Preference Share Redemption not taxable as deemed dividend & amounts to ‘transfer’

Parle Biscuits Pvt. Ltd. Vs ACIT (ITAT Mumbai)- It is  held that redemption of preference shares amounts to ‘transfer’ of a capital asset under the Income-tax Act and any loss on redemption thereon would thus be allowable as a capital loss. The Tribunal, relyied on the Supreme Court decisions in the case of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) and Kartikeya Sarabhai v. CIT [1997] 228 ITR 163 (SC) , held that redemption of preference shares has to be considered as ‘transfer’ and loss on redemption thereof is an allowable long- term capital loss.

Further, the Tribunal observed that even if for the purpose of argument, the consideration is deemed as dividend, the same amount of consideration cannot be considered at the time of computing capital gains on redemption, and therefore, the assessee may be entitled to a higher loss on redemption.

On analysing the implications of section 2(22)(d) of the Act, the Tribunal held that since there is no reduction of capital in the given case, considering section 80(3) of the Companies Act, even though the amounts were distributed out of accumulated profits, the amounts received by the assessee cannot be construed as ‘deemed dividend’ and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.

M/s. Parle Biscuits Pvt. Ltd. Vs ACIT, Central Circle – 25

Decided By- ITAT Mumbai

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