The Assessee would be entitled to benefit of indexation under section 48 at the time of redemption of redeemable preference shares.


The assessee had subscribed to the purchase of 4 lakh preference shares each of Rs. 100/- of Enam Finance Consultants Pvt. Ltd. in 1992. The preference shares were to carry a dividend of four percent per annum and were to be redeemable after the expiry of ten years from the date of allotment. During AY 2001-02, the assessee redeemed three lakh shares at par and claimed a long term loss of Rs. 2.73 crores after availing of the benefit of indexation.

The AO disallowed the claim of set off of long term capital loss that arose on redemption against long term capital gain on the sale of other shares on the ground that (i) Both the assessee and the Company in which the assessee held the preference shares, were managed by the same group of persons; and (ii) There was no transfer and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares.

The CIT(A) and ITAT upheld the claim of the Assessee. Revenue filed appeal to HC.


The HC observed that there is a finding of fact that the transaction was not questioned by the Revenue for over ten years and that both the assessee and the Company of which the assessee held redeemable preference shares were juridical entities. The HC observed that mere fact that both companies were under common management would not necessarily indicate that the transaction was not genuine. The Revenue did not bring any material on record whatsoever to substantiate the contention that the transaction was sham. The contention of the Revenue was negated.

Relying on the decision of the SC in Anarkali Sarabhai 224 ITR 422 (SC), the HC held that a redemption of preference shares by a Company squarely comes within the ambit of Section 2(47) of the Income Tax Act, 1961 and it amounts to a transfer. With respect to indexation, the HC allowed the claim. The HC observed that section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issued by the Government. The HC held that four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression in Section 48 of the IT Act. The HC held that the Tribunal was correct in its decision to that effect.

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