1966 (10) TMI 52 - SC - Income Tax

Whether, having regard to the provisions of section 12B(ii), the assessee is entitled to claim a deduction from the full value of the consideration of ₹ 45,262-50P. received for the capital asset, the sum of ₹ 37,630 or any similar sum ? Held that - In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. The principles of accounting indicated by us above are clearly the principle that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with which we are concerned. The application of those principles indicates that the claim of the appellant that the net capital gain by her is not re resented by the whole amount of ₹ 45,262.50P. realised by her on renouncement of her right to receive the new shares was correct and that the net capital gain can only be properly computed after deducting the sum of ₹ 37,630 which approxim ately represents the loss incurred simultaneously by the appellant in her original asset of 710 old shares as a result of the depreciation in their value. The question referred to the High Court must, therefore, be answered in favour of the appellant. The appeal is, consequently, allowed, the answer returned by the High Court is set aside, and the question is answered in the affirmative. Appeal allowed.

Summary

Issues:
- Interpretation of provisions of section 12B(ii) of the Indian Income-tax Act, 1922 regarding deduction claim.
- Determination of capital gain in a transaction involving renouncement of shares and realization of cash value.
- Application of accounting principles in computing capital gain for taxation purposes.

Analysis:
The case involved an appeal regarding the deduction claim under section 12B(ii) of the Indian Income-tax Act, 1922. The appellant inherited 710 ordinary shares and renounced her right to purchase new shares, realizing a sum of Rs. 45,262.50. The appellant claimed a deduction of Rs. 37,630 due to the depreciation in the value of her original shares. The court analyzed the transaction, determining that the net capital gain should be computed by considering the value of the old shares and the cash realized after renouncement. The court justified the appellant's claim for deduction as it accurately reflected the capital gain in the transaction.

In an alternative analysis, the court considered the capital gain from the perspective of the depreciation in the value of the original shares when acquiring the right to obtain new shares. The court concluded that the net capital gain should be calculated by deducting the depreciation amount from the cash realized on transferring the right. This approach led to the same conclusion as the primary analysis, supporting the appellant's claim for deduction.

The court emphasized the application of commercial principles and accounting practices in computing capital gain for taxation purposes. Referring to a previous judgment, the court highlighted the relevance of accounting principles in valuing rights to receive new shares issued by a company. The court rejected the High Court's view that accounting principles are not applicable in taxation computations, asserting that such principles are crucial for determining the net capital gain or loss accurately. Consequently, the court ruled in favor of the appellant, allowing the appeal and setting aside the High Court's answer. The appellant was granted costs in both the Supreme Court and the High Court.

In conclusion, the judgment clarified the computation of capital gain in a complex transaction involving the renouncement of shares and the realization of cash value. It underscored the importance of applying accounting principles and commercial practices to accurately determine capital gains for taxation purposes, ultimately ruling in favor of the appellant's deduction claim.