Periar Trading Company Private Limited Vs ITO (ITAT Mumbai)

Conclusion: Conversion of cumulative and compulsory convertible preference shares (CCPS) into equity shares cannot be treated as ‘transfer’ under section 2(47) and no capital gain is to be computed upon such conversion.

Held: AO made addition on account of conversion of cumulative and compulsory convertible preference shares (CCPS) into equity shares treating the same as transfer within the meaning of section 2(47) and accordingly, computing the long term capital gain as per section 45. It was noted that  CBDT vide its Circular dated 12.05.1964 had clarified the position that where one type of share is converted into another type of share, there is no transfer of capital asset within the meaning of Sec. 2(47). In the present case, one type of share had been converted into other type and the earlier type of share had ceased to exist. Thus, there was no exchange of any share as the pre-conversion security had ceased to exist. Mere conversion of one type of share to other type of share would not be a transfer of a capital asset within the meaning of Sec. 2(47). Also, there was no leakage of revenue if such interpretation was adopted. In fact, the contrary interpretation would lead to double taxation in as much as, having taxed the capital gain upon such conversion, at the time of computing capital gain upon sale of such converted shares, assessee would be still taxed again, as the cost of acquisition would still be adopted as the issue price of the CCPS and not the consideration adopted while levying capital gain upon such conversion. Thus, such interpretation process was not permissible. Hence, conversion of cumulative and compulsory convertible preference shares (CCPS) into equity shares could not be treated as ‘transfer’ under section 2(47).

ITA No. 1944/Mum/2018