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2016 (4) TMI 307

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..... nt Member And Shri Sandeep Gosain, Judicial Member For the Petitioner : Shri Dharmesh Shah For the Respondent : Shri Sandeep Goel ORDER Per Jason P. Boaz, A. M. This appeal by the assessee is directed against the order of the CIT(A)-28, Mumbai dated 13.05.2014 for A.Y. 2005-06. 2. The facts of the case, in brief, are as under: - 2.1 The assessee was a partner in a firm which was converted to a company, M/s. Enviro Control Associates India (P) Ltd. For A.Y. 2005-06, the assessee filed its return of income on 29.12.2005 declaring total income of ₹ 52,519/-. The case was taken up for scrutiny and the assessment was completed under section 143(3) r.w.s. 147 of the Act vide order dated 14.12.2007; wherein the income of the assessee was determined at ₹ 26,20,479/- in view of the addition of ₹ 20,74,170/0 under section 2(22)(d) of the Act on account of deemed dividend. 2.2 Aggrieved by the order of assessment for A.Y. 2005-06 dated 14.12.2007, the assessee preferred an appeal before the CIT(A). On further appeal by the assessee, the Coordinate Bench of this Tribunal in its order in ITA No. 8758/Mum/2011 dated 08.01.2014 allowed the assessee .....

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..... even if the provisions of section 2(22)(d) of the Act were held applicable, the amount of dividend would be exempt from tax in view of the provisions of section 10(34) of the Act. It was prayed that even though the same were not raised by the assessee in the original grounds filed, but the same may be admitted and adjudicated upon since this is a legal issue which goes to the root of the matter and all facts in the matter are available on record and no further investigation of facts is required. In support of this proposition, the assessee has placed reliance on the following judicial pronouncements: - (i) NTPC vs. CIT (229 ITR 383) (SC) (ii) Jute Corporation of India vs. CIT (187 ITR 688) (SC) (iii) Ahmadabad Electricity Co. Ltd. vs. CIT 199 ITR 351 (Bom) (FB) 4.3 We have heard the rival contentions of both the learned A.R. for the assessee and the learned D.R. for Revenue in the context of admission of the additional grounds raised by the assessee. We are of the opinion that since the additional grounds raised (supra) pertain to legal issue that goes to the root of the matter and that all facts in the matter already form part of the record, the same may be a .....

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..... the Act are not applicable in the case on hand. 5.1.2 In support of the above proposition that the sale of the aforesaid preference shares, in the factual matrix of the case on hand did not result in reduction of share capital and therefore would not attract the provisions of section 2(22)(d) of the Act, the learned A.R. for the assessee placed reliance, inter alia, on the following judicial pronouncements of the ITAT Mumbai in the case of Parle Biscuits Pvt. Ltd. in ITA Nos. 5318 5319/Mum/2006 and ITA 447/Mum/2009 and others dated 19,08.2011, wherein after considering the very same issue of the effect of sale of preference shares on reduction of share capital, the Coordinate Bench had held that by virtue of section 80(3) of the Companies Act the redemption of preference shares cannot be considered as reduction of the company s authorised share capital and therefore redemption cannot be treated as deemed dividend as the provisions of section 2(22)(d) of the Act can be invoked only when there is a distribution of accumulated profits by way of reduction of share capital. 5.2 Per contra, the learned D.R. for Revenue supported the impugned order of the learned CIT(A). It was su .....

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..... and was exigible to tax under section 2(22)(d). On further appeal, the Coordinate Bench of the Tribunal remanded the matter to the file of the learned CIT(A) for fresh consideration and adjudication after affording the assessee adequate opportunity of bring heard. 5.4.2 In the impugned order, the learned CIT(A) after considering the submissions made and the provisions of section 80(3) and 100 of the Companies Act, 1956 held that since no payment had been made by the assessee towards acquisition of the redeemable preference shares allotted to him, this amounted to reduction in share capital and therefore the amount of ₹ 20,74,170/- received by him on redemption thereof was deemed dividend under section 2(22)(d) of the Act. We find that as per the record it is evident that the assessee received the 2,07,417 redeemable preference shares in lieu of his credit capital balance of ₹ 38,74,178/- in the erstwhile firm which had since been corporatized. In short, it is clear that the assessee was allotted the aforesaid redeemable preference for valuable consideration. In this factual matrix, it is evidently clear that there is no distribution of accumulated profits by the comp .....

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..... ould not have been necessary, in section 77 of the Companies Act, 1956, to specifically provide that the restriction imposed upon a company in respect of buying its own shares will not apply to redemption of shares issued under section 80 of that Act. The redemption of preference shares by a company, therefore, is a sale and squarely comes within the phrase sale, exchange or relinquishment of an asset in section 2(47)(i) of the Income-tax Act, 1961. The definition of transfer in section 2(47) of the Income-tax Act, 1961, is not an exhaustive definition. Sub-clause (i) of clause (47) of section 2 speaks of sale, exchange or relinquishment of the asset and implies parting with any capital asset for gain which will be taxable under section 45 of the Act. When preference shares are redeemed by the company, the shareholder has to abandon or surrender the shares, in order to get the amount of money in lieu thereof. There is, therefore, also a relinquishment which brings the transaction within the meaning of section 2(47)(i) of the Income-tax Act. The appellant had purchased preference shares in a company at less than their face value and held them as capital assets. Th .....

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..... of preference shares has to be considered as a transfer under the meaning of section 2(47). Therefore computation of capital loss has to be considered on this transaction. Assessee has worked the cost of acquisition as per the provisions of section 48 and since shares was held for more than one year and being a long term capital asset, indexed cost of acquisition has been claimed as against the sale consideration received. On the facts of the case, assessee purchased preference shares at a cost of ₹ 2 crores and the same was redeemed at face value and assessee received only ₹ 2 crores. However, by virtue of mode of computation prescribed under section 48 of the I.T. Act assessee s sale consideration being ₹ 2 crores and indexed cost of acquisition being ₹ 2,35,58,718/- being the deduction allowable under section 48, the net loss of ₹ 35,58,718/- has been computed. This amount is an allowable long term capital loss. 40. The A.O., however, examined the issue of section 2(22)(d). Provisions of section of section 2(22)(d) are as under: - 2(22) . (d) any distribution to its shareholders by a company on the reduction of its cap .....

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..... he shareholders including the assessee. In the Income Tax proceedings connected with the property/amounts so received by the assessee on reduction of share capital in the said company, the Tribunal was required to consider whether any capital gains accrued to the assessee. The Tribunal held that no capital gain accrued to the assessee. The Hon'ble High Court held that a sum of ₹ 64,517/- must be taken to have come out of the accumulated profits and treated as dividend for all purpose and on appeal the Hon'ble Supreme Court confirmed the decision of the Hon'ble Madras High Court and held that: - (ii) that the assessee in the present case had been paid not merely cash but had also been given a property for the reduction in the value of his shares from ₹ 1,000 to ₹ 210. Out of the total amounts so received including the value of the property so received, the portion attributable to accumulated profits had to be deleted. Only the balance amount could be treated as a capital receipt. Thereafter looking to the cost of acquisition of that portion of the share which had been diminished, capital gains would have to be determined. The Tribunal, while comp .....

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