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why it is...........is der any reason

abhishek (Chartered Accountant) (287 Points)

20 April 2010

Conversion of Debenture in to Equity is not liable to tax........but conversion of Preference Shares in to Equity is liable for tax........why it is.......i knw dat it is written in sec 47 but wat is the reason?????????

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17 Replies

Nicky (Chartered Accountant) (245 Points)
Replied 20 April 2010

See I haven’t read the intent of statute I am just giving my opinion:

When u sell a debenture you are doing nothing but taking back an advance you gave i.e. it is like a loan to the company vis-à-vis shares are ownership documents....

So it is like taking back a loan vis-à-vis becoming a owner..

In a loan you get back as much as u invest i.e. the principal amount only.. the difference is merely time value but for shares you are a part of future profits but are not guaranteed of principal amount..

I dont know whether this helps you demystify legislature intent but I have tried

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Max Payne (employed) (2574 Points)
Replied 20 April 2010

Nicky Sir,

Does conversion of preference share result in redemption as per the Companies Act?

I have a vague idea that this redemption of preference share is the reason why

conversion to equity amounts to transfer.

But i could be wrong. (even i am betting that I am wrong)

Nicky (Chartered Accountant) (245 Points)
Replied 20 April 2010

GK,

Compare this to a situation giving up a plot of land for another piece of land, is it transfer.. Yes

Simlarly, you are shifting from prefential ownership to equitable ownership, as in you right to get first divend goes but at the same time you are given voting rights...

No one is wrong all are learning here

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agrawalharishca (Chartered accountants) (138 Points)
Replied 20 April 2010

right

Max Payne (employed) (2574 Points)
Replied 20 April 2010

Nicky sir,

You mean a simple exchange transaction?

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Amir (Learner) (4016 Points)
Replied 20 April 2010

Hey friends,

Nice discussion.......!

I thot of replying to it first but then changed my mind...

I am confused just a wild guess, so pls help urself -

1) Either poor drafting (I mean Law maker just skipped it)

2) Practical life - For ur ease let me share that "the said clause was introduced by Finance Act 1991 w.r.e.f 1.4.1962.........

By the way can anyone tell me how many companies have issued Preference shares and out of them how many have converted thrm into equity in the said period of 30 years(from 1961 to 1991)??? - {Now don't throw this question back to me in case of debentures........:))}

Nicky (Chartered Accountant) (245 Points)
Replied 20 April 2010

G K: Ya Barter...

Amir: I guess the reason is clear a loan advanced cannot be compared to an investment but probably u may be right too

abhishek (STUDENT) (162 Points)
Replied 21 April 2010

dear dost nicky

u have explained in a very effective way

a person is getting equity shares just like a fresh money investment ( although invested in debentures only for interest).

and in preference it means total changeover.

but i was most impressed by this

"No one is wrong all are learning here"

Santhosh Poojary (SIEMPRE AHÍ PARA TI) (15607 Points)
Replied 21 April 2010

Originally posted by : Nicky
	GK, Compare this to a situation giving up a plot of land for another piece of land, is it transfer.. Yes Simlarly, you are shifting from prefential ownership to equitable ownership, as in you right to get first divend goes but at the same time you are given voting rights... No one is wrong all are learning here

"NO ONE IS WRONG ALL ARE LEARNING HERE"

GREAT WORDS NICKY SIR.....THANKS

Ashish Kukreja (CA Final Student) (587 Points)
Replied 21 April 2010

@ Abhishek Sir

Sir it is mentioned in Sec 47 of IT Act that Conversion of debentures into shares shall not be regarded as transfer..so it means Govt wants to encourage conversion of debentures into equity shares and not conversion of one class of shares to another.. and also in sec 81(4) of companies act the CG can convert debentures or company's borrowings from CG into shares by making such an order as if they thinks fit...Jab sarkar khud hi convert karwana chahti hai to janta ko bhi kyon rokegi..

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SACHIN KUMAR GARG (Final Student) (105 Points)
Replied 21 April 2010

Hi All

I feel glad to discuss with great mind in the field of commerce.

now comes to the pt., Sir debn. are close ended product and not trasfarable in open mkt i.e not sold in mkt like shares either pref, or equity, thats y no question is arises capital gain on the other hand share are transfrable.

That's y conversion of debenture is not taxable while conversion of pref. share into equity share is taxable.

Nicky (Chartered Accountant) (245 Points)
Replied 21 April 2010

Dear Sachin, TATA Capital NCD's (Non Convertible Debentures) are being traded in the market and tradabilty or vendabilty is never the criteria for Capital Gains

SACHIN KUMAR GARG (Final Student) (105 Points)
Replied 22 April 2010

Dear Nicky sir

I knw tradability is not the critaria of cap. gain. for explain

Lets take an simple example

i have 10000 debenture @ 100 each. i wan to sale in mkt @ 105 each. But in practical it is quite imposiable to sale them. Bcoz no one can purchase it over and above @ 100 each. That way i can't generate the capital gain on debentures. But on the other hand if we do the same with share it can be done easly. I think the same logic is follow by the lawmakers.