1970 (2) TMI 39 - HC - Income Tax

Sale of the right to the new rights issue shares - company offered its existing shareholders for subscription one new share of the rights issue for every five existing old shares - depreciation in the value of existing shares - set off

Summary

Issues Involved:
1. Taxability of Rs. 27,500 as business profit.
2. Entitlement to claim Rs. 39,500 as a revenue loss.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 27,500 as business profit:

The assessee, a share-broker, sold his right to subscribe to 350 new shares offered by Tata Iron and Steel Co. Ltd. during a rights issue, realizing Rs. 27,500. The primary contention was whether this amount should be considered a capital gain or business profit. The assessee initially claimed it as a capital gain, but later conceded it as business profit. The Income-tax Officer and the Appellate Assistant Commissioner held it as business profit taxable under the Indian Income-tax Act, 1922. The Income-tax Appellate Tribunal, however, allowed the assessee's second contention that the fall in the value of his original 1,750 shares should be set off against the Rs. 27,500, resulting in no profit.

The court referred to four Supreme Court judgments, particularly focusing on the principles laid down in *Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax*. In this case, the Supreme Court held that the correct method for evaluating capital gain was to find the aggregate of the ex-right value of the old shares and the actual cash received from the sale of the rights, then deduct the cum-right value of the old shares. Applying these principles, the court noted that the Tribunal had not set off the depreciation in the old shares against the amount realized from the sale of the rights. Consequently, the court answered question No. 1 in the negative, indicating that Rs. 27,500 was not the assessee's clear profit liable to tax.

2. Entitlement to claim Rs. 39,500 as a revenue loss:

The assessee argued that if the Rs. 27,500 was considered revenue profit, then the depreciation in the value of the original 1,750 shares should be set off against it, resulting in a loss of Rs. 39,250. The court noted that the amount of Rs. 39,250 was calculated by deducting Rs. 2,82,750 (market rate per share on 31st March, 1960) from Rs. 3,22,000 (market rate per share on 1st April, 1959). However, this calculation did not align with the principles laid down in *Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax*, which required using the market rates of the Tata ordinary shares cum-right and ex-right immediately before and after the rights issue.

The court concluded that the principles from *Dhun Kapadia's* case were not applied correctly in calculating the Rs. 39,250. Therefore, question No. 2 was also answered in the negative, indicating that the assessee was not entitled to claim the sum of Rs. 39,500 as a revenue loss.

Conclusion:

The court, adhering to the principles laid down by the Supreme Court in *Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax*, concluded that the amount realized from the sale of rights shares should be set off by the depreciation in the old shares. Consequently, both questions were answered in the negative, and no order as to costs was made.