{"id":61011,"date":"2022-11-08T17:42:59","date_gmt":"2022-11-08T12:12:59","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=61011"},"modified":"2024-05-28T12:51:21","modified_gmt":"2024-05-28T07:21:21","slug":"premium-on-redemption-of-preference-shares-is-not-accruable-interest","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/premium-on-redemption-of-preference-shares-is-not-accruable-interest\/","title":{"rendered":"Premium on Redemption of Preference Shares Is Not Accruable Interest"},"content":{"rendered":"

The Bangalore Income tax appellate tribunal, while allowing the appeal of the appellant in the case Enzen Global Solutions (P.) Ltd. v. Income Tax Officer <\/em><\/strong>held that the assessing officer should consider the additional evidence adduced by the assessee before the CIT (A) and other evidence to which the assessee relies on its claim. The tribunal further disallows the revenue authorities’ action to tax the assessee’s income. The premium received at the time of redemption of preference shares will be taxed in the year of redemption. Further, only the returns on such shares are liable to be taxed on an accrual basis<\/a>.<\/p>\n\n\n\n

Facts of the case<\/strong><\/h2>\n\n\n\n

The Assesse has invested a total amount of Rs.130,00,00,000 in 13,00,00,000 preference shares with a face value of Rs 1000 per share of M\/s. Resource Consulting Private Limited. These shares shall be redeemed at the end of 20 years at an interest rate of 16.5 % on the face value. It means both the principal and the premium amount shall be payable to assesse at the time of redemption. The assessee in the original return of income has mistakenly declared an amount of Rs.17, 09, 02,857 as the premium payable on redemption of preference shares under the head “Income from other sources”. However, the assessee has realised the mistake and filed a revised return wherein the amount of Rs.17, 09, 02,857 is subsequently reduced from the net profit.<\/p>\n\n\n\n

It was claimed by the assessee that the premium received was to be taxed under the capital gain only at the time of redemption. Therefore, an amount of Rs.17, 09, 02,857 shall stand withdrawn. The assessee’s contention is rejected by the assessing officer (AO). The AO states that preference shares contain features of equity and debt instrument. Hence the payment to the preference shareholder<\/a> is started from the beginning. Henceforth, the taxability of the premium does not depend upon the redemption of preference shares.<\/p>\n\n\n\n

Further, the AO states that the interest on the dividend is on a cumulative basis. Hence, it becomes a cumulative preference share, and even though its payment is uncertain, its accrual is definite. Therefore, according to AO, the dividend is the income received on the preference shares.<\/p>\n\n\n\n

The assessing officer also made an additional case by observing that the cumulative preference shares can be termed as an equity instrument, and the dividend will be received by the assessee irrespective of whether the company has declared a dividend or not. The AO presumes that the dividend distribution tax is already deducted, which can be claimed as an exemption by the investor. Henceforth the dividend is accrued on an accrual basis, and the interest expenses cannot be allowed for that specific investment as it is an expenditure incurred on earning exempt income. Therefore expenses incurred in the process of claiming preference shares shall not be allowed under Section 14A.<\/p>\n\n\n\n

Therefore, an amount of Rs 17, 09, 02,857 has to be either taxed as interest income or regarded as an expenditure. In both cases, the accrued premium must be taxed, and dividend interest shall be disallowed.<\/p>\n\n\n\n

Being aggrieved by order of the Assessing officer, the assessee filed an appeal before CIT (A). The CIT (A) also upheld the views of the assessing officer by treating the non-convertible preference shares as a debt instrument and taxing the premium on an accrual basis under “Income from other sources”. Being aggrieved by order of CIT (A), the assessee filed an appeal before the tribunal.<\/p>\n\n\n\n

Issues of the case<\/strong><\/h2>\n\n\n\n