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2023 (10) TMI 1431 - AT - Income TaxLoss due to the fall in value of equity shares - Treatment of the loss as a business loss or capital loss - HELD THAT - There is no dispute that the said amount is chargeable to tax as business profit. The assessee has however worked out the fall in the value of original shares amounting to Rs 2,72,36,160/- and has claimed the same as an eligible deduction while offering its income to tax. The same has however resulted in a net business loss of Rs 1,94,54,400/- which it has sought to carried forward to subsequent years. The said fall in the value has been worked out based on the market quotation in Ludhiana Stock Exchange wherein prior to the right issue, on 30/10/1992 last cum right price of the shares were Rs. 610/- per share and the first Ex-right price of the share on 11/11/1992 was Rs. 400/- per share resulting in fall in the price of the share by Rs. 210/- per share. The cum right price and ex-right price per share has not been disputed by the Revenue nor the quantum of fall in value of original shares so arrived has been disputed by the Revenue. Facts of the present case are pari-materia with fact of the case before K.A. Patch 1970 (2) TMI 39 - BOMBAY HIGH COURT wherein the preposition laid down in case of Miss Dhun Dadabhoy Kapadia 1966 (10) TMI 52 - SUPREME COURT has been followed and it has been held that it would make no difference where the shares are held as stock in trade or as an investment as the profits have to be worked out in a commercial sense taking into account the relevant accounting principles. In the instant case, the business profits have to be ascertained by ascertaining the excess of the amount of appreciation in the face value of the new shares which would be the sale proceeds of the right to the new rights shares over the amount of depreciation in the old shares which would be the same as the difference between the cum-right market value and the ex-right market value of the old shares. The assessee has rightly computed the same where right renunciation premium on 64688 rights have been determined at Rs 7781760 and depreciation in the value of the old shares have been determined at Rs 27236160/- and the net business loss of Rs 1,94,54,400/- has been claimed to be carried forward. We accordingly set-aside the order so passed by the ld. CIT (A) and allow the ground of appeal so raised by the assessee and the AO is hereby directed to allow the carry forward of business loss to subsequent years.
Issues Involved:
1. Allowability of capital loss due to the fall in value of equity shares of M/s Vardhman Spinning & General Mills Ltd. 2. Classification of the assessee as a trader in shares or an investor. 3. Treatment of the loss as a business loss or capital loss. 4. Applicability of the Supreme Court's decision in Miss Dhun Dadabhoy Kapadia vs. CIT. Issue-wise Detailed Analysis: 1. Allowability of Capital Loss Due to Fall in Value of Equity Shares: The primary issue was whether the assessee's claim of capital loss amounting to Rs. 1,94,54,400/- due to the fall in the value of equity shares of M/s Vardhman Spinning & General Mills Ltd. was allowable. The assessee argued that the loss should be allowed based on the depreciation in the value of the original shares due to the renunciation of rights. The AO initially disallowed this claim, considering it a notional loss and not an actual transfer of shares, thus not allowable for calculating the total income of the assessee. 2. Classification of the Assessee as a Trader in Shares or an Investor: The AO classified the assessee as a trader in shares, asserting that the income/loss from transactions in shares should be treated as business income. This classification was critical as it influenced whether the loss could be set off against business income or capital gains. The Ld. CIT(A) initially held that the assessee was an investor, and the shares were held as investments, thus treating the loss as a capital loss. However, the Tribunal later upheld the AO's classification of the assessee as a trader in shares. 3. Treatment of the Loss as Business Loss or Capital Loss: The Tribunal's decision was pivotal in determining the treatment of the loss. The Tribunal concluded that since the assessee was a trader in shares, the loss should be treated as a business loss. The AO argued that any gain or loss under the head "income from business or profession" would arise only with an actual transfer of shares, and since there was no transfer, the loss was notional and not allowable. The Ld. CIT(A) upheld this view, stating that the loss was notional and could not be allowed as a business loss. 4. Applicability of the Supreme Court's Decision in Miss Dhun Dadabhoy Kapadia vs. CIT: The assessee relied on the Supreme Court's decision in Miss Dhun Dadabhoy Kapadia vs. CIT, which allowed the deduction of depreciation in the value of original shares from the capital gain realized on the transfer of rights. The Ld. CIT(A) distinguished the facts of the current case from those in the Kapadia case, noting that in the latter, the loss was due to the actual transfer of rights, whereas in the present case, there was no actual transfer of shares. However, the Tribunal found the facts of the present case to be similar to those in the Kapadia case and other cited judgments, where notional losses were allowed. Comprehensive Analysis: The Tribunal, after reviewing the litigation history and the facts of the case, concluded that the assessee's claim of loss due to the fall in the value of shares should be allowed as a business loss. The Tribunal noted that the assessee had sold rights and received a premium, and the fall in the value of original shares was a direct consequence of the rights issue. The Tribunal applied the principles laid down by the Supreme Court in Miss Dhun Dadabhoy Kapadia vs. CIT, which allowed the deduction of depreciation in the value of original shares from the capital gain realized on the transfer of rights. The Tribunal also referred to several other judgments, including CIT vs. K.A. Patch and CIT vs. Oberoi Building and Investment Pvt. Ltd., which supported the assessee's claim. The Tribunal emphasized that the method of calculating the actual amount of profit or loss does not vary whether the shares are held as stock-in-trade or as investments. In conclusion, the Tribunal set aside the order of the Ld. CIT(A) and directed the AO to allow the carry forward of the business loss of Rs. 1,94,54,400/- to subsequent years, thereby allowing the appeal of the assessee.
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