Taxability of Dividend and Capital Gain arising on Conversion of Tata Motors DVR in to TATA Motor Ordinary Shares
Tax Implications of Tata Motors DVR Conversion – Worked Example
The conversion of Tata Motors DVR (‘A’ Ordinary) shares into ordinary shares under the capital reduction scheme (effective 1 September 2024) has created unique taxation challenges. Many CAs are receiving client queries on how to handle deemed dividend, capital gains, and future cost basis. It is being noticed that correct sale price, purchase price is not being reflected correctly in AIS, TaxPnL so taxing them properly is necessary to avoid any future enquiry from department. Lets learn it from an example.
Here’s a worked example for clarity.
1. Scheme Snapshot
For each DVR share:
₹200.63 deemed dividend, and
0.7 ordinary share allotted (fractions settled in cash).
FMV of ordinary shares taken as ₹1,111.35 (closing price on 30 Aug 2024).
2. Example Facts
1000 DVR shares (LTCG) purchased at ₹350 each → Cost = ₹3,50,000
100 DVR shares (STCG) purchased at ₹450 each → Cost = ₹45,000
Total DVR shares = 1100
Ordinary shares received = 1100 × 0.7 = 770
Long-term allocation = 700 shares
Short-term allocation = 70 shares
3. Working
(A) Long-Term Block (1000 DVR → 700 ordinary shares)
Consideration = 700 × 1,111.35 = ₹7,77,945
Less: Deemed Dividend = 1000 × 200.63 = ₹2,00,630
Less: Cost = ₹3,50,000
LTCG = ₹2,27,315 (Gain)
(B) Short-Term Block (100 DVR → 70 ordinary shares)
Consideration = 70 × 1,111.35 = ₹77,795
Less: Deemed Dividend = 100 × 200.63 = ₹20,063
Less: Cost = ₹45,000
STCG = ₹12,732 (Gain)
4. Summary
Deemed Dividend (Taxable as “Other Sources”) =
(1100 × 200.63) = ₹2,20,693 (TDS deducted @10%)
Long-Term Capital Gain = ₹2,27,315
Short-Term Capital Gain = ₹12,732
Total Capital Gain = ₹2,40,047
5. Key Takeaways for CAs
1. Dual Taxation – Two streams arise:
Deemed dividend (Section 2(22)(a)), taxable as “Other Sources”.
Capital gains/loss on surrender of DVR shares.
2. Apportionment –Ordinary shares received (770 in this case) must be allocated pro-rata between LTCG and STCG blocks.
3. Future Sale of Ordinary Shares –The cost of acquisition of the newly allotted ordinary shares is deemed to be ₹1,111.35 per share (FMV as on 30 Aug 2024). The holding period for these shares starts from 1 September 2024, irrespective of the original DVR holding period.
4. TDS Credit –Clients must claim credit for dividend TDS in Form 26AS.
5. Loss Cases –Investors with higher DVR acquisition costs may see capital loss instead of gains.
6. Conclusion
The Tata Motors DVR conversion is not a plain merger but a capital reduction with dividend distribution, creating two taxable events. Chartered Accountants must carefully split holdings, allocate costs, and ensure proper ITR reporting.
In our example (1000 LT shares @ ₹350, 100 ST shares @ ₹450), the client faces:
Deemed Dividend: ₹2.20 lakh (taxable, TDS deducted)
Capital Gains: ~₹2.40 lakh (₹2.27 lakh LTCG + ₹12.7k STCG)
Cost of new ordinary shares: ₹1,111.35 per share, with holding period beginning 1 Sept 2024 for future sale computations.
A clear understanding of this computation will help in client advisories and in avoiding reporting mismatches during assessments.
Author Bio
Thanks for the clear explanation but how to use the fields in capital gain entry in ITR2 is not very obvious to me.
You showed how to reach the capital gain in section 3(A) that was understood.
For entry of deemed dividend in ITR2 in Dividend section, it is directly possible.
Can you please help on
Where to use (adjust by subtracting) the deemed dividend to calculate the capital gain in ITR2 field ?
For capital gain (LTCG) Available fields are as below.
ISIN Code(2) *- Which one to use here ? TATA Motor Ordinary or DVR ?
No. of Shares/Units(4)
Sale-price per Share/Unit(5)
Full Value of Consideration(Total Sale Value)(6) = 4 * 5 *
Cost of acquisition without indexation(7)
Cost of acquisition(8) *
Fair Market Value per share/unit as on 31st January,2018(10) – Which one to use ? Tata motor ordinary ? or DVR ?
Expenditure wholly and exclusively in connection with transfer(12)
Thanks in advance.
Excellent Article with perfect examples.
Thank you
Nice & crisp presentation with clarity. I think we need to calculate Capital gain on sale of shares by the company to adjust the 10% TDS amount on the deemed dividend
NICE POST WITH GOOD CLARITY
WHAT ABOUT TAXABILITY OF SALE OF SHARES BY THE COMPNAY TO COVER THE TDS ON DEEMED DIVIDEND
Dear sir, I inherited TMDVR shares from my father after his death, in 2022, but my father had made some purchase and sale trns in 2019, for example had 1000 shares, then bought 5000 and sold 3000 in 2019. Can I use the avg purchase price from the Annual statement to calculate the Cost of Acquisition of the shares I inherited. I do not have all the contract notes of my father from 2019, and currently broker is not responding. So right now can I use that price?
As per Section 49 of the Income-tax Act, when you inherit shares, the cost of acquisition is deemed to be the cost at which your late father acquired them. In your case, since the DVR shares were inherited in 2022, the relevant cost will be based on your father’s purchase price in 2019.
While the ideal documents are contract notes, in their absence, you may rely on the broker’s annual statement / demat statements, which reflect average purchase cost and quantity. This method is generally accepted, provided it matches with the holdings and is applied consistently.
We recommend:
1. Preserve the broker’s annual statement as documentary proof.
2. Note that during scrutiny, the Assessing Officer may ask for clarification, so keep a written note that contract notes are unavailable and the annual statement is the best available record.
3. The holding period of these shares will include your father’s original holding (i.e., from 2019 onwards).