2016 (4) TMI 307 - AT - Income Tax

Deemed dividend u/s. 2(22)(d) - redemption of the preference shares at face value - Held that - Respectfully following the decision of the Coordinate Bench of this Tribunal in the case of Parle Biscuits Pvt. Ltd. 2011 (8) TMI 1176 - ITAT MUMBAI , which is factually and legally similar and therefore applicable in the factual and legal matrix of the case on hand, we hold that in terms of section 80(3) of the Companies Act, 1956, there is no reduction in the authorised share capital of the company, M.s Enviro Control Associates India Pvt. Ltd. by virtue of the redemption of the aforesaid preference shares at face value, which were acquired by the assessee for valuable consideration in lieu of its credit balance in his capital account with the erstwhile firm and therefore this amount does not fall within the definition of deemed dividend under section 2(22)(d) of the Act and cannot be treated as such. We, therefore, delete this addition made under section 2(22)(d) of the Act by the AO - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition under section 2(22)(d) on account of deemed dividend from redemption of preference shares.
2. Applicability of section 10(34) for exemption of the deemed dividend.

Detailed Analysis:

1. Addition under section 2(22)(d) on account of deemed dividend from redemption of preference shares:

The primary issue in this appeal is whether the amount of ?20,74,170 received by the assessee on redemption of preference shares constitutes a deemed dividend under section 2(22)(d) of the Income Tax Act. The assessee argued that the redemption was made out of the original amount of shares allotted for valuable consideration, and thus, it did not result in a distribution of assets or reduction of capital as per section 2(22)(d).

The Tribunal considered the factual matrix where the assessee received redeemable preference shares in lieu of his credit balance with the erstwhile firm, which was converted into a private limited company. The Tribunal noted that the redemption of preference shares at par did not lead to a reduction in the company's authorized share capital, as per section 80(3) of the Companies Act, 1956. Consequently, the provisions of section 2(22)(d) were deemed inapplicable since there was no distribution of accumulated profits.

The Tribunal referenced the decision in the case of Parle Biscuits Pvt. Ltd., which held that redemption of preference shares does not equate to a reduction of authorized share capital and thus cannot be treated as deemed dividend under section 2(22)(d). Following this precedent, the Tribunal concluded that the addition made by the AO and upheld by the CIT(A) was factually unsustainable and deleted the addition of ?20,74,170.

2. Applicability of section 10(34) for exemption of the deemed dividend:

The assessee raised additional grounds arguing that even if section 2(22)(d) was applicable, the amount of deemed dividend would be exempt under section 10(34) of the Act. The Tribunal, however, did not find it necessary to adjudicate this issue since the primary grievance was resolved by deleting the addition under section 2(22)(d).

Conclusion:

The Tribunal allowed the appeal, holding that the redemption of preference shares did not result in a reduction of the authorized share capital and thus did not attract the provisions of section 2(22)(d). Consequently, the addition of ?20,74,170 as deemed dividend was deleted, and the necessity to address the additional grounds regarding exemption under section 10(34) was obviated.