The company redeemed my preference shares and paid me the face value. Is that a transfer, or just a repayment?
It is a transfer. When a company redeems its preference shares the shareholder has to give up, abandon or surrender the shares in order to get the money, which is a relinquishment; and in substance the shareholder sells the shares to the company. The gain is chargeable under s.45.
Decided by the Supreme Court (Supreme Court of India (S.C. Agrawal and Suhas C. Sen, JJ.), Civil Appeal No. 541 of 1983) on 1997-01-24, reported as (1997) 224 ITR 422 (SC) / [1997] 90 Taxman 509 (SC) / [1997] 138 CTR 253 (SC) / [1997] 11 SCL 121 (SC) / (1997) 3 SCC 238. It bears on section 2(47), section 45 of the Income Tax Act 1961, in Capital Gains matters.
The instinctive argument on a redemption is that nothing moves to anybody - the shares are cancelled and the company merely returns capital - so there is no transfer and no charge. This decision closes that argument off, and it does so on the first limb of s.2(47), sale or relinquishment, rather than on the extinguishment limb. It cuts both ways: the same reasoning is what allows a loss on redemption to be claimed as a capital loss, and what keeps the receipt out of the deemed dividend provisions.
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The assessee, an individual, held 297 redeemable preference shares of Universal Corporation Private Limited of face value Rs. 1,000 each, which she had bought for Rs. 2,68,550. The company redeemed the shares and she received their total face value of Rs. 2,97,000, exceeding what she had paid by Rs. 30,450. The Income-tax Officer taxed that difference as capital gain under s.45. The assessee's case was that redemption is not a transfer within s.2(47) - neither a sale, exchange or relinquishment of the asset under clause (i) nor an extinguishment of any rights therein under clause (ii), 'therein' implying the continued existence of the asset. The Appellate Assistant Commissioner, the Tribunal and the Gujarat High Court all decided against her. The assessment year is 1969-70, the year of account being the calendar year 1968. The High Court granted a certificate of fitness under s.261 because it had taken a view contrary to that of the Madras High Court on the question.
The appeal was dismissed and the judgment of the Gujarat High Court affirmed, with no order as to costs. Redemption of preference shares by the company falls squarely within clause (i) of s.2(47) - the sale, exchange or relinquishment of the asset - so the surplus is chargeable under s.45. The shares were held as capital assets. Because the case fell within clause (i), the Court expressly declined to express any opinion on the assessee's further contention that clause (ii), the extinguishment limb, could not be invoked where the share itself stood extinguished by redemption.
The Court took two independent routes to the same result. On relinquishment, s.2(47) is an inclusive and not an exhaustive definition, and clause (i) implies parting with a capital asset for gain; to get the redemption money the assessee had to give up or abandon or surrender her shares, and the Court took the dictionary sense of 'relinquish' - to give up, abandon, surrender - as covering exactly that (para 5). On sale, the Court read ss.77, 80 and 85 of the Companies Act, 1956 together. Section 77(1) forbids a company limited by shares from buying its own shares, and sub-section (5) was needed to save the right to redeem shares issued under s.80; that saving would have been unnecessary if redemption were not a purchase. What the company does on redemption is pay the shareholder the value of the shares and take the shares back - in effect it buys them back, and what the shareholder does is sell them to the company (paras 7 to 9). The Court approved the Bombay High Court's decision in Sath Gwaldas Mathuradas Mohata Trust, and noted the Gujarat High Court's reliance on Buckley and Pennington for the proposition that every return of capital is pro tanto a purchase of the shareholder's rights. It distinguished the authorities pressed for the assessee: CIT v. R.M. Amin [1977] 106 ITR 368 (SC) concerned distribution on liquidation, not this; Sunil Siddharthbhai concerned a partner's contribution of assets to a firm; Rasiklal Maneklal concerned amalgamation, where there was neither exchange nor relinquishment; and Vania Silk Mills concerned insurance money for destroyed machinery and was of no assistance.
In order to get this amount the assessee had to give up or abandon or surrender the shares held by her.
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Handle my notice → Ask a CA on WhatsAppIt is a transfer. When a company redeems its preference shares the shareholder has to give up, abandon or surrender the shares in order to get the money, which is a relinquishment; and in substance the shareholder sells the shares to the company. The gain is chargeable under s.45. This was decided by the Supreme Court (Supreme Court of India (S.C. Agrawal and Suhas C. Sen, JJ.), Civil Appeal No. 541 of 1983) and bears on section 2(47), section 45 of the Income Tax Act 1961. It is reported as (1997) 224 ITR 422 (SC) / [1997] 90 Taxman 509 (SC) / [1997] 138 CTR 253 (SC) / [1997] 11 SCL 121 (SC) / (1997) 3 SCC 238. The instinctive argument on a redemption is that nothing moves to anybody - the shares are cancelled and the company merely returns capital - so there is no transfer and no charge. This decision closes that argument off, and it does so on the first limb of s.2(47), sale or relinquishment, rather than on the extinguishment limb. It cuts both ways: the same reasoning is what allows a loss on redemption to be claimed as a capital loss, and what keeps the receipt out of the deemed dividend provisions. If it applies to you, the first step is this: Compute the gain or loss on redemption as a capital gain under s.45, taking the redemption proceeds as full value of consideration and the actual cost of the shares as cost of acquisition.
The assessee, an individual, held 297 redeemable preference shares of Universal Corporation Private Limited of face value Rs. 1,000 each, which she had bought for Rs. 2,68,550. The company redeemed the shares and she received their total face value of Rs. 2,97,000, exceeding what she had paid by Rs. 30,450. The Income-tax Officer taxed that difference as capital gain under s.45. The assessee's case was that redemption is not a transfer within s.2(47) - neither a sale, exchange or relinquishment of the asset under clause (i) nor an extinguishment of any rights therein under clause (ii), 'therein' implying the continued existence of the asset. The Appellate Assistant Commissioner, the Tribunal and the Gujarat High Court all decided against her. The assessment year is 1969-70, the year of account being the calendar year 1968. The High Court granted a certificate of fitness under s.261 because it had taken a view contrary to that of the Madras High Court on the question. The matter was decided on 1997-01-24 by the Supreme Court (Supreme Court of India (S.C. Agrawal and Suhas C. Sen, JJ.), Civil Appeal No. 541 of 1983). On those facts the Supreme Court held as follows. The appeal was dismissed and the judgment of the Gujarat High Court affirmed, with no order as to costs. Redemption of preference shares by the company falls squarely within clause (i) of s.2(47) - the sale, exchange or relinquishment of the asset - so the surplus is chargeable under s.45. The shares were held as capital assets. Because the case fell within clause (i), the Court expressly declined to express any opinion on the assessee's further contention that clause (ii), the extinguishment limb, could not be invoked where the share itself stood extinguished by redemption.
The Court took two independent routes to the same result. On relinquishment, s.2(47) is an inclusive and not an exhaustive definition, and clause (i) implies parting with a capital asset for gain; to get the redemption money the assessee had to give up or abandon or surrender her shares, and the Court took the dictionary sense of 'relinquish' - to give up, abandon, surrender - as covering exactly that (para 5). On sale, the Court read ss.77, 80 and 85 of the Companies Act, 1956 together. Section 77(1) forbids a company limited by shares from buying its own shares, and sub-section (5) was needed to save the right to redeem shares issued under s.80; that saving would have been unnecessary if redemption were not a purchase. What the company does on redemption is pay the shareholder the value of the shares and take the shares back - in effect it buys them back, and what the shareholder does is sell them to the company (paras 7 to 9). The Court approved the Bombay High Court's decision in Sath Gwaldas Mathuradas Mohata Trust, and noted the Gujarat High Court's reliance on Buckley and Pennington for the proposition that every return of capital is pro tanto a purchase of the shareholder's rights. It distinguished the authorities pressed for the assessee: CIT v. R.M. Amin [1977] 106 ITR 368 (SC) concerned distribution on liquidation, not this; Sunil Siddharthbhai concerned a partner's contribution of assets to a firm; Rasiklal Maneklal concerned amalgamation, where there was neither exchange nor relinquishment; and Vania Silk Mills concerned insurance money for destroyed machinery and was of no assistance. In the words reproduced by the source cited on this page: "In order to get this amount the assessee had to give up or abandon or surrender the shares held by her." The decision followed or applied Sath Gwaldas Mathuradas Mohata Trust v. CIT [1987] 165 ITR 620 / 33 Taxman 328 (Bom.) - approved; Anarkali Sarabhai v. CIT [1982] 138 ITR 437 / [1983] 12 Taxman 120 (Guj.) - the judgment under appeal, affirmed.
It was decided by the Supreme Court on 1997-01-24 and is reported as (1997) 224 ITR 422 (SC) / [1997] 90 Taxman 509 (SC) / [1997] 138 CTR 253 (SC) / [1997] 11 SCL 121 (SC) / (1997) 3 SCC 238. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(47), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed and the judgment of the Gujarat High Court affirmed, with no order as to costs. Redemption of preference shares by the company falls squarely within clause (i) of s.2(47) - the sale, exchange or relinquishment of the asset - so the surplus is chargeable under s.45. The shares were held as capital assets. Because the case fell within clause (i), the Court expressly declined to express any opinion on the assessee's further contention that clause (ii), the extinguishment limb, could not be invoked where the share itself stood extinguished by redemption. It arises in Capital Gains matters, on section 2(47), section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India (S.C. Agrawal and Suhas C. Sen, JJ.), Civil Appeal No. 541 of 1983. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the holding period from the date of acquisition of the preference shares to the date of redemption before deciding whether the gain is short-term or long-term. Where the redemption produces a loss, claim it as a capital loss rather than writing it off, and rely on this decision for the proposition that there is a transfer. Keep the redemption distinct from a buy-back under s.115QA and from a distribution on liquidation under s.46, which have their own machinery.
Still good law. Applied by the Supreme Court in PCIT v. Jupiter Capital (P.) Ltd. [2025] 170 taxmann.com 305 / 303 Taxman 95 / 472 ITR 616 (SC), order of 2 January 2025 (J.B. Pardiwala and R. Mahadevan, JJ.), at para 17: that Court took this decision as holding that both reduction of share capital and redemption of shares involve the purchase by a company of its own shares and so fall within transfer under s.2(47). It had earlier been discussed at length by the Supreme Court in Kartikeya V. Sarabhai v. CIT [1997] 94 Taxman 164 / 228 ITR 163 (SC), which treated it as applicable to a reduction of capital, the only difference being that redemption there was in entirety while a reduction is partial. Nothing found overrules, doubts or narrows it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read in full from the numbered paragraphs. Three points. First, the decision rests on clause (i) of s.2(47) - sale, exchange or relinquishment - and the Court said in terms that, the case falling within clause (i), it was not necessary to express any opinion on whether the extinguishment limb in clause (ii) applies where the share itself is extinguished by redemption. Second, the entry previously warned against carrying this decision across to a reduction of share capital. That warning goes too far, and in the wrong direction: the Supreme Court has since done exactly that, in Kartikeya V. Sarabhai and again in PCIT v. Jupiter Capital, and it did so under the same clause (i) rather than under the extinguishment limb. What the decision does not reach is a buy-back of equity shares under the modern statutory scheme. Third, two printing slips in the report: the case review gives the Bombay decision approved as [1987] 155 ITR 620 while the cases-referred list and para 16 give 165 ITR 620, and para 23 records the judgment under appeal as dated 18/22-8-1992 when the Gujarat High Court decided it on 18 August 1982. The Court did not decide whether the extinguishment limb of s.2(47) applies to redemption, having found clause (i) enough. The judgment does not tell you how to compute the period of holding where preference shares were issued on conversion or as bonus, and it says nothing about how a premium on redemption paid out of accumulated profits interacts with s.2(22) - both provisions, and s.115QA, post-date or fall outside what was argued. It is decided under the Companies Act, 1956; the later Supreme Court order in Jupiter Capital works from s.66 of the Companies Act, 2013. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and the judgment of the Gujarat High Court affirmed, with no order as to costs. Redemption of preference shares by the company falls squarely within clause (i) of s.2(47) - the sale, exchange or relinquishment of the asset - so the surplus is chargeable under s.45. The shares were held as capital assets. Because the case fell within clause (i), the Court expressly declined to express any opinion on the assessee's further contention that clause (ii), the extinguishment limb, could not be invoked where the share itself stood extinguished by redemption.
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