High Court Of Gujarat
Assistant Commissioner Of Income Tax vs. Acropolish Investments Ltd. & Ors.
Section 45, 48, 55(2)(aa)
Asst. Year 1993-94
D.A. Mehta & S.R. Brahmbhatt, JJ.
Tax Appeal Nos. 556, 746, 747 & 749 to 751 of 1999
16th February, 2009
Counsel Appeared :
M.R. Bhatt with Mrs. Mauna M. Bhatt, for the Appellant : J.P. Shah with Manish J. Shah, for the Respondent
D.A. MEHTA, J. :
All these tax appeals are taken together as in each of the tax appeals following three identically worded questions have been formulated at the time of admission on 20th Sept., 2000 :
“1. Whether the Tribunal is right in law and on facts in holding that the assessee was entitled to short-term capital loss ?
Whether the Tribunal is right in law and on facts in holding that the AO was not justified in determining the short-term capital gain relating to the transaction of sale of right of fully convertible debentures in relation to which the assessee claimed loss ?
Whether the Tribunal is right in law and on facts in applying the decision in the case of Ms. Dhun Kapadia wherein the assessee had actually suffered a loss in the price of shares held by her, with reference to the cost of acquisition, whereas in the case of the assessee, even after the shares became ex-right the ruling price of those shares at Rs. 180 was much higher than the actual cost of acquisition by the assessee at Rs. 35 and thus there was no loss to the assessee ?”
The Tribunalâs order in Tax Appeal No. 556 of 1999 is the principal order dt. 20th April, 1999 while in rest of the appeals a consolidated order dt. 17th Aug., 1999, following the earlier view, has been made. Accordingly, the facts, as narrated in Tribunalâs order in Tax Appeal No. 556 of 1999 have been taken up for consideration.
In each of the cases the assessment year in question is 1993-94. The respondent-assessee, in Tax Appeal No. 556 of 1999, an investment company, initially filed return of income on 31st Dec., 1993 declaring nil income which was processed under s. 143(1)(a) of the IT Act, 1961 (the Act). This was followed by revised return filed on 30th March, 1994 again declaring nil income. A short-term capital loss of Rs. 7,03,96,560 was claimed by the assessee in revised return.
The assessee was holding 14,04,162 shares of Arvind Mills during the relevant accounting period as well as another lot of 1,46,140 shares of Arvind Mills Ltd. During the accounting year the assessee became entitled to one convertible debenture for every 10 shares held as on 18th Oct., 1992. The assessee was thus entitled to 1,53,036 rights in the ratio of 1:10. The assessee renounced the rights in favour of two group companies for consideration of Rs. 3,06,07,200 which was credited to the P&L a/c. The AO worked out the taxable short-term capital gains at a sum of Rs. 3,06,07,200 holding that in absence of any cost of acquisition the entire consideration received was taxable. Accordingly, the loss claimed by the assessee to the tune of Rs. 7,03,96,560, on the transaction relating to renunciation of rights to receive debentures, was disallowed.
The assessee carried the matter in appeal before CIT(A) and succeeded for the reasons recorded in order dt. 26th Sept., 1997. Revenue carried the matter in appeal before the Tribunal and contended that the apex Court decision in case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) was not applicable on facts of the case as the scheme of 1961 Act was different to the scheme of 1922 Act i.e. old Act; that in this case the entitlement was to a convertible debentures and not to a right share; and because of the market scam the price in the shares fell and the depreciation in the value of the shares could not be only on the basis of ex-right factor. The Tribunal, however, for the reasons recorded in order dt. 20th April, 1999, held that the contention that the assessee was not entitled to the loss was not tenable and the Departmental appeal on this issue was thus dismissed.
6. On behalf of the appellant-Revenue Mr. M.R. Bhatt, learned senior standing counsel, submitted that the apex Court decision in case of Miss Dhun Dadabhoy Kapadia vs. CIT (supra) was not applicable firstly, because provisions of s. 12B of 1922 Act and the provisions of ss. 45 to 48 of 1961 Act are different; secondly, in the present case the assessee was entitled to only convertible debentures whereas in the case before the apex Court the assessee therein was entitled to right shares on the basis of shares held; thirdly, the fall in value of the original shares was not only on account of issuance of the rights entitlement, but was also due to various other market factors. It was further contended that the transaction in question was in violation of s. 13 of the Securities Contract Act. Lastly, it was submitted that the right was already embedded in original shares and thus the loss, if any, was in relation to a long-term asset and was liable to be treated as long-term capital loss. Mr. Bhatt elaborately read provisions of s. 12B of 1922 Act as well as provisions of ss. 2(47), 45, 48(i) and 48(ii) of the Act to emphasise the difference in language of the provisions and contended that the 1922 Act permitted working out capital gain or loss on the basis of actual cost, whereas in the provisions under the present Act the concept was as regards cost of acquisition and the said two concepts were different. For this purpose, attention was also invited to the second proviso as appearing below s. 48(ii) of the Act. In support of the submissions made Mr. Bhatt placed reliance on the decision of this Court in the case of CIT vs. Suhashbhai Vadilal (1999) 157 CTR (Guj) 577 : (1999) 239 ITR 362 (Guj).
7. Mr. J.P. Shah, learned advocate appearing on behalf of the respondent-assessee, submitted that the decision of the apex Court in case of Miss Dhun Dadabhoy Kapadia vs. CIT (supra) was applicable to the facts of the present case in absence of a specific provision providing for the mode and manner in which capital gain or loss had to be computed. Inviting attention to the observations made by the apex Court it was submitted that the difference between the cum-right price and ex-right price had to be taken as cost for the purposes of working out the gain or loss to an assessee on renunciation of the rights entitlement. It was submitted that this Court had rightly applied the decision of the apex Court in the case of CIT vs. Suhashbhai Vadilal (supra) and laid down that what an assessee paid plus what the assessee lost in the value when the original holding became ex-right would be the cost on the basis of which capital gain or capital loss had to be worked out. That similar view was adopted by following and applying the ratio of decision of the apex Court by the Bombay and Calcutta High Courts in the cases of : (i) CIT vs. K.A. Patch (1971) 81 ITR 413 (Bom); and (ii) CIT vs. Oberoi Building & Investment (P) Ltd. (1994) 118 CTR (Cal) 103 : (1993) 203 ITR 403 (Cal).
8. It is an accepted position between the parties that s. 55 of the Act has been amended w.e.f. 1st April, 1995 by the Finance Act, 1994 by insertion of cl. (aa) in sub-s. (2) of s. 55 whereby the cost of acquisition in relation to a capital asset, where by virtue of holding capital asset being a share or any other security, the assessee became entitled to subscribe to any additional financial asset, then in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, the cost shall be taken to be nil in the case of such an assessee. Therefore, till 31st March, 1995 the legislature had not provided for any modality of working out cost of such a right entitlement on the basis of a financial asset held by an assessee.
9. In the impugned order the Tribunal has taken note of the fact that the Departmental Representative had contended that the said amendment should be treated to be retrospective in nature and be applied to the transaction for the year under consideration. Thereafter, the Tribunal has dealt with this issue and rejected the contention by referring to the Notes on Clauses issued by CBDT to hold that the amendment was only prospective in operation.
10. The position therefore is that for the year under consideration in a case where rights entitlement offered to an existing shareholder are renounced in favour of a third party, the transaction has to be worked out and the resultant gain or loss computed on the basis of the principles laid down by the apex Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (supra) wherein it is stated : “… In working out capital gain or loss, 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 to when making computation for his business purposes. The principles of accounting indicated by us above are clearly the principle that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with which we are concerned….”
11. Thus, applying the principles laid down by the apex Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (supra) the Court does not find any case made out to interfere with the decision of the Tribunal holding that the assessee was entitled to the short-term capital loss claimed by the assessee. Therefore, in the facts and circumstances of the case the contention regarding the apex Court decision not being applicable due to change in the scheme of the Act does not merit acceptance. Similarly, the submission regarding the entitlement being to shares in the case before the apex Court and in the present case the entitlement being to convertible debentures is a distinction without any difference in principle. Insofar as the contention relatable to the taxability of the transaction by way of long-term capital gain or long-term capital loss, suffice it to state that the same is not even the case of the AO and it is not possible to expand the scope of the controversy.
12. Accordingly, all the three questions are answered in the affirmative. The appeals are accordingly dismissed with no order as to costs.
13. Registry to place a copy of this order in connected matters.
[Citation : 328 ITR 664]