Conversion of Fully Compulsory Convertible Preference Shares ('FCCPS') and Redeemable Cumulative Convertible Preference Shares ('RCCPS') into equity shares on favourable basis to redeeming assessee-company -- Capital gains thereof

Facts: Assessee-company issued FCCPS and RCCPS to two companies. These were transferred by the shareholders to a third person. The said shares were then redeemed by conversion into equity shares on favourable terms to the assessee company. Gains were credited to share premium. AO held that the amounts credited to share premium was capital gain to the assessee company. CIT(A) reversed the view. On higher appeal by revenue -

Held against the revenue that the resultant benefit on conversion at a lower than par value of the FCCPS/RCCPS cannot be taxed in the hands of the company. Tax implications if any can be in the hands of the shareholder only.

Ed. Note: Decision year pertains to times when buy back/redemption was taxable in shareholders hands. In this case a loss would arise in the hands of the shareholders as conversion terms were unfavourable to them. Such an unusual occurrence definitely will invite doubts in the mind of the revenue.

Case: Asstt. CIT v. Privi Speciality Chemicals Ltd. 2023 TaxPub(DT) 779 (Mum-Trib)