Section 2(47) – Conversion of compulsory convertible preference shares into equity shares does not amount to transfer

Section 2(47) – Conversion of compulsory
convertible preference shares into equity shares does not amount to transfer

Facts

During the year
under appeal, the assessee company converted 51,634 number of cumulative and
compulsory convertible preference shares (CCPS) held by it in Trent Ltd., into
equity shares. According to AO, the conversion of CCPS into equity shares was
transfer within the meaning of the definition provided in section 2(47)(i) of
the Act. Accordingly, the sum of Rs. 2.85 crore, being difference of market
value of 51,634 number of equity shares of Trent Ltd. as on date of conversion
and the cost of the acquisition of CCPS was by him as taxable as capital gains.
On appeal, the CIT(A) confirmed the order of the AO.

Held

The Tribunal noted that the CBDT vide its
Circular F. No. 12/1/84-IT(AI) dated 12.05.1964 has clarified that where one
type of share is converted into another type of share, there is no transfer of
capital asset within the meaning of section 2(47). It also relied on the Mumbai
Tribunal’s decision in the case of ITO vs. Vijay M. Merchant, [1986] 19 ITD
510.

According to it, the decision of the Supreme
Court in the case of CIT vs. Motors & General Stores (P.) Ltd [1967] 66
ITR 692 and relied on by the CIT(A) in his order, was entirely
distinguishable on facts of the present case. It further observed that, 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, the assessee would still be 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. Accordingly, it was held that conversion of CCPS into equity shares
cannot be treated as ‘transfer’ within the meaning of section 2(47) of the Act.