Income-tax---

----Capital gains---Transfer---Company---Surrender of shares in exchange for land---Transaction amounted to transfer---Surplus resulting from transaction assessable as capital gains---Indian Income Tax Act, 1961, Ss.2(47) & 45.

Section 2(47) of the Income Tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise that: there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to a sale, can also by considered as a transfer and any profit or gain which arises from the transfer of capital asset is liable to be taxed under section 45 of the Act. If an assessee surrenders some of his shares in a company the assessee continues to remain a shareholder but there is an extinguishment of part of his right as a. shareholder.

The assessee was an individual who surrendered 148 shares held by him in company C and received land belonging to the company in lieu of such surrender worth Rs.1,46,200. The Assessing Officer took the view that what was received would constitute dividend. The Commissioner of Income tax (Appeals) held that surrender of shares was a transfer within the meaning of section 2(47) of the Act and, therefore, the surplus resulting from such transaction was liable to be taxed as capital gain. The Tribunal, however, held that the surplus did not constitute capital gains. On a reference:

Held, that the surplus resulting from the surrender of shares in exchange for land was assessable as capital gains.

Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163 (SC) fol.

CIT v. Kulu Valley Transport Co. (Pvt.) Ltd. (1970) 77 ITR 518 (SC); CIT v. G. Narasimhan (1979) 118 1TR 60 (Mad.) and Kartikeya. V. Sarabhai v. CIT (1982) 138 ITR 425 (Guj.) ref.

P.K.R. Menon and N.R.K. Nair for the Commissioner.

JUDGMENT

P. A. MOHAMMED, J.---The question referred to us for decision in this tax reference case is as follows:

"Whether, on the facts and in the circumstances of the case, will reduction of share capital resulting in release of assets attract capital gains in the hands of the shareholders?"

The applicant before us is the Commissioner, of Income-tax, Trivandrum, and the respondent is the assessee. The assesses is an individual who surrendered' 148 shares held by him in Cavunal Rubber Estate (P.) Limited, and received land belonging to the company in lieu of such surrender worth Rs.1,46,200: The Assessing Officer took the view that what is received by the assessee would constitute "dividend" within the meaning of section 2(22)(d) and surrender of 148 shares and receiving the lands thereon would constitute "transfer" and, therefore, would be liable to tax. As against the said decision an appeal was filed before the Commissioner of Income-tax (Appeals) who held that surrender of shares was a transfer within the meaning of section 2(47) of the Act and, therefore, the surplus resulting from such transaction was liable to be taxed as capital gain. Then the matter went up in second appeal before the Appellate Tribunal. The Tribunal following the decision of` the Madras High Court in CIT v. G. Narasimhan (1979) 118 ITR 60, answered the question in favour of the assessee. The Department is aggrieved by the aforesaid decision of the Tribunal.

Learned senior standing counsel for the Department submitted that the question is now fully covered in favour of the Department in view of the decision of the Supreme Court in Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163. The Supreme Court affirmed the decision of the Gujarat High Court in Kartikey V. Sarabhai v. CIT (1982) 138'ITR 425. The Tribunal decided in favour of the assessee placing reliance on the decision of the Madras High Court in CIT v. G. Narasimhan (1979) 118 ITR 60. At the same time the Tribunal noted the contrary view taken by the Gujarat High Court in Kartikey V. Sarabhai v. CIT (1982) 138 ITR 425. When two views are possible, the view which is favourable to the -assessee is to be-adopted in view of the decision of the Supreme Court in CIT v. Kulu Valley Transport Co. (Pvt.) Ltd. (1970) 77 ITR 518. That was why the Tribunal accepted the? view taken by the Madras High Court in CIT v. G. Narasimhan (1979) 118 ITR 60. But this view will be available till the Supreme Court finally pronounces on the question. Now, the Supreme Court finally decided question in Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163 against the assessee. This Court is, therefore, bound to follow the decision 'of the Supreme Court.

Now, let us see what the Supreme Court said in Kartikeya V. Sarabhai v. CIT (1997) 228 ITR 163 (page 168):

"Section 2(47) which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While it is no doubt true that the appellant continues to remain a shareholder of the company even with the reduction of share capital, it is not possible to accept the contention that there has been no extinguishment of any part of his right as a shareholder qua the company. It is not necessary for a capital gain to arise that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. (emphasis supplied). Relinquishment of the asset or the extinguishment of any right in it, which may not amount to a sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act. "

Thus, the position is now well-settled and, therefore, this reference can only be decided in favour of the Revenue. The question referred to us is accordingly answered in the affirmative, that is to say in favour of the Department and against the assessee.

A copy of the judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-Tax Appellate Tribunal, Cochin Bench, as required by law.

M.B.A./4067/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.