Capital Gain Ta

Tax queries 1385 views 2 replies

Muralidharan

Self Employed

1035 Points Joined December 2008

During the financial year 2002-03 a closely held public company had issued 1% non-cumulative redeemable convertible preference shares for Rs.3.00 crores. (30 lac 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 had attracted the provisions of capital gains tax.
(2) Whether the allottees who got equity shares on 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.

Looking forward for your reply.

Thanking you,

with regards
Muralidharan

Replies (2)

Manoj BG

Tax Professional and in Service

1795 Points Joined June 2009

Hi Murlidharan,

First of all, thanks for such a nice case u presented here.

Since the transaction of transfer of preference share for equity share would not be covered under exceptional list under sec 2(47) of the income tax act, it would liable to tax under income tax act.

1. No tax would be liable to be paid by the company as the company is setting off its liability with another liability and there is no capital asset involved. Thus, company not liable to pay any capital gain tax.

2. Secondly, Allotees liable to pay capital gain tax as follows ::

a. Fair market value on the date of conversion would be the full value of consideration/.

b. Allotees can take the indexation benefit if prefence shares hold for more than 12 months.

c. Cost of acquisition is the original cost at which preference shares were purchased.

3. Indexation benefits deinately allowable since the prefence share is a long term capital asset (i.e. hold fro more than 12 months.)

Hope this solves ur query.

Regards,

Manoj

CA Tarkeshwar

job

77 Points Joined August 2008

dear friend

: (1) conversion of the said preference shares into equity shares is a transfer under the definition of Transfer as provided by Sec 2(47) to include exchange or relinquishment of capital assets. Therefore, it attracts the provisions of capital gains tax.

(2) The FMV on the date of conversion of equity shares should be taken as Full value of consideration. Here the capital asset is the said preference shares, the holding period of which is 7 years, is a long term capital assets, therefore indexation benefit is available. Therefore the allotteee s are liable to pay capital gain tax for the difference in the fair market value of equitu share and indexed cost of acquisition of preference shares

(3) Yes indexation benefit is available

Since the issuer is not listed, no STT, therefore no benefit of 10(38) exemption