Conversion of Warrants into Shares Not Transfer – No Capital Gains | ITAT

Case Details: Deputy Commissioner of Income-tax vs. Kemper Holding (P.) Ltd. [2026] 183 taxmann.com 294 (Mumbai-Trib.)

Judiciary and Counsel Details

• Sanjay Garg, Judicial Member & Sanjay Arora, Accountant Member
• Surinder Jit Singh for the Appellant.
• Pradeep Sagar for the Respondent.

Facts of the Case

Assessee, a company, was allotted 7,00,000 warrants of Rs. 100 each, paying 10% of the warrant’s cost. The assessee later converted the warrant into equity shares on the payment of the remaining cost price.

The Assessing Officer (AO) treated the difference between the market value and exercise price as long-term capital gain and also invoked the proviso (iv) to section 48. Aggrieved by the order, the assessee preferred an appeal to the CIT(A). The CIT(A) deleted the addition, and the matter reached the Mumbai Tribunal.

ITAT Held

The Tribunal held that the conversion of the warrant into shares by paying the remaining 90% amount was neither an extinguishment nor a relinquishment of any rights in the assets. The assessee purchased the warrants by paying 10% of the predetermined share price. The assessee had the option to convert the said warrants into shares by paying 90% of the amount within the stipulated period. The non-payment of which would have resulted in forfeiture of the money. The money paid for the warrants was an advance payment for the purchase of shares, and the assessee exercised his rights within the stipulated time and received the shares, paying the remaining 90% at the predetermined share value. It can be considered an investment in shares.

The capital gain would have arisen if the assessee had sold the said shares in the market at a higher price. The shares have been retained by the assessee, and the gain or fall in the market value of the said shares does not itself constitute any transfer under the Act. The purchase of shares at a specified rate, which was booked by paying 10% amount in advance, neither amounts to any transfer of shares or warrants by the assessee nor does it invite any tax liability under the Act.

The AO wrongly and illegally interpreted proviso (iv) to section 48 of the IT Act. A bare perusal of the said proviso reveals that the same is attracted in case the shares, debentures or warrants are transferred by the assessee to some other person without receiving any consideration in terms of money. In the case in hand, the assessee has not transferred any warrant or share to any other person; rather, he has just exercised his option to purchase the shares at a stipulated rate by paying the remaining 90% amount, which, in clear term falls in the definition of investment and not in the definition of sale or transfer on his part.

Therefore, the conversion of warrants into shares did not constitute a transfer under section 2(47), and no capital gains were chargeable under section 48.