2007 (7) TMI 230 - HC - Income Tax

Whether the capital loss can be claimed in respect of transfer of rights issue in a case where the assessee sold its right to subscribe to partially convertible debentures held that market value of the rights issue had to be reckoned regardless of whether the sale contribution of the rights was less than the notional loss or not - assessee is entitled to claim the capital loss that had arisen due to transfer of rights issue to partially convertible debentures revenue s appeal dismissed

Summary

Issues:
- Whether capital loss can be claimed for the transfer of rights issue in a case where the assessee sold its right to subscribe to partially convertible debentures.

Analysis:
The case involved the question of whether a capital loss can be claimed by an assessee for the transfer of rights issue in a scenario where the assessee sold its right to subscribe to partially convertible debentures. The assessee claimed a short-term capital loss in the amount of Rs. 22,42,053 for the sale of 43,535 rights to Partly Convertible Debentures of a company to another entity. The assessee argued that the fall in the market value of existing shares should be deducted from the amounts received, citing a previous decision of the Apex Court. However, the Assessing Officer did not apply the previous decision directly to the case but chose not to compute any capital gain at all. The Commissioner of Income-tax (Appeals) and the Appellate Tribunal both upheld the assessee's claim, stating that the market value of the rights issue must be considered irrespective of the sale contribution being less than the notional loss.

The Apex Court's decision in a previous case, where the assessee renounced her right to shares and claimed a capital loss due to a fall in market value, was cited. The court held that the assessee was entitled to deduct the loss suffered by depreciation in the old shares from the capital gain realized. The court emphasized applying principles that are part of commercial practice or used by an ordinary business person for computation purposes. Additionally, a Division Bench of the Bombay High Court in a separate case allowed a loss claimed by an assessee holding old shares as stock-in-trade, emphasizing the valuation of shares at cost versus market price.

Based on the precedents set by the Apex Court and the Bombay High Court, the High Court of Madras concluded that the law is well-settled on the matter. The court held that the assessee is entitled to claim the capital loss arising from the transfer of rights issue to partially convertible debentures. Ultimately, the court found no substantial question of law for consideration in the appeal and dismissed the case.