During the financial year 2002-03 a closely held public limited company had issued 1% non-cumulative redeemable convertible preference shares for Rs.3.00 crores. (30 lac preference shares of Rs. 10/- each). These preference shares can be redeemed or be converted into equity shares at the end of seven years. The company during the current financial year (2010-11) had converted the said preference shares into equity shares. The conversion has been made at par at Rs. 10/- each and accordingly the preference shareholders have been allotted 30 lac equity shares of Rs. 10/- each aggregating to Rs.3.00 crores. The fair market value of the equity shares of the closely held company is Rs. 32.00. In this connection my query is :
(1) whether the said conversion of preference shares into equity shares would attract the relevant provisions of capital gains tax under Income Tax Act. (2) Whether the allottees who got equity shares on such conversion is liable to pay capital gain tax for the difference in the fair market value and face value of shares (32 - 10 = 22). (3) Also kindly advise whether indexation benefits are available for such transaction.
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