Sanjjay Saumyha Vs PCIT (ITAT Chennai)
Summary: The Chennai Bench of the Income Tax Appellate Tribunal dismissed the assessee’s appeal and upheld revisionary jurisdiction under Section 263 in relation to accumulated interest embedded in zero coupon debentures that were prematurely converted into equity shares. The assessee, a director and shareholder of M/s AVR Swarna Mahal Jewellery Pvt. Ltd. (“SMJPL”), had received zero coupon debentures issued at Rs.2,000 per debenture during FY 2009-10. They were redeemable after nine years at Rs.6,400 per debenture but were converted prematurely into equity shares on 30.09.2012.
The accumulated interest up to the date of conversion was Rs.75,46,082/-. The assessee offered Rs.13.48 lakh to tax, including interest of Rs.12.23 lakh for the relevant year and the grossed-up portion of TDS, but did not offer the balance interest of Rs.61,97,169/-. Her case was that she followed the cash system of accounting under Section 145 and had received no money on the debenture investment. She also contended that conversion of debentures into equity shares was not regarded as a transfer under Section 47(x) and that the capital-gain consequences would arise when the equity shares were eventually sold.
The Tribunal rejected this contention. It found that the conversion value comprised both the face value of Rs.2,000 per debenture and accumulated interest of approximately Rs.1,500 per debenture. Consequently, the whole interest amount of Rs.75.46 lakh was deemed to have been received upon conversion. The Tribunal observed that if the balance Rs.61.97 lakh was not taxed in the year of conversion, it would never be brought to tax. It also rejected the double-taxation contention because, for computing capital gains on a subsequent sale of the shares, the cost would include both components in terms of Section 49(2A).
