Capital Gains on conversion of preference shares to equity s

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dhara (Querist)
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13 September 2009 How to compute capital gains in case of conversion of a Convertible preference shares to equity shares? ALso what shall be the Cost of Aquisition, Date of aquisition, etc. when the equity shares are sold?

CA Satheesh

CA Satheesh (Expert)
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13 September 2009 say u hav purchased 100 con Pref share @ 500 Your cost is 50000 Say date is D-1

on D- 2 it has been converted to equety share say 25 shares for 100 pref share market value is per share 2500 So your market value of share is 25 * 250 =75000

D-2 is your date of transfer & capital gain of rs 25 K is taxable

convertion of pref share is considered as deemed to be transfer & no exemption available
for convertion of debentute to equity exmp available Sec 47 ( deemed as not transfer )
as per Sec 2. 47 transfer include exchange

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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13 September 2009 Conversion of preference shares into equity shares is a transfer with in the meaning of section 2(47) of The Income tax act,1961 and there will be capital gain to the share holder on the date of allotment of equity shares in exchange of preference shares. The full consideration in this case shall be the fair market value of equity shares on the date of its allotment. Cost of acquisition is the cost of preference shares and the date of acquisition is the date of allotment/purchase of that shares.

Citation :- 1) CIT Vs. Motor and General Stores P Ltd (1967) 66ITR 692 (SC).
2) CIT Vs. Trustees of HEH Nizams Second Supplementary Family Trust (1976) 102 ITR 248(AP).

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dhara

dhara (Querist)
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14 September 2009 Hey thanks for your prompt and quick reply

Dhara

dhara

dhara (Querist)
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14 September 2009 Well I checked the relevant case laws mentioned which substantiates that the conversion of preference shares to equity shall be treated as exchange and hence transfer as defined in sec 2(47).

However there is no metion anywhere of the precise computation mechanism for computaion of capital gains as on the date of conversion.

In that case can we apply the case law of B C srinivasan shetty that in case the computation provision fails, capital gains cannot be effactuated.

Also Mr. Satheesh has provided the computation based on fair market value. However if possible can you provide some legal base to take this stand.

Thanks again.