India: Company earned income upon conversion of compulsory convertible debentures (tribunal decision)

A tribunal decision concerning compulsory convertible debentures

A tribunal decision concerning compulsory convertible debentures

The Kolkata Bench of the Income-tax Appellate Tribunal held that under section 56(2)(viib) of the Income-tax Act, 1961, a private company is treated as earning “income from other sources” upon the conversion of compulsorily convertible debentures into equity shares—in an amount equal to the aggregate consideration received for such shares over the fair market value of the shares.

In determining the fair market value of the shares, a taxpayer may use either the discounted cash flow method or the net asset value method. The taxpayer chose the discounted cash flow method, but the tax authority disregarded the taxpayer’s chosen method and used the net asset value method instead. However, the tribunal held that the tax authority could not substitute a different method of valuation for the shares.

The case is: Milk Mantra Dairy Pvt. Ltd. v. DCIT

Read a July 2022 report [PDF 335 KB] prepared by the KPMG member firm in India


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