Whether the amount received on redemption of preference shares was a transfer for the purpose of capital gains tax liability or whether it was deemed dividend ???
Income Tax Appellate Tribunal Mumbai Bench in the case of Parle Biscuits P. Ltd., Mumbai V/s. Department Of Income Tax held that that redemption of preference shares amounts to ‘transfer’ of capital asset which is subject to capital gains under Section 45 of the Income- tax Act 1961 (the Act) and any loss on redemption thereon would be allowable as a capital loss Thus, amount received on redemption of preference shares cannot be taxed as ‘deemed dividend’. The sum received amounts to ‘transfer’ of a capital asset under the Income-tax Act and any loss on redemption thereon would thus be allowable as a capital Loss.
FACTS OF CASE:
· The Parle Biscuits P. Ltd. (Taxpayer) is engaged in manufacture of biscuits under the brand name of Parle-G, Krackjack, Monaco, Nimkin etc. The taxpayer was allotted preference shares in two Indian companies.
· Taxpayer claimed capital loss of 35,58,718/- on account of redemption of preference shares. The total consideration received by assessee on redemption of preference shares has two categories. The preference shares are of SFR Ltd. and Himachal Futuristics Communications Ltd
· The preference shares were redeemed and the taxpayer relying on the decision of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) treated the amount received as a ‘transfer’ under Section 2(47) of the Act for the purpose of capital gains tax liability.
· Taxpayer claimed indexation benefit on cost of acquisition of 2 crores thereby arriving at the cost of acquisition at 2,35,58,7 18/-The taxpayer claimed indexation benefit on the cost of acquisition and the resultant difference was claimed as capital loss.
· The Assessing Officer (AO) relying on the decision of CIT V/s G. Narasimhan [1999] 236 ITR 327(S.C) held the amount received on redemption of preference shares was treated as deemed dividend under Section 2(22)(d) of the Act, Thus the question of allowing the loss did not arise. The AO thus disallowed the capital loss relating to redemption of preference shares.
· Aggrieved by the Order of the Assessing Officer, assessee contended before the learned CIT (A) that the view taken by the Assessing Officer is not in accordance with law. The taxpayer contended that since the shares were non-participating preference shares, they were covered under the exception of the definition of deemed dividend. Accordingly, the amount received on redemption of such preference shares was not taxable as deemed dividend under Section 2(22)(d) of the Act
· The Taxpayer relying on decision of court contended that redemption of preference shares amounts to transfer for the purpose of capital gains tax liability.
JUDGEMENT
· The Tribunal, relied on the Supreme Court decisions in the case of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) and Kartikeya Sarabhai v. CIT [1997] 228 ITR 163 (SC), held that redemption of preference shares has to be considered as ‘transfer’ under Section 2(47) of the Act and loss on redemption thereof is an allowable long-term capital loss.
· Further, the Tribunal observed that even if for the purpose of argument, the consideration is deemed as dividend, the same amount of consideration cannot be considered at the time of computing capital gains on redemption, and therefore, the assessee may be entitled to a higher loss on redemption.
· On analyzing the implications of section 2(22)(d) of the Act, the Tribunal held that since there is no reduction of capital in the given case, considering section 80(3) of the Companies Act, 1956 even though the amounts were distributed out of accumulated profits, the amounts received by the assessee cannot be construed as ‘deemed dividend’ and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.
CONCLUSION
This is an important Judgment by Mumbai ITAT as in the above quoted case there was no reduction of share capital considering section 80(3) under the provisions of Companies Act, 1956. Therefore the amount received on redemption of preference share did not result into deemed dividend and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.
Hope the information will assist you in your Professional endeavors. In case of any query / information, please do not hesitate to write back to us.
Nice explanation.