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TMI Blog2003 (2) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of misinterpretation of judgment of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) divorced from its context and facts. 1.1 The Hon'ble apex Court in this case observed that "Right offer" of acquiring 710 new shares of TISCO was embedded in the 710 original/old shares of TISCO held by Miss Dhun D. Kapadia. The cost of original/old shares as per third proviso to sub-s. (2) of s. 12B of the IT Act, 1922, was Rs. 341 per share, which included the cost of "rights" embedded in the original share. Miss Kapadia instead of subscribing the new issues opted to sell/renouce "Right offer" to third party in open market for a total consideration of Rs. 45,252. The assessee claimed that for working out capital gain on sale/renunciation of "rights", proportionate cost of acquisition of rights worked out by the assessee at Rs. 53 per share i.e., Rs. 37,630 should be deducted from sale consideration of Rs. 45,252. The Hon'ble Supreme Court observed that the cum-right price of shares of TISCO immediately prior to issue of right offer was Rs. 253 and right price soon after the issue of right offer was Rs. 198.75. Thus, there was a depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of original/old shares held by them. The present cases involved consideration of claim of such short-term capital losses on sale/renunciation of "Right offers" The AO disallowed such claim of losses. The CIT(A) allowed the same. 2. The Revenue has raised the following identical grounds in all these appeals: "1.1. The learned CIT(A) has erred in law and on facts in deleting the short-term capital gain of Rs. 5,60,000 in ITA No. 3706/A/1997; Rs. 1,86,000 in ITA No. 3709/A/1997, Rs. 8,06,000 in ITA No. 3713/A/1997 and Rs. 42,000 in ITA No. 3714/A/1997, when as per admitted facts on record assessee received the aforesaid amount on sale of right renunciation forms for which no cost was incurred. 1.2. The learned CIT(A) has erred in law and on facts in directing to allow the carry forward of short-term capital loss of Rs. 12,88,000 in ITA No. 3706/A/1997; Rs. 4,29,000 in ITA No. 3709/A/1997; Rs. 18,55,180 in ITA No. 3713/A/1997 and Rs. 96,000 in ITA No. 3714/A/1997 on sale of right renunciation forms when as per admitted facts on record assessee actually benefited by receipt of Rs. 5,60,000 in ITA No. 3706/Ahd/1997; Rs. 1,86,000 in ITA No. 3709/A/1997; Rs. 8,06,000 in ITA No. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght has to be considered, that should be worked out with reference to the actual cost of acquisition. 1.8. The learned CIT(A) has erred in law and on facts in not following the appeal order of CIT(A)-V, Ahmedabad, dt. 21st Jan., 1996, in the case of Sunil Siddharthbhai for asst. yr. 1993-94 of the same group on identical facts and circumstances, wherein it was held that decision of Hon'ble Supreme Court in the case of Dhun Dababhoy Kapadia was not applicable on the facts and circumstances of the case and taking into consideration changed position of law for taxation of capital gains under 1961 Act as applicable to the assessee's case. In doing so learned CIT(A) has ignored the decision of Hon'ble Gujarat High Court in the case of Taraben R. Patel Anr. vs. ITO Ors. (1995) 127 CTR (Guj) 187 : (1995) 215 ITR 323 (Guj) wherein it has been categorically held that on identical facts the appellate authorities will not depart from previous decisions at his sweet will in absence of material circumstances or without giving reasons for such departure. 1.9. The learned CIT(A) has further erred in law and on facts in relying on other judgments in support of his finding that the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing transacted on the floor of the stock exchange. 3.1. The learned CIT(A) has erred in law and on facts in holding that the amendment brought under the provisions of s. 55(2)(aa) in the matter of determination of the value of rights to financial assets was not explanatory and clarificatory in nature and hence not applicable to all pending proceedings. 3.2. The learned CIT(A) has erred in law and on facts in not appreciating that in view of the judgment of Hon'ble Supreme Court in the case of CWT vs. Shravankumar Swaroop Ors. (1994) 122 CTR (SC) 380 : (1994) 210 ITR 886 (SC) and judgment of Hon'ble Gujarat High Court in the case of CIT vs. Chandulal Venichand (1994) 188 CTR (Guj) 257 : (1994) 209 ITR 7 (Guj) to the proposition that the amendment brought as aforesaid being for rationalisation and simplification of existing provisions was clarificatory in nature and thus applicable to all pending proceedings. 4.1. The learned CIT(A) has erred in law and on facts in not at all considering the deciding the alternative submission filed in the course of appeal hearing that the amount received by assessee on sale of right renunciation form, was clearly in the nature of profits, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of Rs. 200 per right. The sale proceeds of Rs. 5,60,000 so received by way of consideration for the aforesaid transfer of right offer was credited as profit in the P L a/cs. At the time of filing of the original return, no income attributable to aforesaid sale consideration of right offer transferred by the assessee was shown in view of the judgment of the Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) in which it was held that where cost of acquisition cannot be envisaged, no tax on capital gain can be levied. However, in the revised return the assessee claimed a loss of Rs. 12,88,000 in relation to the aforesaid transfer of right offer on the basis of interpretation of the judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT. The value of shares of Arvind Mills Ltd. on 23rd July, 1992, as quoted on Ahmedabad Stock Exchange immediately prior to announcement of right offer was Rs. 246 per share. The first ex-right quotation as on 24th July, 1992, was Rs. 180. Thus there was a fall of Rs. 66 per share as a result of announcement of right offer by Arvind Mills Ltd. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Dadabhay Kapadia on similar basis. The loss was worked out as under: Rs. 'Sale consideration received on sale of 4,033 rights @ 200 per right 8,06,600 Cost of the rights worked out @ 660 per right 26,61,780 Loss 18,55,180 ITA No. 3714/Ahd/1997: Anangbhai Ajaybhai In this case also the assessee made a claim for short-term capital loss of Rs. 36,340 on sale of right offer by filing a revised return on 30th March, 1994. The assessee owned 14,952 shares of Arvind Mills Ltd. He, therefore, became entitled to get 1,495 debentures in the ratio of 1:10 of shares held. The assessee renounced such right offer and transferred the same in favour of one of its group concerns at the rate of Rs. 200 per right. The assessee received Rs. 15,800. The loss was claimed on similar basis by computing the cost of right at Rs. 660. The short-term capital loss of Rs. 36,340 was worked out on similar basis. 5. The AO in the assessment orders of the respondent-companies has observed that all these assessees were owning certain shares of Arvind Mills Ltd. The average cost of such shares owned by all of them ranged between Rs. 20 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the cost of Rs. 660 per right computed by the assessee. These facts have stated in the assessment order only with a view to point out the glaring mistake in the working of short-term capital loss claimed by the assessee on sale of such right offer. The AO, however, observed that the assessee is not entitled to any deduction in respect of short-term capital loss claimed on the basis of misinterpretation of the judgment of the Hon'ble apex Court in the case of Miss Dhun Dadabhoy Kapadia. 5.4. The AO has also given a detailed chart on pp. 10 and 11 of the assessment order in the case of Ajax Investments Ltd., giving complete details of rights of FCD transferred by various companies of this group in favour of Arvind Polycoat Ltd. M/s Arvind Polycoat Ltd. is also a company of the same group who had availability of finances with them. They made major investments in the right issue of Arvind Mills Ltd. by purchasing rights for FCD at the rate of Rs. 200 per FCD from various other companies of the same group. The details of other group companies who had invested in the right issue of Arvind Mills Ltd. by purchase of rights from other group companies, could not be gathered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeds of right offer has shown NIL income in the original return on the basis of judgment of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty but later on they have filed the revised return and claimed capital loss by calculating notional depreciation in value of shares. No reasonable explanation for filing the revised return by changing the stand as mentioned above was furnished during the assessment proceedings. It has also been observed that various other persons of the same group viz., Chinubhai Chimanbhai and Ashokbhai Chimanbhai for asst. yr. 1993-94 have sold their rights to FCD of Arvind Polycoat Ltd. and have contended that there will be no cost of acquisition of such rights and consequently there will be no capital gains tax in view of Supreme Court decision in the case of B.C. Srinivasa Setty. These assessees have not claimed any capital loss on the basis of Miss Dhun Dadabhoy Kapadia's case. The AO observed that the assessees have wrongly and deliberately applied the ratio of Miss Dhun Dadabhoy Kapadia's case in the present cases by filing the revised returns only with a view to claim set off of capital loss against current and future capital gains. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for computation of capital gains. There is no provision which permits such a situation that an assessee who sells shares at the rate of Rs. 80 which costed him only Rs. 20 or Rs. 22 per share should not attract any tax on capital gains arising as a result of sale thereof. Such a view is against commonsense and is also contrary to claim provisions of law. 5.9. The AO on p. 18 of the said assessment order has placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) in which it has been observed that the intention should be found out from the language used by the legislature and if strict literal construction leads to an absurd result a result not intended to be subserved by the object of the legislation, then if another construction is possible apart from strict literal construction, then that construction should be preferred. The AO has observed on p. 19 of the said assessment order that instead of following the spirit of decision in the case of Miss Dhun Dadabhoy Kapadia, the assessee has tried to use this decision as a tool for tax evasion. The assessee has stretched few words from the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has placed reliance on the judgments in the case of CIT vs. S. Arumugham Pillai (1969) 73 ITR 382 (Mad), Tripty Drinks (P) Ltd. vs. CIT 1978 CTR (Ori) 35 : (1978) 112 ITR 721 (Ori) and CIT vs. Indian Overseas Bank (1984) 41 CTR (Mad) 212 : (1985) 151 ITR 446 (Mad). Applying the principles laid down in these judgments the AO has observed that in the instant cases it has been found that the assessee's original investment in shares has appreciated by three times and in addition to such appreciation, the assessee has also received the amount by way of sale of right offer, for which no purchase price was paid by the assessee. Thus, there is neither any loss in the value of investments when compared with the cost price nor there is any other loss to the assessee. The entire exercise of computation of loss undertaken by the assessee is hypothetical and theoretical. No businessman will say that when your investment appreciates there-fold and you also receive substantial amount on sale of rights, you are incurring losses. Because if this is loss, then everyone will like to have such loss, where one can make huge money without paying any taxes. 5.13. The AO thereafter on p. 23 of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, in the present cases the transfer is not of a goodwill but is that of right to receive convertible debentures, whose cost can be determined on the basis of depreciation in the valuation of original shares consequent upon declaration of right by the company and such depreciation in value will be deemed to be the cost of acquisition of the right, which the assessees sold/renounced in favour of third party for a consideration. (c) The Tribunal further held that the depreciation in value of shares as a result of right offer computed by the assessee at Rs. 66 per share cannot be accepted. The rates of spot delivery are better indicator of the actual market value of the shares. The Tribunal accepted that the depreciation in the value of shares consequent to the declaration of right will have to be calculated as under: (i) Last quotation of 24th July, 1992, as cum-right on sport basis Rs. 215 (ii) First quotation ex-right Rs. 180 Depreciation Rs. 35 (d) The Tribunal after taking into consideration the totality of the facts and circumstances directed the AO to compute the capital loss suffered by the assessee on the basis of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sstt. CIT vs. Amazon Investments Ltd., dt. 20th April, 1999, and in the cases of aforesaid five parties, dt. 17th Aug., 1999, were submitted. The learned counsel also submitted copies of assessment orders of all these six assessees to show that the facts relating to all those cases are absolutely identical and similar. Shri Shah contended that the earlier decisions of the Tribunal on identical facts are binding. The successor Bench must follow the earlier decisions. The view taken by the Tribunal in the above referred cases is fully supported by the judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia. He also drew our attention to the judgment of the Hon'ble Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1963) 48 ITR 882 (Bom) with a view to bring to our notice the relevant facts of the said case. The provision of s. 12B of the old IT Act, 1922, have also been reproduced on p. 891 of the said report. It was pointed out that the language of s. 12B so far as it relates to computation of capital gains is almost similar as contained in the corresponding provisions of the IT Act, 1961. 9.1. The learned counsel referred to the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if sold it would be the purchaser of the right who would be entitled to apply for and actually obtain the rights shares. In the cases of issue of bonus shares, the bonus shares would be given to the holders of the then existing shares and the working out of the cost to the shareholder would be simple. The working out of the cost would be to add the number of bonus shares to the number of the old shares and spread out the cost of the old shares over the aggregate of the old and the bonus shares. The result would be the average price of each share of the combined lot of the old and the bonus shares. He also invited our attention to various examples given at pp. 420 and 421 of 81 ITR. It was pointed out that if the principle in Dhun Dadabhoy Kapadia's case is held applicable in each of these two examples, what would be the taxable gain would be Rs. 5, though in example No. 1 the profit is Rs. 22.50 and in example No. 2 there is a loss of Rs. 50. The learned counsel contended that the method of averaging out of the cost as laid down in the three cases dealing with bonus shares, may, with some reservations, apply only if, in the case of a rights issue, the shareholder actually applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or debentures. If their value is included and that is not more than the cost invested in the share capital, the sale amount of rights shares or debentures cannot be taxed as capital gain. Thus, in view of the fact that those original shares were treated as capital assets and when there is no finding that the assessee is a dealer in shares and considering the decisions of their Lordships, relied upon by the Tribunal, if after including that gain, the value of the shares on that date falls short of the cost invested in the shares, no capital gain remains for tax." 9.7. The learned counsel then referred to the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Suhasbhai Vadilal (1999) 157 CTR (Guj) 577 : (1999) 239 ITR 362 (Guj) it was held in the aforesaid case that: "the shares in R were given to the shareholders of S as a matter of right, depending upon their holding and at the ratio of 1:1. Though they were not rights issues properly so-called of S the fact remained that the shares of S carried with them the right to receive the shares of R in view of the special arrangement made between the two companies and the resolution passed by R linking its issue directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is with a view to achieve consistency in judicial pronouncements, the Courts have evolved the rule of precedents, principle of stare decisis, etc. These rules and principles are based on public policy and if these are not followed by Courts then there will be chaos in the administration of justice, which we see in plenty in this case. This Court in the case of Sub-Inspector Rooplal vs. Lt. Governor held thus: 'At the outset, we must express our serious dissatisfaction in regard to the manner in which a coordinate Bench of the Tribunal has overruled, in effect, an earlier judgment of another coordinate Bench of the same Tribunal. This is opposed to all principles of judicial discipline. If at all, the subsequent Bench of the Tribunal was of the opinion that the earlier view taken by the coordinate Bench of the same Tribunal was incorrect, it ought to have referred the matter to a larger Bench so that the difference of opinion between the two coordinate Benches on the same point could have been avoided. It is not as if the latter Bench was unaware of the judgment of the earlier Bench but knowingly it proceeded to disagree with the said judgment against all known rules of precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court has held a particular provision of law to be constitutional and not violative or Art. 14 of the Constitution of India, it is not open to another Division Bench to hold that the same provision of law is unconstitutional. Judicial discipline demands that one Division Bench of a High Court should, ordinarily, follow the judgment of another Division Bench of that High Court. In extraordinary cases, where the later Division Bench finds it difficult, for stated reasons, to follow the earlier Division Bench judgment, the proper course is to order that the papers be placed before the Chief Justice of High Court for constituting a larger Bench. (g) State of A.P. vs. V.C. Subbarayaddu Ors. AIR 1998 SC 848: In this case it was held that a Division Bench disagreeing with earlier Bench ruling should as a matter of propriety refer the matter to the larger Bench. (h) CIT vs. Crescent Films (P) Ltd. (2001) 171 CTR (Mad) 239 It was held by the Hon'ble Madras High Court in this case that a decision is to be regarded as a precedent for its ratio decidendi and not for the facts in relation to which such ratio was laid down. (i) Vishnu Traders vs. State of Haryana Ors. 1995 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex-right value soon before and after the offer of right over FCDs was announced. The relevant figures of sale price or rights renounced/sold by all those six assessees at the rate of Rs. 200 per right offer and the short-term capital loss claimed by them allegedly on the basis of principles of law laid down in the case of Miss Dhun Dadabhoy Kapadia are as under: Sale value of FCDs @ Rs. 200 per right Short-term loss claimed by taking cost at Rs. 660 per right Niranjan Narottambhai 11,46,600 26,37,180 Acropolish Investments 1,22,35,400 2,81,41,420 Amazon Investments Ltd. 3,06,07,200 7,03,96,560 Avon Investments Ltd. 4,80,000 11,04,000 Sanjaybhai Shrenikbhai 7,60,000 17,48,000 Shrenikbhai Kasturbhai 11,41,200 26,23,760 12. The Tribunal vide its order, dt. 20th April, 1999, in the case of Amazon Investments Ltd. and order, dt. 17th Aug., 1999, in other five cases directed the AO to compute the loss suffered by the assessees by taking depreciation in the value of share being difference between cum-right and ex-right value on sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned: 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT authorities and Tribunals are supposed to apply the ratio of a decision to the facts of particular cases with due care and discernment bearing in mind the restricted scope of their jurisdiction under s. 35 and the object for what it is conferred." (g) K.T.M.T.M. Abdul Kayoom Anr. vs. CIT at p. 703: "Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. The decision, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right incurred, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases." (h) CIT vs. J.H. Gotla: The relevant extract from the headnote are reproduced below: "If a strict and literal construction of the statute leads to an absurd result, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Act, 1994, and subsequently amended by the Finance Act, 1995, inter alia, provided that the cost of acquisition in relation to any right to renounce right share shall be NIL, will be applicable prospectively w.e.f. 1st April, 1995, and will accordingly apply in relation to asst. yr. 1995-96 and subsequent years. We respectfully following the aforesaid decisions of the Tribunal hold that the AO was not justified in invoking the amended provisions of s. 55(2) in relation to the present cases pertaining to asst. yr. 1993-94. (b) We also agree with the findings given by the Tribunal in the aforesaid cases that the decision of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia rendered under the old IT Act, 1922, will be applicable to the cases adjudicated under the provisions of IT Act, 1961, because the phraseology used in s. 12B of the 1922 Act is in pari materia with the language used in corresponding provisions contained in IT Act, 1961. (c) We also agree with the findings given by the Tribunal in the aforesaid cases that the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty is not applicable in relation to determination of capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he new issues, are announced by the company flows from the relevant provisions contained in the Companies Act. The cost of acquisition of original shares includes the cost of acquisition of such "rights" conferred on the assessee. The real question before the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia was the apportionment of the cost of acquisition of original shares having right embedded therewith between (i) the cost of old shares after announcement of right offer, and (ii) the cost of acquisition of right offer. The question which was referred by the Tribunal to the Hon'ble Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia was whether the Tribunal was right in rejecting the claim of the applicant to deduct from the computation of capital gain the cost of right determined in accordance with the accepted principles of accountancy in the light of provisions of s. 12B of the 1922 Act. The Hon'ble Supreme Court laid down a principle of law that in working out the capital gain or loss on renunciation/sale of right the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be "cum-right" upto and including 1st June, 1956, and from 4th June, 1956, "ex rights". The market quotation of old Tata ordinary shares as on 1st June, 1956, was Rs. 253 ("cum-right") and it was Rs. 198.75 on 4th June, 1955 (ex-right). Thus, there was a fall in the market quotation of old shares of Rs. 54.25 per share. 20.4. The Hon'ble Bombay High Court held that the assessee had not expended any sum or laid out any expenditure for the purpose of acquisition of these rights. She got it by reason of her holding the 710 shares and by reason of the provisions of s. 105C of the Indian Companies Act. The Tribunal was right in holding that the entire amount of Rs. 45,262.50 was a capital gain. 20.5. The Hon'ble Supreme Court in the aforesaid case reported in 63 ITR 651, inter alia specifically noted the fact at p. 652 that the appellant Miss Dhun Dadabhoy Kapadia was holding 710 ordinary shares of TISCO, which she had inherited sometime prior to 1st Jan., 1954, as an investment. The Hon'ble Supreme Court held as under: "The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the company. There was already a provision that, if the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was thus clearly justified because the net capital gain by her in the transaction, which consisted of issue of new shares together with her renouncement of the right to receive new shares and make some money thereby, could only be properly computed in the manner indicated by us above. In the alternative, the case can be examined in another aspect, At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the right to obtain 710 new shares. When she sold this right to obtain 710 new shares and realised the sum of Rs. 45,262.50, she capitalised that right and converted it into money. The value on the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxable capital gain Rs. 7,632 21. The provisions of s. 48 of the IT Act, 1961, provide that the income chargeable under the head "capital gains" shall be computed by deducing from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely, inter alia, the cost of acquisition of the asset and the cost of any improvement thereto [s. 48(ii)]. Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, then the provisions of cl. (ii) shall have effect as if for the words "Cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted. The expressions "indexed cost of acquisition" and "indexed cost of any improvement" have been defined in the Explanation below s. 48. Sec. 55(2)(b), as it existed in the relevant year [i.e., prior to insertion of s. 55(2)(aa)(ii) w.e.f. 1st April, 1995] further provides that for the purposes of s. 48, "cost of acquisition" in relation to any capital asset which became the property of the assessee before the 1st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition viz., Rs. 20 to Rs. 22 in the cases of these assessees as per their respective balance sheets. Therefore, the cost of acquisition of the "Right offer", which is embedded in the cost/value of old shares has to be only a portion or a fraction of the "cost of acquisition" or "indexed cost of acquisition" of old shares. The cost of acquisition of such embedded right, which is only a fractional interest embedded in the old shares, cannot exceed the total "cost of acquisition" of such old shares. The judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadbhoy Kapadia cannot, therefore, be interpreted or read so as to mean that the cost of acquisition of such fractional right embedded in the old shares can exceed the actual and total cost of acquisition of the old shares in which the right to have right share was embedded. The cost of acquisition of right offer is a part of the total cost of acquisition of the share. In the case of Miss Dhun Dadabhoy Kapadia as against the deemed cost as on 1st Jan., 1954, of old shares at the rate of Rs. 341 per share, only a fractional or proportionate cost of embedded right to acquire PCDs pursuant to right offer was taken at the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of s. 105C of the Indian Companies Act, which is in following terms: 'Where the directors decide to increase the capital of the company by the issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member irrespective of class, and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting the time within which the offer, if not accepted, will be deemed to have been declined; and after the expiration of such time or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the directors may dispose of the same in such manner as they think most beneficial to the company.' Mr. Kolah further contends that in the said cost of Rs. 341 is included the cost of the right conferred on the assessee under s. 105C of the Companies Act. When the board of directors of the company decided by passing the resolution of 12th March, 1956, to issue additional capital, that right became crystallised. Referring us to certain observations in four books on principles of accountancy, viz., Accountancy by Pickles and Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the necessary amount to the company actually obtains the share, or, in the alternative, to sell his right to apply for the rights share. He pointed out that the two modes available under this option are totally different and independent of each other. In the first case he exercises his option and gets the actual share itself. In the latter case, however, he does not get any share at all, but sells the right to obtain a share, the right to obtain a share being different from the obtaining of the share itself. He contended that when a shareholder sells his right, he effects a totally different and independent transaction uncorelated to his holding of the original or old share. He contended that the real profit or loss on the amount thereof resulting in the case of each holder of the old shares should be ascertained at the time when he sells his old shares but, of course, after the actual cost of the old shares is reduced by the depreciation suffered in respect of the old share at the time of the sale of the right which sprang out of the old share, the depreciation being the shortfall ascertained by deducting the ex-right price from the cum-right price at the time of the issue of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal share in which the right to acquire right share is embedded will have to be apportioned but the apportionment of the cost of acquisition of Rs. 20 to Rs. 22 has to be made in a reasonable and rational manner. Cost of acquisition of "rights" which is only a part of the share cannot be taken at a figure of Rs. 66 per share, as against total actual cost of share of Rs. 20 per share. The ratio of fall in the market value, may be applied for bifurcation/apportionment of the cost of acquisition of shares. 26. A useful reference may also be made to the judgment of the Hon'ble Supreme Court in the case of A.R. Krishnamurthy Anr. vs. CIT (1989) 76 CTR (SC) 18 : (1989) 176 ITR 417 (SC). The relevant extract from the headnote is reproduced below: "Held, affirming the decision of the High Court, that the grant of the mining lease was transfer of a "capital asset" within the meaning of s. 45 of the IT Act, 1961. The cost of acquisition of the land would include the "cost of acquisition" of the mining right under the lease and the date of acquisition of the right to grant lease had to be the same as the date of acquisition of the freehold rights. The amount paid by the appellant to pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Rajesh Textile Mills Ltd. and that depreciation was the amount lost to the assessee in acquiring the new shares of Rajesh Textile Mills Ltd. Therefore, the cost of acquisiton of shares of Rajesh Textile Mills Ltd., was the cost of such shares plus depreciation in the value of shares in Sayaji Mills Ltd. The actual original cost of acquisition of shares of Sayaji Mills Ltd., is not mentioned in the said judgment. It is not known whether depreciation in the value of shares computed at Rs. 108.75 per share was only a fraction of the actual cost of original shares or whether Rs. 108.75 was more than the actual cost of share of Sayaji Mills Ltd. whose market value prior to such issue of right was Rs. 543.75 per share. Unless fall in market value or depreciation in market value of shares as a result of announcement of right offer is compared with the actual cost of acquisition, the question relating to apportionment of cost of acquisition of original share cannot properly be decided in conformity with the principles laid down by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia and in the case of A.R. Krishnamurthy. Moreover, it is not a case of transfer of a right o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, if the company issued any new shares, every holder of old shares would be entitled to such number of ordinary shares as the board may, by resolution, decide. This right to receive 710 new shares was crystallized when the Board of Directors of that company passed a resolution for issue of new shares. This right could be exercised by the appellant by actually purchasing those shares at the prescribed rate, or by renouncing those shares in favour of another person and obtaining monetary gain in that transaction. At the time, therefore, when the appellant renounced her right to take these new shares, the capital asset which she actually possessed consisted of her old 710 shares plus this right to take 710 new shares. The cost of acquisition of such capital asset comprising of old shares along with the right embedded therein was Rs. 341 per share and the formula of depreciation in the market value being the difference between the cum-right price and ex-right price was applied only for apportionment of such cost of acquisition. According to that formula the proportionate cost of right offer came to Rs. 54.25 per share as against which the assessee claimed deduction for cost of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of those shares. The proportionate cost of such right embedded in old/original shares in the hands of various assessees is also, bound to be different depending on their respective cost of acquisition. 30. The Hon'ble Supreme Court has observed that the view they have taken in this case finds support from the principles laid down by the Hon'ble Supreme Court in the case of Dalmia Investment Co. Ltd. for valuation of bonus shares issued by a company to holders of original shares. The Hon'ble Supreme Court in the said case of Dalmia Investment Co. Ltd. have held that where bonus shares are issued in respect of ordinary shares held in a company by an assessee they will have to be valued by spreading the cost of old shares over the old shares and the new shares (viz., bonus shares). At p. 580 of the said judgment, the Hon'ble Supreme Court has observed as under: "The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cost of acquisition attributable to such right offer was thus computed by the Hon'ble Supreme Court at Rs. 54.25 per share out of actual cost of acquisition of original share at Rs. 341. The cost of acquisition of right offer was thus only a small fraction of cost of acquisition of the share. It is, therefore, clear that the cost of acquisition of right offer in accordance with the principles laid down by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia based on the earlier judgment in the case of Dalmia Investment Co. Ltd. has to be only a proportionate part of the cost of acquisition of original/old shares. In the present cases the proportionate cost of right offer adopted by the assessees at the rate of Rs. 66 per share or at the rate of Rs. 35 per share held by the Tribunal in the case of Amazon Investments Ltd. in fact exceeds the actual cost of original shares. The average cost of acquisition of share, in the case of Ajax Investments Ltd. is Rs. 20 per share and in the case of Aligator Investments Ltd. it is Rs. 21 per share and in the case of Affection Investments Ltd. it is Rs. 22 per share only. The cost of right share will have to be determined by app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of that case, is a well-planned device to avoid tax, which cannot be accorded approval in such judicial proceedings. 33. We may also refer here to the following extract from the Second R.C. Ghiya Memorial Lecture delivered by the Hon'ble Chief Justice of India, Shri J.S. Verma at Jaipur on 28th June, 1997, and published in the Journal section of 228 ITR at p. 5, namely: "The law has to be interpreted according to the current societal standards. The law when enacted, in spite of the best effort and capacity of the legislators cannot visualise all situations in future to which that law requires application. New situations develop and the law has got to be interpreted for the purpose of application to them, for the purpose of finding a solution to the new problems. That is how the law advances. That is the area or field of judicial creativity to fill in the gap between the existing law and the law as it ought to be. If you have proper perception and proper values, those will influence your thought process and the exercise which you perform in the form of judicial creativity would be tempered more by morality and ethics. Complete justice or true justice must encompass withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court: The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not to skilful, advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers." As stated earlier, some of the expert brains in the country involved in tax planning activities appear to have advised large number of big groups of concerns throughout the country to use the judgment of the Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in the case of McDowell Co. Ltd. and also in the context of the observations made by the Hon'ble Supreme Court in various cases, such matters require serious consideration and in our humble opinion such claims of losses arising due to sale/renunciation of right offers in favour of other companies of the same group pursuant to "Right offers" announced by the companies of the same group by claiming cost of acquisition of "Right offer" at a figure higher than the cost of original shares was a part of colourable device adopted by these assessees. 34. In view of the facts and detailed discussion in this order, we do not consider it proper to make a reference, once again, to the Hon'ble President, ITAT under s. 255(3) of the IT Act, 1961, to constitute a Special Bench to decide these appeals involving similar points. We have made this humble attempt to decide these appeals in conformity with the clear provisions of law and in consonance with the principles of law laid down by the Hon'ble apex Court in the case of Miss Dhun Dadabhoy Kapadia, read with the principles laid down in the case of Dalmia Investment Co. Ltd. followed in Kapadia's case and the principles laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting capital gains has undergone changes from time to time. The provisions of s. 55(2)(b)(i) of the IT Act, 1961, are similar to third proviso to sub-s. (2) of s. 12B of the IT Act, 1922, referred to in the case of Miss Dhun Dadabhoy Kapadia. It provides that the expression "cost of acquisition" occurring in ss. 48 and 49 in relation to an asset acquired before 1st day of April, 1981, would mean the cost of acquisition of the asset to the assessee or the fair market value of the asset on 1st day of April, 1981, at the option of the assessee, will be regarded as "cost of acquisition" for computing capital gains. The original cost of shares, if such shares have been acquired by the present assessees before 1st April, 1981, will have to be substituted by their fair market value as on 1st April, 1981, if the assessees exercise such an option permissible under s. 55(2)(b)(i) of the Act. 35.2. It may also be relevant here to mention that the entire system of taxation of long-term capital gains has been changed by the Finance Act, 1992. The scope and effect of the amended provisions inserted by the Finance Act, 1992, applicable from asst. yr. 1993-94, have been elaborated in the Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later." 35.3. If these respondent-assessees have owned the original shares for a period exceeding one year and if they would have sold such original shares along with the right embedded therein, they would have been entitled to grant of deduction of indexed cost of acquisition out of sale proceeds of such shares. It will, therefore, be more appropriate and equitable if such indexed cost of acquisition of original share is apportioned in the ratio of 16.28 per cent. In other words, the proportionate cost or right offer transferred by the assessee in the year under consideration viz., asst. yr. 1993-94 will be 16.28 per cent of indexed cost of acquisition of original/old shares. 35.4. The cost of acquisition of shares of Arvind Mills Ltd. by these respondent-assessees viz., Affection Investments Ltd., Aligator Investments Ltd. and Ajax Investments Ltd. as discussed in the assessment orders of these respondent-companies was Rs. 22 per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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