TaxTMI 
TaxTMI 
1991 (6) TMI 107
X X X X Extracts X X X X
X X X X Extracts X X X X
....for some shares and Rs. 2,085 for some shares. The equity shares of Ballabgarh Private Ltd. Co. as on31-3-1982were valued at Rs. 150 each. It may be stated here that in the past on31-3-1981also these shares were valued plying same rate. These shares formed part of the opening stock on1-4-1982. During the current year, these equity shares were converted into preference shares. The equity shares in Partap Steel Rolling Mills Pvt. Ltd., Amritsar of the face value of Rs. 1,000 each were converted at par into 4% fully paid up irredeemable accumulative preference shares of Rs. 1,000 each. Similarly, equity shares in M/s. Partap Steel Rolling Mills Pvt. Ltd., Ballabgarh were converted into 4% fully paid up irredeemable accumulative preference share of Rs. 100 each at par. Both the companies converted its entire equity capital to preference capital on16th March, 1983. These preference shares were held by the assessee as stock in trade on31-3-1983. The assessee has been following the method of cost or market value whichever is lower for valuation of closing stock. Accordingly to find out the market value of preference shares and since they were upquoted to find out the market value, the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that it was only in order to keep the business running and in order to retain maximum funds with the concerned companies that it was decided to covert the whole of equity shares into preference shares. The CIT(A) found that the assessee was on the Board of Directors of these Companies and he did not resist passing of resolution regarding conversion even when the assessee was put to business loss by reduction in the value of the preference shares. According to the Commissioner (Appeals) the assessee was unable to state any reason why the assessee was a party to such conversion. Besides, the share-holders were only family members closely related to the assessee. Thus, according to him, the whole purpose of conversion was to take advantage of the different method of valuation prescribed for preference shares so as to incur huge business loss which would allow the assessee to wipe of all taxable income. This was not permissible for which guidance was drawn from the famous decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, observing that the Assessing Officer was justified in not allowing this loss disregarding the conversion of shares. The asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely :-- (a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax ; and (b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely :-- (i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding-up or repayment of capital ; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation : Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely :-- (i) that, as respect dividends, in addition to the preferential right....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of sub-rule (2) the market value of an unquoted preference share of any company shall-- (a) where the preference share is issued before the valuation date at a rate of dividend of not less than eight per cent, be the paid-up value of such share ; and (b) where the preference share is issued before the valuation date at a rate of dividend of less than eight per cent, be the adjusted paid-up value of such share. (2) Where no dividend has been paid in respect of an unquoted preference share by any company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date, the paid-up value or the adjusted paidup value, as the case may be..................... (b) in the case of a cumulative preference share, one-half of the rates specified in the aforesaid table. Explanation : For the purposes of this rule, "adjusted paid-up value", in relation to a preference share, means an amount which bears to the paid-up value of the preference share, the same proportion as the stip....