Preference shares Redemption not taxable as deemed dividend

Brief of the case:

• The ITAT Mumbai bench in the above cited case held that since redemption of preference shares does not result in reduction of share capital as per Sec 80 of the Companies Act,1956 , the redemption value cannot be taxed as deemed dividend as the distribution of profits if at all there may be is not resulting in reduction of capital.
• Further, the assessee did not acquire the shares free of cost but against a valuable consideration (i.e credit balance in taken over firm) , which would not result in any other  gain to assessee so as to be taxed as deemed dividend.
  

Facts of the case:

• The assessee was a partner in the firm which was converted into a company, i.e. M/s. Enviro Control Associates India P. Ltd in the books of the firm where assessee had a credit balance of  38,74,178/- as on 31.03.2001and in lieu of the said credit balance the assessee received two lakhs equity shares and 2,07,417 redeemable preference shares.
• On 18.06.2004, the said redeemable preference shares were redeemed at par Rs. 10 and the assessee received Rs. 20,74,170/-.The AO was of the view that the assessee’s receipt of the sum of Rs. 20,74,170/- on redemption of preference shares resulted in reduction of the authorized share capital and invoked the provisions of section 2(22)(d) of the Act to bring the same to tax as deemed dividend.
• On appeal to CIT(A) , he held 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 therefore the amount of `20,74,170/- received by him on redemption thereof was deemed dividend under section 2(22)(d) of the Act.
• Aggrieved assessee is in appeal before the tribunal.

Contention of the Assessee: