TMI Blog2023 (2) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, it is to be appreciated that the conversion of preference shares into equity shares is in the hands of the shareholder, i.e. M/s Satguru Constructions. Thus, gain, if any, arising from such a conversion will only be taxable in the hands of the shareholder. Therefore, in view of the above, we find no infirmity in the findings of the learned CIT(A) on this issue. As a result, ground No. 1 raised by the Revenue is dismissed. Addition on account of unrealised foreign exchange gain - HELD THAT:- From the perusal of the financial statement of the assessee, forming part of the paper book, we find that during the year, the assessee has only accounted for gain arising from foreign exchange fluctuation. Finding of the AO that loss on foreign exchange valuation was claimed as a deduction is contrary to the material available on record. Further, as per the provisions of section 43A of the Act, as amended by Finance Act 2002, w.e.f. 01/04/2003, the actual payment of the decreased /enhanced liability, due to a change in the rate of exchange subsequent to the acquisition of the asset in foreign currency, is a condition precedent for making adjustment in the cost of the fixed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, the assessee e-filed its return of income on 10/12/2009 declaring a total loss of Rs.1,39,84,692. The assessee company originally issued fully compulsory convertible preference shares ( FCCPS ) and Redeemable Cumulative Convertible Preference Shares ( RCCPS ) at a face value of Rs. 10,000 each to M/s Avigo Venture Investments Ltd and M/s Avigo Trustee Company Private Ltd. Thereafter, both the preference shareholders transferred these preference shares to M/s Satguru Construction. During the year under consideration, all the redeemable preference shares were redeemed by the assessee by issuing 19,29,953 equity shares at a face value of Rs. 10 each and crediting Rs. 22,06,90,470 in the Reserves and Surplus under the Security Premium Account. Accordingly, during the assessment proceedings, the assessee was asked to show cause as to why the amount credited as a security premium in the Reserves and Surplus be not treated as a capital gain on redemption of preference shares. In response thereto, the assessee submitted that the transfer on the conversion of preference shares into equity shares is in the hands of the shareholder i.e. M/s Satguru Constructions, and not in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains even after admitting in the same breath that the appellant company had a liability to pay on redeeming the preference shares. At the best, the AO could have challenged the charging of share premium at substantially high rate. However, since the provisions of section 56(2)(7b) are applicable only after A.Y. 2013-14, there was also no scope for addition on that account. Thus, in view of the facts of the case, the conclusion drawn by the AO while treating the conversion of preference shares into equity shares at a premium as capital gains is erroneous and do not have any legs to stand. Therefore, the addition of Rs.22,06,91,000/- is deleted. The ground of appeal is allowed. Being aggrieved, the Revenue is in appeal before us. 6. During the hearing, the learned Departmental Representative ( learned DR ) by vehemently relying upon the order passed by the AO submitted that the amount credited in the Security Premium Account on the conversion of preference shares into equity shares is the gain arising in the hands of the assessee, which is taxable. The learned DR also placed reliance upon the decision of the Hon ble Supreme Court in Kartikeya V. Sarabhai vs CIT, [1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We, therefore, answer Question No. 1 in the affirmative and against the assessee. 10. Thus, from the above, it is evident that the conclusion of the Hon ble High Court that redemption of preference shares will result in transfer within the meaning of section 2(47) of the Act was held to be in the hands of the shareholder, which in the present case is M/s Satguru Constructions. The Hon ble Supreme Court in Anarkali Sarabhai vs CIT, in [1997] 224 ITR 422 (SC), upheld the aforesaid findings of the Hon ble Gujarat High Court. Further, the aforesaid decision of the Hon ble Gujarat High Court was followed in Kartikeya V. Sarabhai vs CIT [1982] 128 ITR 425 (Guj.), which was affirmed by the Hon ble Supreme Court in Kartikeya V. Sarabhai vs CIT, [1997] 228 ITR 163 (SC), relied upon by the learned DR. In the present case, it is to be appreciated that the conversion of preference shares into equity shares is in the hands of the shareholder, i.e. M/s Satguru Constructions. Thus, gain, if any, arising from such a conversion will only be taxable in the hands of the shareholder. Therefore, in view of the above, we find no infirmity in the findings of the learned CIT(A) on this issue. As a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. 13. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee on this issue by observing as under: 4.4.2 I have verified the facts of the case. As per the amended provisions of section 43A of the Act, it is expressly provided that the increase or decrease in the liability of a tax-payer as expressed in indian currency for making payment towards the whole or part of the cost of the asset for repayment of the whole or a part of the moneys borrowed by him for any person shall be added or reduced from the actual cost of the asset only on the actual payment of loan. The CBDT has also specified in instruction no. 3/2010 that loss on account of mark to market cannot be considered as an allowable deduction where no sale or settlement has actually taken place. I have also perused the decision of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd., 312 ITR 254 wherein the Hon'ble Court has referred to the provisions of section 43A and held that after the amendment of section 43A with effect from A.Y. 13-14, loans on account of fluctuation of foreign exchange would be required to be adjusted only when actual losses were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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