2005 (8) TMI 44 - HC - Income Tax

Capital loss - A perusal of the judgment of the Calcutta High Court in the case of Oberoi Building and Investment Pvt. Ltd. no doubt shows that the capital gain arising on the sale of right to purchase the rights shares had been shown as short-term capital gain and assessed as such. However no dispute had been raised by the Revenue about the nature of the capital asset. The Calcutta High Court therefore had no occasion to deal with the question as to whether the capital gain was short-term or long-term in nature. Thus this judgment cannot be said to be an authority on the proposition that the date of the decision of the company to issue the rights shares is the date of acquisition of the right to receive the rights shares for determining as to whether such right is a long-term capital asset or a short-term capital asset. No other point has been raised. In view of the above we find no merit in these appeals and dismiss the same

Issues:
Interpretation of capital loss as long-term or short-term, determination of the nature of the right to receive rights shares as a capital asset, relevance of the date of acquisition of original shares in determining the nature of rights shares, application of legal precedents in capital gains assessment.

Analysis:
The judgment addressed five appeals with a common question of law and facts against the Income-tax Appellate Tribunal's order for the assessment year 1992-93. The case involved an assessee who renounced rights shares in favor of another company, resulting in a claimed loss against the price realized from the renouncement. The Assessing Officer initially treated the loss as a long-term capital loss, which the Commissioner of Income-tax (Appeals) later classified as a short-term capital loss. However, the Tribunal upheld the Assessing Officer's decision, considering the loss as a long-term capital loss.

The appellant contended that the right to receive bonus or rights shares arises when the company decides to issue such shares, regardless of the date of acquisition of the original shares. Legal arguments were supported by various judgments, including the pivotal case of Miss Dhun Dadabhoy Kapadia. The Revenue, on the other hand, argued that the right to receive shares in a rights issue is embedded in the old shares and is acquired at the time of acquiring the original shares.

The Tribunal's decision aligned with the legal precedent set by Miss Dhun Dadabhoy Kapadia, where the adjustment of loss was allowed based on the fall in the value of old shares against the amount received upon renunciation of the rights shares. The Tribunal emphasized that the period for which the old shares were held determines the nature of the right to receive rights shares as a long-term or short-term capital asset.

The judgment highlighted that the legal authorities cited by the appellants did not support their case, as those cases dealt with different contexts, such as the sale of bonus shares. The judgment clarified that in the present case, the transfer was of the right to receive rights shares, acquired at the time of obtaining the old shares. The Court differentiated this scenario from cases involving the sale of actual rights shares and emphasized the relevance of the date of acquisition of the right in question.

The judgment also analyzed a decision by the Calcutta High Court, noting that it did not address the specific issue of whether the capital gain was short-term or long-term in nature, as the Revenue did not dispute the nature of the capital asset. Ultimately, the Court found no merit in the appeals and dismissed them, without awarding costs.

In conclusion, the judgment clarified the distinction between long-term and short-term capital losses in the context of renounced rights shares, emphasizing the importance of the date of acquisition of the right to receive such shares in determining the nature of the capital asset.

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