TaxTMI 
TaxTMI 
2016 (4) TMI 307
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....Y. 2005-06 dated 14.12.2007, the assessee preferred an appeal before the CIT(A). On further appeal by the assessee, the Coordinate Bench of this Tribunal in its order in ITA No. 8758/Mum/2011 dated 08.01.2014 allowed the assessee's appeal for statistical purposes by remanding the matter to the file of learned CIT(A) for adjudication afresh after affording adequate opportunity of being heard to the assessee. 2.3 In the second round, the learned CIT(A), after considering the assessee's submission put forth vide letter dated 06.05.2014, upheld the action of the Assessing Officer (AO) in treating the amount of Rs. 20,74,170/- received by the assessee on redemption of preference shares as dividend under section 2(22)(d) of the Act. The learned CIT(A) accordingly dismissed the assessee's appeal vide the impugned order dated 13.05.2014. 3. Aggrieved by the order of the CIT(A)-28, Mumbai dated 13.05.2014 for A.Y. 2005-06, the assessee has preferred this appeal raising the following grounds: - "1. The Learned Commissioner of Income-Tax (Appeals) has erred in Law and facts in passing the order u/s. 250 of the Act. 2. The Learned Commissioner of Income-Tax (Appeals) has erred in l....
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....ce the additional grounds raised (supra) pertain to legal issue that goes to the root of the matter and that all facts in the matter already form part of the record, the same may be admitted for consideration and adjudication in the interest of justice and equity. We accordingly admit the additional grounds raised by the assessee for consideration and adjudication in this appeal. 5. Grounds of appeal at S.Nos. 1 to 5: Addition under section 2(22)(d) on account of Redemption of Preference Shares - Rs. 20,74,170/- 5.1.1 In the above grounds, the assessee assails the impugned order of the learned CIT(A) in upholding the addition of Rs. 20,74,170/- made by the AO on account of dividend under section 2(22)(d) of the Act on redemption of preference shares without appreciating that the redemption is made out of original amount of shares allotted and that such redemption does not result in distribution of assets to constitute reduction of capital as stated in section 2(22)(d) of the Act. The learned A.R. for the assessee reiterated the submission put forth before the learned CIT(A). It was contended that the said redeemable preference shares numbering 2,07,417 received by the assesse....
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.... of accumulated profits by way of reduction of share capital. 5.2 Per contra, the learned D.R. for Revenue supported the impugned order of the learned CIT(A). It was submitted that the learned CIT(A), after considering the assessee's submissions and also the provisions of section 80(3) and 100 of the Companies Act, 1956 and section 2(22)(d) of the Act held that redemption of preference shares amounts to reduction of capital. The learned D.R. further submitted that the learned CIT(A) was correctly of the view that since no payment had been made by the assessee towards acquisition of the redeemable preference shares allotted to him, this amounted to reduction in share capital and accordingly the amount received by the assessee on redemption of the redeemable preference shares amounted to receipt of dividend and the provisions of section 2(22)(d) of the Act would apply in the case on hand. 5.3 In rejoinder, the learned A.R. for the assessee pointed out that the redeemable preference shares received by the assessee were not received free of cost as contended but were received in lieu of the assessee's credit balance lying with the erstwhile firm which was converted/corporatized i....
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....ence for valuable consideration. In this factual matrix, it is evidently clear that there is no distribution of accumulated profits by the company to its shareholders by redemption of the preference shares at par resulting in reduction of authorised share capital and therefore the provisions of section 2(22)(d) of the Act would not apply in the case on hand. Section 80(3) of the Companies Act, 1956 states that the redemption of preference shares cannot be considered as reduction of authorised share capital and therefore treating the same as deemed dividend under section 2(22)(d) of the Act does not arise as the same can be invoked only when there is distribution of accumulated profits by way of reduction of share capital. 5.4.3 In coming to this finding we draw support from the decision of the Coordinate Bench of this Tribunal in the case of Parle Biscuits Pvt. Ltd. in ITA Nos. 5318 & 5319/Mum/2008 and 447/Mum/2009 dated 19.08.2001 wherein in a similar factual situation the Coordinate Bench had held that since in the facts of the case there is no reduction of authorised share capital as per the provisions of section 80(3) of the Companies Act, 1956 which states that redemption o....
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.... Act. The appellant had purchased preference shares in a company at less than their face value and held them as capital assets. The company redeemed them at their face value: Held accordingly, that the difference between the sum received by the appellant on redemption of the shares and the sum earlier paid by her for purchasing them, was taxable as capital gains." 38. Similar issue was also considered by Hon'ble Supreme Court in the case of Kartikeya Sarabhai vs. CIT 228 ITR 163 where there is reduction in face value of shares, the definition of transfer were discussed and held as under: - "Section 2(47) of the Income-tax Act, 1961, defines "transfer" in relation to a capital asset. It is an inclusive definition which, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or extinguishment of any right in it, which may not amount to a sale, can also be considered as a transfer and any pr....
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..... ....... (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;" 41. As can be seen by the above provision, there should be a reduction of its capital and distribution to the shareholders out of the accumulated profits. Section 80(3) of the Companies Act states that the redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorised share capital. By virtue of section 80(3) redemption of preference shares cannot be considered as reduction of authorised share capital, therefore, treating them as deemed dividend does not arise, as the provisions of section 2(22)(d) can only be invoked only when there is distribution of accumulated profits by way of reduction of share capital. On the facts of the case, assessee has purchased the preferential shares at a cost of Rs. 2 crores and they were redeemed at the same price of Rs. 2 crores. Therefore the question of invoking ....
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....gains would have to be determined. The Tribunal, while computing capital gains, would have to decide how this property should be valued for the purpose of deciding what the assessee had received on reduction in the value of his shares, and whether any capital gains had accrued to the assessee or not. This question was not required to be considered by the Tribunal because the Tribunal came to the conclusion that there being no transfer of any capital asset, the question of capital gains did not arise. But the question would now have to be considered and decided by the Tribunal when the matter went back before it for the determination of capital gains." 42. It was further held that thus the amount distributed by a company on reduction of its share capital has two components, i.e. distribution attributable to accumulated profits and distribution attributable to capital (except capitalised profits). To the extent of accumulated profits whether such accumulated profits are capitalised or not, the return to the shareholder on reduction of share capital is a return of such accumulated profits. This part of it is taxable as dividend. The balance may be subject to tax as capital gain, if....