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Shri Uday K. Pradhan Versus Income Tax Officer

2016 (4) TMI 307 - ITAT MUMBAI

Deemed dividend u/s. 2(22)(d) - redemption of the preference shares at face value - Held that:- Respectfully following the decision of the Coordinate Bench of this Tribunal in the case of Parle Biscuits Pvt. Ltd. [2011 (8) TMI 1176 - ITAT MUMBAI], which is factually and legally similar and therefore applicable in the factual and legal matrix of the case on hand, we hold that in terms of section 80(3) of the Companies Act, 1956, there is no reduction in the authorised share capital of the company .....

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ecided in favour of assessee. - ITA No. 4669/Mum/2014 - Dated:- 6-4-2016 - Shri Jason P. Boaz, Accountant 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 .....

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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 s appeal for statistical purposes by remanding the matter to the file of learned CIT(A) for adjudication afresh after affording adequate opportunity of being heard to the assessee. 2.3 In the second round, the learned CIT(A), a .....

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d this appeal raising the following grounds: - 1. The Learned Commissioner of Income-Tax (Appeals) has erred in Law and facts in passing the order u/s. 250 of the Act. 2. The Learned Commissioner of Income-Tax (Appeals) has erred in law and in facts in confirming the addition of ₹ 20,74,170/- on account of dividend u/s. 2(22)(d) of the Act on redemption of preference shares. 3. The learned Commissioner of Income-Tax (Appeals) has erred in upholding the order of the Assessing Officer in tre .....

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or any of the foregoing grounds of appeal. 4.1 In addition thereto, the assessee has alternatively raised the following additional grounds: - 1. The Ld. CIT(A) has erred in law and in facts in not appreciating that the dividend of ₹ 20,74,170/- u /s 2(22)(d) of the Act is exempt in the hands of the appellant. 2. The appellant craves leave to add, amend, alter or delete any or all grounds of appeal. 4.2 It is submitted by the learned A.R. for the assessee that alternatively in the addition .....

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f 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 Revenu .....

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nds of appeal at S.Nos. 1 to 5: Addition under section 2(22)(d) on account of Redemption of Preference Shares - ₹ 20,74,170/- 5.1.1 In the above grounds, the assessee assails the impugned order of the learned CIT(A) in upholding the addition of ₹ 20,74,170/- made by the AO on account of dividend under section 2(22)(d) of the Act on redemption of preference shares without appreciating that the redemption is made out of original amount of shares allotted and that such redemption does n .....

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d into a private limited company. It was also contended that the redemption is made out of the original amount of shares allotted to the assessee for valuable consideration and therefore there is no distribution of any profit by the company to its shareholder on redemption of preference shares. It is further contended that in the case on hand the provisions of section 2(22)(d) of the Act which is in respect of deemed distribution of profits to its shareholders by a company on reduction of its ca .....

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rofit by the company to its shareholders or reduction in authorised share capital on the redemption of the aforesaid preference shares and therefore the provisions of section 2(22)(d) of 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 lea .....

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ed 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 submitted that the learned CIT(A), after considering the assessee s submissions and also the provisions of section 80 .....

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s amounted to receipt of dividend and the provisions of section 2(22)(d) of the Act would apply in the case on hand. 5.3 In rejoinder, the learned A.R. for the assessee pointed out that the redeemable preference shares received by the assessee were not received free of cost as contended but were received in lieu of the assessee s credit balance lying with the erstwhile firm which was converted/corporatized into a company. 5.4.1 We have heard the rival contentions of both the parties and perused .....

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akhs equity shares and 2,07,417 redeemable preference shares. In the year under consideration, i.e. on 18.06.2004, the said redeemable preference shares were redeemed at par, i.e. ₹ 10/- and the assessee received ₹ 20,74,170/-. The AO, on examination thereof, was of the view that the assessee s receipt of the sum of ₹ 20,74,170/- on redemption of preference shares resulted in reduction of the authorised share capital and invoked the provisions of section 2(22)(d) of the Act to .....

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sessee 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 .....

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by redemption of the preference shares at par resulting in reduction of authorised share capital and therefore the provisions of section 2(22)(d) of the Act would not apply in the case on hand. Section 80(3) of the Companies Act, 1956 states that the redemption of preference shares cannot be considered as reduction of authorised share capital and therefore treating the same as deemed dividend under section 2(22)(d) of the Act does not arise as the same can be invoked only when there is distribut .....

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956 which states that redemption of preference shares shall not be taken as reducing its authorised share capital, that part of the amount received by the assessee at face value does not fall within the definition of deemed dividend under section 2(22)(d) of the Act and therefore cannot be treated as such. At paras 37 to 43 of its order, the Coordinate Bench of this Tribunal has held as under: - 37. We have considered the issue. As far as redeeming preference shares are concerned, the Hon'bl .....

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ny, what the shareholder does in effect is to sell the hare to the company. The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. In effect, the company buys back the preference shares from the shareholders. If redemption of preference shares did not amount to sale, it would not have been necessary, in section 77 of the Companies Act, 1956, to specifically provide that the restriction imposed upon a com .....

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nquishment 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 .....

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eld as under: - Section 2(47) of the Income-tax Act, 1961, defines transfer in relation to a capital asset. It is an inclusive definition which, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or extinguishment .....

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ce share has a right to vote on any resolution in accordance with the provisions of this sub-section, his voting right on a poll, as the holder of such shares, shall, subject to the provisions of section 89 and sub-section (2) of section 92, be in the same proportion as the capital paid up in respect of the preference share bears to the total paid-up equity capital of the company . Hence, when as a result of the reducing of the face value of the share, the share capital is reduced, the right of .....

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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 on .....

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) …… ……. (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; 41. As can be seen by the above provision, there should be a reduction of its capital and distribution to the shareholders out of the accumulated profits .....

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uction of share capital. On the facts of the case, assessee has purchased the preferential shares at a cost of ₹ 2 crores and they were redeemed at the same price of ₹ 2 crores. Therefore the question of invoking deemed dividend provision on this transaction does not arise, eventhough the redemption of shares are to be made out of the profits of the company by virtue of section 80(1) of the Companies Act. However, since it cannot be treated as reduction of authorised share capital by .....

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the company with face value of ₹ 1,000/- each. During the accounting period relevant to A.Y. 1963-64 the company passed a resolution to reduce its capital and the procedure prescribed under the Companies Act was undergone. After obtaining the orders from the Court reduction was given effect and on 26.05.1962. Subsequently the face value of shares in the company was reduced from ₹ 1,000/- to ₹ 210/-. There was a pro-rata distribution of some properties of the company and paymen .....

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r 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 .....

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y the Tribunal because the Tribunal came to the conclusion that there being no transfer of any capital asset, the question of capital gains did not arise. But the question would now have to be considered and decided by the Tribunal when the matter went back before it for the determination of capital gains. 42. It was further held that thus the amount distributed by a company on reduction of its share capital has two components, i.e. distribution attributable to accumulated profits and distributi .....

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