Section 2(42A), section 47(xb) and section 49(2AE) – Tax neutral conversion of preference shares to equity shares – Clarification regarding tax treatment for earlier years

Issue/Justification

The Finance Act 2017 amended Section 47 of the Act, by virtue of which conversion of preference share of a company into equity share of that company will not be regarded as transfer. The amendment is made by insertion of sub-section (xb) in section 47. Consequent amendments were also made in section 2(42A) of the Act by insertion of sub-clause (hg) in clause (i) of Explanation 1 to section 2(42A) for determining the period of holding of such equity shares, by including the period of holding of the preference shares as well.

Further, sub-section (2AE) is inserted in section 49 to compute the cost of acquisition of the converted equity shares. As per the amendment, the cost of such equity shares shall be deemed to be the cost of acquisition of preference shares.

Currently, conversion of bond or debenture of a company into shares of that company is not regarded as transfer. However, no similar tax exemption was available so far in case of conversion of preference shares of a company into its equity shares.

Suggestion

It is suggested that

a) Since this amendment has clarified the real legislative intent, a clarification may be given by way of Explanation in section 47 or by way of an Explanatory Circular that the aforesaid provisions would be applicable in respect of earlier years as well.

b) Also, conversion of warrants into equity shares may be covered under section 47.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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