SEC. 56(2)(X) AN ANTI-ABUSE SHIELD, NOT TOOL TO TAX NATURAL ACCRETION; CANNOT TAX LEGITIMATE CAPITAL APPRECIATION IN OCCRPS CONVERSION

Contention of Assessee:

The assessee has raised multiple contentions before the Tribunal and the same are stated here under:-

a) Conversion price is not “consideration”
The price of Rs.47.30 is a regulatory benchmark price fixed at issuance under SEBI ICDR and becomes relevant only as cost of acquisition under Section 49(2AE). At conversion, the assessee does not pay cash; it surrenders OCCRPS. Hence, consideration equals the value of OCCRPS surrendered on the conversion date.

b) Exchange of capital assets:-
Conversion of OCCRPS into equity is a property-for-property exchange. When valued contemporaneously, no inadequacy exists.

c) Scheme of the Act:

• Section 47(xb) treats conversion as not a transfer.
• Section 49(2AE) prescribes cost mechanism for future capital gains.

Taxing appreciation at conversion under Section 56(2)(x) of the Act would distort legislative design.

d) Section 56(2)(x) is anti-abuse provision and it applies to colourable value shifting and not to natural capital appreciation.

e) Reliance placed on Reva Investment (P.) Ltd. v. CGT to contend that inadequacy must be examined in a broad commercial sense and that, where property is exchanged for property, the valuation of what is given and what is received must be undertaken on a similar basis.

Contention of Revenue:

The Revenue contended that section 56(2)(x) of the Act applies whenever FMV exceeds consideration and the agreed conversion price of Rs. 47.30 per share represents consideration.

The Revenue further contended that FMV determined under Rule 11UA at Rs. 66.15 is binding and accordingly invocation of section 56(2)(x) of the Act is a correct measure.

Ruling:

The Hon’ble Mumbai Tribunal has ruled in favour of the assessee by giving following observations stated hereunder:-

• Section 56(2)(x) is not a general charging provision but a narrowly tailored anti-abuse deeming provision.
• The predetermined conversion price is a regulatory construct fixed at issuance. It represents cost of acquisition for future capital gains under Section 49(2AE) of the Act, not the economic consideration at conversion. At conversion, the assessee surrenders OCCRPS; consideration must be understood in its ordinary commercial sense as the value of the asset given up.
• Section 56(2)(x) of the Act requires comparison of aggregate FMV of property received with aggregate consideration. The AO erroneously compared FMV with a historical benchmark rather than the contemporaneous value of OCCRPS surrendered.
• The appreciation between issuance and conversion remains in the capital field. Taxing it under Section 56(2)(x) of the Act would create layered taxation, and defeat the legislative intent of Section 47(xb) of the Act.
• Rule 11UA is merely a machinery provision and they cannot expand the scope of charging provision.

Editor’s Note:-

i. In cases of conversion of preference shares, CCDs, or other convertible instruments, demonstrate exchange character and contemporaneous valuation of instrument surrendered.

ii. Maintain SEBI ICDR compliance documentation to establish regulatory pricing framework.

iii. This ruling provides strong precedent in private equity and cross-border structures involving structured capital instruments.