as capital gains under Income-tax Act

The High Court of Bombay ruled that the redemption of preference shares constituted a transfer under section 2(47) of the Income-tax Act, subjecting the ... Capital Gains, Sale, Transfer Issues Involved: Interpretation of section 45 read with section 2(47) of the Income-tax Act regarding taxation on redemption of preference shares.Summary:The High Court of Bombay addressed the issue of whether the amount received by the assessee on redemption of preference shares should be taxed under the head 'Capital gains'. The case involved the purchase of redeemable preference shares, their redemption, and the subsequent tax treatment. The Commissioner contended that the redemption constituted a 'transfer' of a capital asset, triggering tax liability under section 2(47) of the Income-tax Act. The Tribunal upheld the Commissioner's view, leading to an appeal by the assessee.In analyzing previous judgments, the Court considered the distinction between extinguishment of rights and a regular sale. Referring to the Gujarat High Court decision, the Court emphasized that even if the number of shares remains the same, a reduction in value can constitute an extinguishment of rights. In the present case, a clear sale had occurred when the company redeemed the shares, resulting in the relinquishment and extinguishment of the assessee's rights in the shares.Ultimately, the Court concluded that the redemption of the preference shares amounted to a transfer under section 2(47) of the Income-tax Act, attracting tax liability on the amount received by the assessee. The judgment favored the Commissioner's position, holding the assessee accountable for capital gains tax on the transaction. The Court ruled in favor of the tax authorities, affirming the taxability of the amount received by the assessee and directing the applicant to bear the costs of the reference.