32.1 Capital Gains tax is levied on any transaction involving a “transfer”. A “transfer” includes not only sale but also includes exchange, extinguishment, etc. Thus consideration for transfer may be in cash or kind. When preference shares are converted into equity shares, there is an exchange of assets (preference shares are exchanged into equity shares).
There is relief available for conversion of debentures into shares. No capital gain tax is charged. There was no such relief in case of preference shares. Representations have been made to consider preference shares on par with debentures.
32.2 Finance Bill now provides that when a preference share of a company is converted into equity share of the same company, it will not attract Capital Gains tax.
32.3 As a corollary, when the equity share (converted from preference share) is sold, the period of holding of equity share will commence from the date of acquiring the preference share. The cost at which preference shares were acquired will be taken as cost of equity shares [S. 49(2AE)].