Taxability in the hands of Company & Shareholder in case of conversion of debentures into shares of company
As per section 47(x) of Income Tax Act 1961, any transfer by way of conversion of debentures into shares of company is not regarded as transfer and thus no capital gain liability arises in the hands of individual holding shares of company.
Capital gain liability will arise at the time of sale of shares and not at the time of conversion of debentures into shares.
What will be the cost of acquisition of shares that are converted from debentures?
Further at the time of sale of shares cost of acquisition of shares shall be deemed to be cost of debentures as per section 49(2A) of Income Tax Act 1961
What will be the period of holding of shares that are converted from debentures?
Period of holding will be considered from the date of purchase of debentures and not the date of conversion of debentures into shares.
Thus indexation benefit would be available from the date of acquisition of debentures and not from the date of conversion of debentures into shares.
Conclusion
No tax liability arises at the time of conversion of debentures into shares of company in the hands of company and also in the hands of shareholder.
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