Andhra Pradesh H.C : The cost of right shares cannot be taken into account for working out the assessable capital gains

Counsel Appeared

Swamy & D. ManMohan, for the Assessee : M. Suryanarayana Murthy & A.V. Krishna Koundinya, for the Revenue

V. ANJANEYULU, J.:

These two references made by the Tribunal at the instance of the assessee relate to the asst. yrs. 1977-78 and 1978-79. The question referred for the consideration of this Court is:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the cost of right shares cannot be taken into account for working out the assessable capital gains ?”

The assessee subscribed to certain shares in Motor Industries Co. Ltd. (MICO). The MICO subsequently declared bonus shares on more than one occasion and had also declared right shares. For the purpose of the present reference, we are concerned with the right shares which were offered at the rate of Rs. 175 per share and the assessee became entitled to subscribe for 137 right shares.

In the previous year relevant to the asst. yr. 1977-78, the assessee had sold 100 MICO shares and subsequently in the asst. yr. 1978-79, 300 MICO shares were sold. For both these assessments, the question arose about the determination of capital gain derived on the sale of the shares. There was no dispute before the Revenue that what was sold by the assessee in the previous years relevant to the asst. yrs. 1977-78 and 1978-79 were not the right shares as such. They could have come from either the originally subscribed shares or the bonus shares. For the purpose of determining the actual cost of the original shares, the cost of the original shares was duly spread over the bonus shares also following the principle set out by the Supreme Court in CIT vs. Gold Mohore Investment Co. Ltd. (1969) 74 ITR 62 (SC) : TC2R.381. There is no dispute up to this point. The assessee claimed that the principle of spreading the original cost of the share on bonus share should also be applied to right share and the value of the share determined accordingly. The Revenue did not accept the aforesaid contention. The original cost of the share was determined at Rs. 617 on the basis above mentioned and the capital gain computed.

The assessee carried the matter in appeal before the CIT(A) and the Tribunal but did not succeed. Both the appellate authorities affirmed the manner in which the ITO determined the actual cost of the shares sold for the purpose of ascertaining the capital gain derived on the sale of the shares. It is in these circumstances that the assessee asked for and obtained the present reference to this Court for consideration.

We think the tax authorities were correct in determining the cost of the shares without taking into consideration the right shares. The principle enunciated by the Supreme Court in Gold Mohore Investment Company’s case (supra) regarding the spreadover of the cost paid for the original shares on the bonus shares is not strictly applicable to right shares, because right shares are paid for unlike bonus shares. Bonus shares are issued by a company without receiving any consideration whatsoever, whereas right shares are issued after receiving consideration subjects to certain entitlement vested in the shareholder with reference to the shares originally held. Our attention has not been invited to any decision which would support the assessee’s contention that the principle applicable to the spread over of the cost of the original shares on bonus shares would also equally apply to right shares. Inasmuch as there is no dispute that the shares sold were not right shares but were drawn from the lot of the shares originally subscribed or the bonus shares, the actual cost of the shares sold was correctly computed by the Revenue and capital gain determined correctly for the purpose of assessment. We do not think that there is any error in the assessments made.

6. We accordingly answer the question referred in both the references in the affirmative, that is, in favour of the Revenue and against the assessee. No costs.

[Citation : 172 ITR 193]