Tribunal allows appeal on CCPS conversion, remands notional interest issue for further review.

The Tribunal partially allowed the appeal by deleting the addition for the conversion of Cumulative Compulsory Convertible Preference Shares (CCPS) into equity shares, stating it did not constitute a transfer under the Income Tax Act. The issue of notional interest on the capital balance in the partnership firm was sent back to the Assessing Officer for further examination. As the first issue was resolved in favor of the assessee, the assessment under Minimum Alternate Tax (MAT) computation became academic and was not further addressed.

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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 Rs. 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 Rs. 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.

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