Uday K. Pradhan vs. Income Tax Officer ITAT “F” Bench, Mumbai Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA No. 4669/Mum/2014 A.Y.: 2005-06. Date of Order: 6th April, 2016 Counsel for assessee / revenue: Dharmesh Shah / Sandeep Goel

Facts
The assessee was a partner in a firm which was converted into a company. As per the books of the erstwhile firm, the assessee had a credit balance of Rs. 38.74 lakh and in lieu of the said credit balance, the assessee received two lakh equity shares and 2,07,417 redeemable preference shares. In the year under appeal, the said redeemable preference shares were redeemed at par and the assessee received Rs. 20.74 lakh. The AO was of the view that the assessee’s receipt of the sum of Rs. 20.74 lakh on redemption of preference shares resulted in reduction of the share capital and therefore, invoked the provisions of section 2(22)(d) of the Act to bring the same to tax as deemed dividend. On appeal, the CIT(A) was of the view that this was a colourable device for distribution of accumulated profits without any payment by the assessee and which benefitted the assessee/shareholder to the tune of Rs. 20.74 lakh therefore it was exigible to tax u/s. 2(22)(d).

Held
Based on the records, the Tribunal noted it was evident that the assessee received the 2,07,417 redeemable preference shares in lieu of his credit balance in capital account of Rs. 38.74 lakh in the erstwhile firm which had since been corporatised. Thus, the assessee was allotted the redeemable preference shares for valuable consideration and that there was no distribution of accumulated profits by the company to its shareholders on redemption of preference shares, which could result in reduction of share capital. Therefore the Tribunal held that the provisions of section 2(22) (d) of the Act would not apply. The Tribunal noted that even as per section 80(3) of the Companies Act, 1956, the redemption of preference shares is not considered as reduction of share capital. Therefore, according to the Tribunal, treating the redemption of preference shares as deemed dividend u/s. 2(22) (d) of the Act does not arise, as it can be treated so only when there is distribution of accumulated profits by way of reduction of share capital.

In coming to this finding the Tribunal relied on the decision of the Coordinate Bench in the case of Parle Biscuits Pvt. Ltd. In ITA Nos. 5318 & 5319/Mum/2008 and 447/ Mum/2009 dated 19.08.2001.