Deputy Commissioner Of Income Tax, ... vs M/S. Enzen Global Solutions Private ... on 19 September, 2022
14. Aggrieved by the order of the CIT(A), the assessee is in appeal before the
Tribunal. Learned Counsel for the assessee drew our attention to the provisions of
section 55 of the Companies Act, 2013, and pointed out that as per the aforesaid
provisions, irredeemable preference shares cannot be issued. The maximum period
of redemption cannot exceed 20 years from the date of issue. He pointed out that
redemption of preference shares can be made only out of profits of the Company
which will otherwise be available for dividends or out of proceeds of the fresh issue
of shares. He also drew our attention to the provisions of section 123 of the
Companies Act, 2013, which lays down that dividends can be declared by a
company only out of profits of the Company or out of its free reserves. In the light
of the aforesaid provisions, the first submission made by the learned Counsel for
the assessee was that by no stretch of imagination, the preference shares can be
treated as a debt of the company. The preference shareholders have a preference in
terms of return of capital over the equity shareholders and but for this difference,
the preference shareholders cannot be regarded as a debtor of the company and the
preference shares cannot be regarded as a debt. The decisions which were cited
before the CIT(A) were also cited before us. Further, learned Counsel placed
reliance on the decision of the Hon'ble Bombay High Court in the case of Aditya
Prakash Entertainment Pvt. Ltd., Vs. Magikwand Media Pvt. Ltd., CP
No.404/2016, judgment dated 05.03.2018. In the aforesaid decision, the preference
shareholders filed a petition for winding up of the company under section 433(e) of
the Companies Act, 1956, to wind up the company on the ground that the company
is unable to pay its debts. It was a case of the petitioners that they were holders of
ITA Nos.2332, 2550/Bang/2019
Page 13 of 31
redeemable preference shares and despite exercising of option to redeem the
preference shares, the company did not make payment and despite the fact the
company had profits. The Hon'ble Bombay High Court, on consideration of
several decisions, held that when a company issues redeemable preference shares, it
is not obtaining loan as it could by issuing debentures. There is a fundamental
difference between the capital made available to a company by issue of a share and
money obtained by a company under a loan or a debenture. Respective incidences
and consequences of issuing a share and borrowing money on loan or on a
debenture are different and distinctive. Relying on the said decision, the learned
Counsel reiterated his plea that the action of the Revenue authorities in treating
redeemable preference shares as akin to debt and consequently holding that
dividend / interest income has accrued to the assessee cannot be sustained.