| Question And Answer | |
|---|---|
| Subject: | Taxation on Conversion of Loan into Redeemable Preference Shares at Par |
| Category: | Income-Tax |
| Querist: | Mahesh |
| Answered by: | Advocate Shashi Ashok Bekal |
| Tags: | .Conversion of Loan into Redeemable Preference Shares at Par, capital or revenue, valuation |
| Date: | July 12, 2022 |
Company “A” has assigned the loan (a fully written-off loan account) to the NBFC in the year 2021 at a discounted value (lower value as compared to the original debt obligation). The loan was taken over by NBFC because NBFC is hope full of that it will recover the higher amount in the future. The Borrower against the loan (original debt) has allotted redeemable preference shares (RPS) of Rs 100/- each at par to the NBFC. The Borrower’s net worth pre-allotment of RPS is negative. The query is What will be the tax impact on NBFC when the loan is converted into Redeemable preference shares. Whether the difference between the discounted amount of loan (assigned value) and shares allotted at par by converting original debt will be considered as taxable income.
The valuation of shares has to be supported by a share valuation report prepared in accordance with Rule 11UA of the Income-tax Rules, 1962.
If there is a difference between the value of shares allotted and the assigned value of loan (the consideration), the same will be taxable under section 56(2)(x) of the Act.