Redemption of Preference Shares : 

When a preference share is redeemed by a company, what the shareholder does in effect is to sell the share to the company. The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. In effect, the company buys back the preference shares from the shareholders. The redemption of preference shares by the company, therefore, is a sale and squarely comes within the phrase “sale, exchange or relinquishment‟ of an asset [Anarkali Sarabhai vs. CIT (1997) 224 ITR 422].

Acquisition of irredeemable preference shares of a company in exchange of equity shares consequent to capital restructuring scheme of the company cannot be exchange of one kind of shares against another kind of shares having different rights and liabilities. Where the assessee sells the preference shares within 6 months of their acquisition, the capital gain/loss shall be short-term in nature [CIT vs. Santosh L. Chowgule (1998) 234 ITR 787 (Bombay)].