2018 (11) TMI 859 - AT - Income Tax

Computation of capital gain - Addition on account of conversion of cumulative and compulsory convertible preference shares (CCPS) into equity shares treating the same as transfer within the meaning of section 2(47) - Held that - According to us, there is no leakage of revenue if such interpretation is adopted. Not only this interpretation would be in furtherance to the legislative intention but would also make the competition provision of capital gain work smoothly, in synchronization with other provisions, without any conflict with other provisions. On the other hand, if the view is adopted that capital gain tax liability arose upon conversion, the same would be not only against the legislative intention but also would make the composition of capital gain unworkable and would bring conflict with other provisions of the Act. In fact, the contrary interpretation would lead to double taxation in as much as, having taxed the capital gain upon such conversion, at the time of computing capital gain upon sale of such converted shares, the assessee would be still taxed again, as the cost of acquisition would still be adopted as the issue price of the CCPS and not the consideration adopted while levying capital gain upon such conversion. By so starch of imagination, such interpretation process is permissible. We are of the view that conversion of CCPS into equity shares cannot be treated as transfer within the meaning of Sec. 2(47) of the Act and hence, we delete the addition and allow this issue of assessee s appeal. Addition on account of notional interest @ 7% on capital balance in the partnership firm as income of the assessee - Before us, assessee contended that the deed was not modified pertaining to the below changes and thus, the same has not been registered with the Registrar of Firms - Held that - the supplementary deed entered by the assessee was duly executed on a stamp paper and as such, holds legal validity. Now, before us, ld. Counsel stated that even under section 40(b) of the Act, which provides the allowance for remuneration and interest expense of partners for a partnership firm does not provide for a requirement to have the partnership firm registered in order to allow the expenses in the hands of the firm. Even otherwise, the income has not accrued to the assessee we find that these facts need verification and hence, the same are restored back to the file of the AO. This issue of the assessee s appeal is allowed for statistical purposes. Assessment under MAT computation u/s 115JB in respect to long term capital gain added by AO on conversion of cumulative compulsory preference share into equity share and notional interest on capital balance - Since we have already adjudicated the first issue of long term capital gain in favour of assessee, gain not to be charged to capital gain and the issue of notional interest set aside to the file of the AO, this issue has been academic and hence needs no adjudication.

Summary

Issues Involved:
1. Addition on account of conversion of Cumulative Compulsory Convertible Preference Shares (CCPS) into equity shares.
2. Addition on account of notional interest on capital balance in the partnership firm.
3. Assessment under Minimum Alternate Tax (MAT) computation under section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition on Account of Conversion of CCPS into Equity Shares:
The primary issue in this appeal is the addition made by the Assessing Officer (AO) on account of the conversion of CCPS into equity shares, treating it as a transfer under section 2(47) of the Income Tax Act, 1961, and computing the long-term capital gain as per section 45 of the Act. The AO noted that the conversion of CCPS into equity shares constitutes a transfer and calculated the capital gain based on the market value difference, resulting in a taxable long-term capital gain of ?2,55,46,266/-. The CIT(A) upheld this view, relying on the decisions of the Hon’ble Bombay High Court and Andhra Pradesh High Court, which considered such conversions as transfers by way of exchange.

However, the assessee argued that the conversion was automatic and without any further consideration, referring to a CBDT circular dated 12.05.1984, which clarified that such conversions do not constitute a transfer of capital assets. The Tribunal, after considering the facts and the CBDT circular, held that the conversion of CCPS into equity shares does not amount to a transfer within the meaning of section 2(47) of the Act. The Tribunal emphasized that the conversion was compulsory and automatic, and the cost of acquisition for the purpose of computing capital gains should be the original cost of the CCPS. Consequently, the addition made by the AO was deleted.

2. Addition on Account of Notional Interest on Capital Balance in the Partnership Firm:
The second issue pertains to the addition of notional interest of ?6,91,418/- computed by the AO on the capital balance in the partnership firm. The AO added this amount based on the partnership deed, which provided for interest at 7% per annum on the capital balance. However, the assessee contended that a supplementary partnership deed, though not registered, had been executed, mutually deciding that no interest would be provided for the capital balance during the relevant year. The Tribunal found that these facts needed verification and restored the matter back to the AO for further examination. Thus, the issue was allowed for statistical purposes.

3. Assessment under MAT Computation under Section 115JB:
The third issue involved the assessment under MAT computation concerning the long-term capital gain added by the AO on the conversion of CCPS into equity shares and the notional interest on the capital balance. Since the Tribunal adjudicated the first issue in favor of the assessee, holding that the gain on conversion should not be charged to capital gains, and set aside the issue of notional interest for further verification, this issue became academic and required no further adjudication.

Conclusion:
In conclusion, the Tribunal allowed the appeal partly, deleting the addition on account of the conversion of CCPS into equity shares and restoring the issue of notional interest on the capital balance to the AO for verification. The assessment under MAT computation was rendered academic and did not require further adjudication. The order was pronounced in the open court on 09-11-2018.