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Computation of short-term capital gain on the sale of rights received from a corporation. Interpretation of Supreme Court and Bombay High Court decisions regarding the method to determine profit/loss on the sale of rights by a shareholder. Disagreement between the assessee and Revenue authorities on the correct method to calculate capital gains. Analysis: The case involved a dispute over the computation of short-term capital gain on the sale of rights received from a corporation. The assessee, a shareholder, sold rights received from the corporation and the issue was to determine the part of the amount to be regarded as short-term capital gains. The Income Tax Officer (ITO) calculated the short-term capital gains at Rs. 8,231, which was the assessee's share of 50% of the gross capital gains. The assessee challenged this computation, citing Supreme Court and Bombay High Court decisions as guidance for determining profit/loss on the sale of rights by a shareholder. The assessee argued that the method employed by the ITO had no legal justification and referred to the Supreme Court's decision in the case of Miss Dhun Dadabhoy Kapadia and the Bombay High Court's decision in CIT v. K.A. Patch for guidance. The method approved by the Supreme Court involved determining the diminution in value of shares after they became ex-right, which would be the cost of the right to the shareholder. The assessee contended that the correct method to compute capital gains/loss was to deduct the fall in the value of shares after they became ex-bonus and ex-rights, excluding the dividend declared, to ascertain the value of the rights and bonus shares. On the other hand, the Departmental Representative supported the method followed by the ITO and CIT(A), emphasizing the application of commercial principles and the consideration of the extra expenditure incurred by the assessee to acquire right shares. However, the Appellate Tribunal rejected both methods proposed by the Revenue authorities and the assessee. The Tribunal concluded that the correct approach was to determine the diminution in the value of shares resulting from the issue of bonus shares and right shares separately. The Tribunal analyzed the components of the fall in the value of shares after the issue of bonus and right shares and calculated the diminution in value per share on account of the rights. After considering various factors, including the issue of bonus shares at a premium and the increase in value of shares after becoming ex-bonus, the Tribunal directed the ITO to adopt a specific value for the rights. The Tribunal held that the total cost of the rights to the assessee should be calculated accordingly for computing the short-term capital gain/loss. Ultimately, the appeal was allowed in part, indicating a favorable decision for the assessee.
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