No capital gains Tax on conversion of preference shares into equity w.e.f AY 2018-19

By | February 11, 2017
(Last Updated On: February 11, 2017)

No capital gains Tax on conversion of preference shares into equity

[Section 47 of Income tax Act- Applicable from Assessment Year 2018-19 (Financial Year 2017-18) ]

Under the existing provisions of the Act, conversion of security from one form to another is regarded as transfer for the purpose of levy of capital gains tax. However, tax neutrality to the conversion of bond or debenture of a company to share or debenture of that company is provided under the section 47. No similar tax neutrality to the conversion of preference share of a company into its equity share is provided.

In order to provide tax neutrality to the conversion of preference share of a company into equity share of that company, Finance Bill 2017 proposed to amend section 47 to provide that the conversion of preference share of a company into its equity share shall not be regarded as transfer.

Consequential amendments are also proposed in section 49 and section 2(42A) in respect of cost of acquisition and period of holding.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

[Clauses 3, 23 & 25]

Relevant Clause 23 of Finance Bill 2017 –  Transfer Excludes conversion of preference shares into equity

Amendment of section 47.

23. In section 47 of the Income-tax Act, with effect from the 1st day of April, 2018,—

(b) after clause (xa), the following clause shall be inserted, namely:—

“(xb) any transfer by way of conversion of preference shares of a company into equity shares of that company;”.

Relevant Clause 25 of Finance Bill 2017 : cost of acquisition of Preference Shares

Amendment of section 49.

25. In section 49 of the Income-tax Act,—

(b) after sub-section (2AD), the following sub-section shall be inserted with effect from the 1st day of April, 2018, namely:–-

“(2AE) Where the capital asset, being equity share of a company, became the property of the assessee in consideration of a transfer referred to in clause (xb) of section 47, the cost of acquisition of the asset shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assessee.”;

Relevant Clause 3 of Finance Bill 2017 – Period of Holding

Amendment of section 2.

(b) in Explanation 1, in clause (i),—

(A) after sub-clause (he), the following sub-clause shall be inserted with effect from the 1st day of April, 2018, namely:—

“(hf) in the case of a capital asset, being equity shares in a company, which becomes the property of the assessee in consideration of a transfer referred to in clause (xb) of section 47, there shall be included the period for which the preference shares were held by the assessee;”;

Books on Budget 2017-18

Taxmann’s Budget 2017-18 -Book

Budget 2017-18- Notifications on Central Excise , Customs and Service tax – New Book

Ajit Prakashan’s Union Budget 2017-18 -New Book

BDP’s Customs Law Manual (2017-18 Budget Editon with CD) -New Book

Related Post on Budget 2017-18

Budget Speech 2017-18 -Download /Print

Finance Bill 2017 -Download /Print -Budget 2017-18

Memorandum Explaining Provisions in Finance Bill 2017

Updates  on Union Budget 2017-18

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