Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the loss suffered on renouncing its rights entitlement to convertible debentures of Larsen & Toubro Ltd., ignoring the fact that the assessee was in receipt of Rs. 62,997 on account of sale of rights which was credited in the P&L a/c which was business income as these right debentures were offered to the assessee in lieu of holding shares which were held as stock-in-trade and therefore, any realization/income which arose on account of stock-in-trade was definitely by way of income ?

High Court Of Bombay

CIT vs. Motichand Construction Co. (P)Ltd.

Section 45(1)

Asst. year 1990-91

S.H. Kapadia & J.P. Devadhar, JJ.

IT Appeal No. 117 of 2001

22nd January, 2003

Counsel Appeared

Desai with K.R. Chaudhari & P.S. Jetley i/b K.B. Rao, for the Appellants : J.D. Mistry with Atul

Jasani, for the Respondents.

JUDGMENT

S.H. Kapadia, J. :

Being aggrieved by the decision of the Tribunal; the Department has come by way of appeal under s. 260A of the IT Act. The appeal concerns asst. yr. 1990-91. The following question of law has been referred to us in this appeal at the behest of the Department :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the loss suffered on renouncing its rights entitlement to convertible debentures of Larsen & Toubro Ltd., ignoring the fact that the assessee was in receipt of Rs. 62,997 on account of sale of rights which was credited in the P&L a/c which was business income as these right debentures were offered to the assessee in lieu of holding shares which were held as stock-in-trade and therefore, any realization/income which arose on account of stock-in-trade was definitely by way of income ?”

Facts

2. For the asst. yr. 1990-91, the assessee claimed loss on sale of right debentures of L & T, amounting to Rs. 2,23,353 in its return of income. These right debentures were issued to the assessee as the assessee was holding shares of L & T (hereinafter referred to, for the sake of brevity as the “old shares”). These old shares were held as stock-in-trade by the assessee. On sale of right debentures, assessee received Rs. 62,997, which was credited in P&L a/c. The AO took the view that since the assessee was holding the old shares as stock-in-trade, the assessee was not entitled to claim loss under the head “Capital gains”. The AO took the view that since the assessee was holding the old shares as stock-in-trade, question of capital loss under s. 45 did not arise. Being aggrieved by the decision of the AO, the matter was carried in appeal before the CIT(A). When the matter came before the CIT(A), the assessee relied upon two judgments. In the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC), the Supreme Court was concerned with the question of valuation of new shares offered to a holder of old shares in a company with right to renounce. In the matter, the assessee had renounced the right and realised Rs. 45,262.50. This entire amount was sought to be taxed as capital gains to which the assessee objected on the ground that on issue of new shares, the value of her old shares depreciated from Rs. 253 per share to Rs. 198.75 and as a result of the said depreciation she had suffered a capital loss in the old shares to the extent of Rs. 37,630, which she was entitled to set off against the capital gain of Rs. 45,262.50. This was allowed by the Supreme Court. The assessee contended before the CIT(A) that the judgment of the Supreme Court in the case of Dhun Kapadia (supra) was applicable. However, the CIT(A) came to the conclusion that the said judgment of the Supreme Court in Dhun Kapadia’s case (supra) was not applicable as the assessee in that case was an investor and the shares were held by way of investment and not as stock-in-trade, whereas in the present case, the shares were held as stock-in-trade and, therefore, the entire amount of Rs. 62,997 was taxable as profit. Therefore, the assessee relied upon the judgment of the Bombay High Court in the case of CIT vs. K.A. Patch (1971) 81 ITR 413 (Bom). In the said judgment, it has been held that whether the shares were held as investment or stock-in-trade, made no difference and the amount realised by sale of rights should be set off by the amount of depreciation in the old shares on account of issuance of rights. That, for this purpose, the market rates of the shares cum-right and exright immediately before and after the issue of the rights should be ascertained. The assessee relied upon this judgment of the Bombay High Court which was not accepted by CIT(A) on the ground that in the case of K.A. Patch (supra), the shares were valued at market price and not at cost. Consequently, the CIT(A) dismissed the appeal filed by the assessee. Being aggrieved, the assessee preferred appeal to the Tribunal, which took the view that in view of the aforestated two decisions, the assessee should succeed. Consequently, the Tribunal allowed the appeal. Being aggrieved, the Department has come by way of appeal under s. 260A of the IT Act to this Court.

Findings

3. In this case, as indicated by the facts mentioned hereinabove, CIT(A) came to the conclusion that the judgment of the Supreme Court in Dhun Kapadia’s case (supra) and the judgment of the Bombay High Court in K.A. Patch’s case (supra) were not applicable as the assessee had valued the old shares at market price. This finding is factually wrong. We have examined the balance sheet, the P&L a/c and the computation tendered by the assessee before the AO, which indicates that the old shares held as stock-in-trade were valued at cost and not at market price. Mr. R.V. Desai learned senior counsel appearing on behalf of the Department fairly conceded that the old shares were valued at cost and not at market price. He further stated that he had taken instructions from the AO, who is present in Court. In the circumstances, the judgment of the Bombay High Court in the case of K.A. Patch (supra) is squarely applicable to the facts of this case.

Conclusion

4. Consequently, the appeal filed by the Department is dismissed. No order as to costs.

5. Office is directed to hand over the R & P to Shri Mohan Das, the AO concerned, after the judgment is signed. Office is directed to take an acknowledgement from the said AO.

[Citation : 261 ITR 70]

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