- (1.) At all material times, the respondent who is the assessee was a shareholder in M/s. Kasthuri Estates (Pvt.) Ltd., Madras. During the accounting period relevant to the assessment year 1963-64, the assessee held 70 shares in M/s. Kasthuri Estates (Pvt.) Ltd. The face value of each share was Rs. 1,000/-. During the said accounting period, the said company passed a resolution to reduce its capital. The procedure prescribed under the Companies Act for the reduction of share capital was undergone. An appropriate order was obtained from the Court. The reduction was given effect on and from 26-5-1962. As a result, the face value of the shares in the company was reduced from Rs. 1,000/- each to Rs. 210/- each. As a result of this reduction, there was a pro-rata distribution of some properties of the company and payment of money to the shareholders, including the assessee.
(2.) In the Income-tax proceedings connected with the property/amounts to received by the assessee on reduction of his share capital in the said company, the Tribunal was required to consider whether any capital gains accrued to the assessee. The Tribunal held that no capital gains accrued to the assessee. At the request of the department, the following two questions were referred by the Income-tax Appellate Tribunal, Madras Bench to the High Court for its opinion under Section 256 (1) of the Income-tax Act. These questions are : "1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in directing that a sum of Rs. 64,517/- being the deemed dividends assessed in the hands of the various shareholders in the past assessment years, should be deducted from the surplus while determining the 'accumulated profits' in the hands of the company 2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that no capital gain was assessable in the hands of the assessee as there was no extinguishment of any right of the assessee and consequently there was no transfer within the meaning of Section 2(47) of the Income-tax Act, 1961, by the assessee of any capital asset for the assessment year 1963-64 -
(3.) Question No. 1 For the purpose of answering Question No. 1, some further material facts are as follows :;