2003 (2) TMI 149 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of short-term capital losses on sale/renunciation of "Right offer."
2. Applicability of the Supreme Court judgment in the case of Miss Dhun Dadabhoy Kapadia vs. CIT.
3. Interpretation of the cost of acquisition for computing capital gains.
4. Legitimacy of tax planning and potential tax avoidance schemes.

Issue-wise Detailed Analysis:

1. Deduction of Short-term Capital Losses on Sale/Renunciation of "Right Offer":
The respondent-assessees, part of the "Shri Lalbhai Group" or "Arvind Mills Group," did not initially claim deductions for losses on the sale/renunciation of "Right offers" in their original returns. These rights were received without payment and were embedded in the original shares of Arvind Mills Ltd. owned by them. They later claimed short-term capital losses by filing revised returns. The AO disallowed these claims, considering them as attempts to avoid tax by misinterpreting the Supreme Court judgment in Miss Dhun Dadabhoy Kapadia vs. CIT. The CIT(A) allowed the claims, which led to the Revenue's appeal.

2. Applicability of the Supreme Court Judgment in the Case of Miss Dhun Dadabhoy Kapadia vs. CIT:
The Supreme Court in Miss Dhun Dadabhoy Kapadia vs. CIT dealt with the apportionment of the cost of acquisition of original shares and the embedded rights. The Court held that the cost of acquisition of rights should be computed by apportioning the cost of acquisition of original shares in an equitable manner. The Tribunal in the present cases found that the facts were distinguishable from the Kapadia case because the market value of shares in the present cases was significantly higher than their original cost, indicating no real depreciation in value.

3. Interpretation of the Cost of Acquisition for Computing Capital Gains:
The Tribunal noted that the cost of acquisition of rights embedded in the original shares should be a fraction of the total cost of acquisition of the shares. The Tribunal rejected the assessees' method of calculating the cost of rights at a figure higher than the total cost of acquisition of the original shares. Instead, it proposed that the cost of acquisition of rights should be proportionate to the actual cost of acquisition of the original shares, using a reasonable and equitable method of apportionment.

4. Legitimacy of Tax Planning and Potential Tax Avoidance Schemes:
The Tribunal highlighted that the claims for short-term capital losses on the sale/renunciation of rights were part of a well-planned tax avoidance scheme. It referred to the Supreme Court's judgment in McDowell & Co. Ltd. vs. CTO, emphasizing that tax planning should be within the framework of the law and that colorable devices for tax avoidance should not be entertained. The Tribunal concluded that the assessees' claims were based on a misinterpretation of the Kapadia judgment and were intended to reduce tax liabilities through artificial losses.

Conclusion:
The Tribunal directed that the cost of acquisition of rights should be computed by apportioning the actual cost of the original shares in a reasonable manner, in line with the principles laid down by the Supreme Court in Miss Dhun Dadabhoy Kapadia. It rejected the assessees' claims for higher costs of acquisition of rights and emphasized the need for equitable and rational apportionment. The appeals were partly allowed, with instructions to the AO to recompute the capital gains accordingly.