Tax Ruling: Notional premium on preference shares not taxable annually

The Tribunal ruled in ITA No.2332/Bang/2019 that notional premium receivable on preference shares cannot be taxed annually on an accrual basis, disagreeing with the Revenue's stance. In ITA No.2550/Bang/2019, the Tribunal disallowed the deduction of interest on delayed TDS remittance based on the decision in CIT Vs. Chennai Properties and Investments Ltd. Additionally, the Tribunal remanded the issue of sundry creditors/trade payables to the AO for fresh consideration due to procedural irregularities by the CIT(A).

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Issues Involved:
- Taxability of notional premium receivable on preference shares.
- Allowability of interest on delayed remittance of TDS.
- Addition of sundry creditors/trade payables.

Issue-wise Detailed Analysis:

1. Taxability of Notional Premium Receivable on Preference Shares:

The primary issue in ITA No.2332/Bang/2019 was whether the Revenue authorities were justified in adding Rs.17,09,02,887/- as notional premium receivable on preference shares as income. The assessee initially declared this amount as "Premium accrued on Redeemable Preference shares" under "Income from Other Sources" but later revised the return, claiming it should be taxed only upon redemption as capital gains.

The AO argued that the preference shares had features of both equity and debt, with assured financial benefits akin to interest, and thus should be taxed on an accrual basis. The AO also suggested that if treated as equity, the dividend would accrue regardless of declaration, and thus expenses related to earning such exempt income should be disallowed under Section 14A.

The CIT(A) concurred with the AO, treating the preference shares as a hybrid instrument and taxing the premium on an accrual basis. The CIT(A) relied on Indian Accounting Standards (Ind AS)-32, which classifies redeemable preference shares as financial liabilities due to the obligation to redeem.

The Tribunal, however, disagreed with the Revenue's stance, emphasizing that the preference shares could not be treated as debt. The Tribunal noted that the premium on redemption could only be paid out of profits or reserves, and thus could not be considered as accrued income. The Tribunal also referenced the decision of the Hon'ble Bombay High Court in the case of Enam Securities Pvt. Ltd., which distinguished between bonds/debentures and preference shares, affirming that preference shares are not debt instruments. Consequently, the Tribunal held that the notional premium could not be taxed annually on an accrual basis and directed its deletion.

2. Allowability of Interest on Delayed Remittance of TDS:

In ITA No.2550/Bang/2019, the Revenue challenged the CIT(A)'s decision allowing the deduction of interest on delayed remittance of TDS. The AO had disallowed Rs.1,27,53,372/- debited as interest on delayed payment of tax, treating it as non-deductible.

The CIT(A) allowed the deduction, distinguishing the interest as compensatory rather than penal, relying on the ITAT Kolkata's decision in DCIT vs. Narayani Ispat Pvt Ltd and the Hon'ble Supreme Court's decision in Lachmandas Mathura vs CIT.

The Tribunal, however, reversed the CIT(A)'s decision regarding the sum of Rs.38,32,459/- related to delayed TDS remittance, following the Hon'ble Madras High Court's decision in CIT Vs. Chennai Properties and Investments Ltd., which held that such interest is not compensatory and thus not deductible.

3. Addition of Sundry Creditors/Trade Payables:

The AO added Rs.8,09,73,776/- as unexplained trade payables, citing the assessee's failure to prove the genuineness and creditworthiness of the credits. The CIT(A) deleted most of the additions after considering additional evidence provided by the assessee, which included ledger extracts, confirmation of balances, PAN numbers, addresses, and reconciliation statements.

The Revenue contended that the CIT(A) admitted additional evidence without remanding it to the AO as required under Rule 46A. The Tribunal agreed with the Revenue, noting that the CIT(A) did not follow the procedure under Rule 46A, which mandates allowing the AO to examine the additional evidence. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and remanded it to the AO for fresh consideration, directing the AO to examine the additional evidence and decide the matter afresh.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the taxability of notional premium on preference shares, holding that it could not be taxed on an accrual basis. The Tribunal partly allowed the Revenue's appeal, disallowing the interest on delayed TDS remittance and remanding the issue of sundry creditors/trade payables to the AO for fresh consideration.

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