ITAT rules against addition made for premium on redemption of preference shares

ITAT rules against addition made for premium on redemption of preference shares

The assessee had earlier appealed before the Commissioner of Income Tax (Appeals), who rejected the submissions

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the addition made for the premium on redemption of preference shares as a deemed dividend, is not sustainable.

The assessee, Information Technology Park Ltd is a public limited company engaged in the business of developing, operating and maintaining industrial parks and Special Economic Zones (SEZ). It is a subsidiary of Ascendas Property Fund (India) Pvt Ltd (APFI).

In 2003, the assessee issued 0.5 percent redeemable non-cumulative preference shares, which were subscribed by APFI. These were issued at a value of Rs.100 per share, redeemable at any time after 24 months but not later than nine months from the date of the allotment.

The assessee filed its original Income Tax Return (ITR) for the Assessment Year 2010-2011 in September 2010 declaring 'Nil' income, after the set off of brought forward business loss of Rs.65,66,55,271.

The return was processed and the case was selected for Computer Aided Scrutiny Selection (CASS) under the Income Tax Act. Subsequently, a notice was issued to the assessee.

During the assessment proceedings, a reference was made to the Transfer Pricing Officer (TPO) for the determination of the Arm's Length Price (ALP) of the international transaction the assessee had entered into with AFPI.

It was noticed that the assessee had redeemed some of the preference shares at a premium based on the valuation done by the expert valuer by adopting the Net Asset Value (NAV) method.

While accepting the method of valuation, the TPO reworked the redemption value based on the book value of the assets. He arrived at the value of Rs.286.80 per share, which resulted in an adjustment of Rs.29,95,66,000 that arose out of the difference.

The assessing officer (AO) passed the final assessment order giving effect to the adjustment based on the letter filed by the assessee maintaining that it would not file objections before the Dispute Resolution Panel (DRP) and instead, would prefer to approach the Commissioner of Income Tax (Appeals).

The assessee made detailed submissions before the CIT(A), which were rejected. The authorities proceeded to treat the premium on preference shares as deemed dividends.

Aggrieved by the order, the assessee appealed before ITAT.

Deleting the addition made by the CIT(A) under the IT Act, the bench comprising N V Vasudevan (vice president) and Padmavathy S (accountant member) observed, "We are of the considered view that the excess premium paid to APFI by the assessee on redemption of preference shares cannot be taxed."