In the case of Enzen Global Solutions Pvt. Ltd. [1] (Taxpayer), the Taxpayer invested in redeemable preference shares to be redeemed at the end of 20 years from the date of allotment at a premium of 16.5% on their face value. The Taxpayer initially offered pro rata premium under the head “income from other sources” in its income tax return but, subsequently, revised it to withdraw the premium as income. The Taxpayer contended that such premium is taxable under capital gains on actual receipt.
The tax authority contended that the rate of premium was fixed for the cumulative preference shares. Furthermore, the rate of dividend of 8% on a cumulative basis was fixed in the offer document and the fixed rate ensured the dividend due to the Taxpayer. The tax authority, thus, concluded that payment of dividend may be uncertain, but its accrual is certain and held the cumulative preference shares to be akin to debt instruments and equated such dividend as interest. Accordingly, the tax authority taxed the amount credited as premium on preference shares as “income from other sources”. The first appellate authority upheld the tax authority’s contention.
On further appeal by the Taxpayer, the Bangalore Income Tax Appellate Tribunal (Tribunal) held that the Taxpayer, being a preference shareholder can, by no stretch of imagination, be equated with a debtor and was not entitled to claim redemption premium as a matter of right. Even in the event where the premium is treated as akin to dividend, the Taxpayer cannot claim dividend as a matter of right, since dividend needs to be approved by the shareholders. Only when a taxpayer has the right to receive periodic payments can it be said that income accrues to the taxpayer under the mercantile method. The Tribunal further referred to the Bombay High Court ruling in Enam Securities[2] and observed that the tax authority cannot disregard the legal effect of distinction between a document evidencing a debt and a document evidencing holding of shares in a limited company.
