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TMI Blog1983 (3) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... share. The ITO was of the view that the assessee should be taxed on the difference between the sale value of the shares and the amount paid on such shares. The difference worked out to Rs. 61,500. The assessee, however, had worked out the loss on the basis that the issue of right shares affected the price of his existing holding of original as well as bonus shares and that the loss suffered in the original holding should pro rata go to increase the cost or reduce profit. It was claimed that such a position was accepted by the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651. 3. The first appellate authority found that there was a fall in price consequent on issue of right shares. Since there was also simult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising out of original holding could be treated as short-term capital gains with reference to the date of issue of bonus shares and not with reference to the date of acquisition of original shares. The reason for this is that the rights in respect of each type of shares need not necessarily be same. For ascertaining the cost of bonus shares, the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 held that the bonus shares, if they are ranked pari passu with original shares, should be valued on the basis of averaging the cost of original shares. However, the Calcutta High Court in CIT v. General Investment Co. Ltd. [1981] 131 ITR 366 applied this principle even when the loss with reference to the original cost of the origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an investor in shares. The question of valuation of Cost of Option to subscribe to right shares had again come up in the case of CIT v. K.A. Patch [1971] 81 ITR 413 (Bom.). The Bombay High Court held that it makes no difference that the assessee was a dealer. In this context the counsel for the revenue pointed out certain anomalies in following the decision in Kapadia's case and wanted the principle of averaging accepted by the Supreme Court in respect of bonus shares to be applied for right shares as well. The examples given by the counsel for the revenue in that case are available in K.A. Patch's case. The High Court repeated the comments made by the counsel for the assessee in the following words : " Mr. Dastur, the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing the shortfall ascertained by deducting the ex-right price from the cum-right price at the time of the issue of the rights shares. Mr. Dastur contended that the method suggested by Mr. Joshi, which is the method of averaging out as laid down in the said three cases dealing with bonus shares, may, with some reservations, apply only if, in the case of a rights issue, the shareholder actually applied for the share offered to him, pays to the company the money payable in respect of those shares and obtains the shares from the company." The High Court applied the rule in Kapadia's case as Shri K.A. Patch had sold the options themselves and had not subscribed to the shares. The principle of averaging would have to be extended to right share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the assessee on the basis of rule in Kapadia's case is not only unjustified in law besides being complicated but also would have the effect of complicating the process of ascertaining the cost of other shares in the event of their sale. As the Courts have pointed out in a number of cases of this type, what we have to look into is the commercial practice. The assessee has a common shares fund account. Ordinary commercial practice suggests that all the shares which have a similar prospect in respect of the dividends have a uniform value to the shareholder. Such uniformity is assured by averaging the entire outlay by the taxpayer subject only to adjustment for any contribution towards right shares remaining unpaid on date of sale. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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