IN THE INCOME TAX APPELLATE TRIBUNAL,

SPECIAL BENCH-E, MUMBAI.

BEFORE SHRI G.E. VEERABADRAPPA, VICE PRESIDENT,

SHRI R.K.GUPTA, JM AND SHRI K.K.BOLIYA, AM

ITA. No. 3069/Mum/98            (assessment year : 1993-94)

Assessee by : Shri S.E. Dastoor & Shri Sanjeev M. Shah

Revenue by : Shri S.C. Gupta (CIT / DR)

Short term capital gains on renouncing of right shares- before the declaration of issue of right shares, the market rate of the shares ranged between Rs. 240 to 285.  After the shares became ex-right, the rates ranged between 150 to 250.  Considering the entire facts and circumstances cited above and the legal position, we are of the view that it would be fair and reasonable if the ex-right value of the shares is estimated at Rs. 225 and cum-right rate should be taken at Rs. 250.  We, therefore, hold that there was diminution to the extent of Rs. 25 per share.  The assessing officer is directed to re-compute the income under head short-term capital gains on the above basis (Para 14)

O  R   D  E  R

PER K.K. BOLIYA, AM:

Pursuant to the recommendations of the Division Bench by its order dated 05.08.2004, the Honble President, ITAT constituted this Special Bench and referred the whole case to the Special Bench for disposal.  As the entire appeal has been referred to the Special Bench for disposal, it would be appropriate to reproduce below the grounds of appeal raised by the assessee:-

1.On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the ACIT in assessing a sum of Rs. 94,52,025 as short term capital gains on renouncing of right shares of M/s Morarjee Gokuldas Spinning & Weaving Mills Ltd.

2.He failed to appreciate and ought to have held that :-

a)The appellant has not incurred any cost on acquisition of the right to subscribe / renounce the shares as the appellant did not have to pay any amount in acquiring the said right shares, since such right was embedded in the purchase of old shares.

b)Further the BSE was not operating on June 29, 1992, the day on which shares became ex-right, due to financial irregularity by some exchange members and hence, there was no market quotation available of the said shares on the day, then became ex-right;

c)Further, the price prevailing on July 16, 1992 on which date, the market re opened cannot be considered as an ex-right price because market had reopened only after prolonged abnormal closure;

d)Consequently, any gain arising on renouncing of right shares cannot be charged to tax as it is a case to which computation provisions cannot apply at all, and such a case was not intended to fall within the changing section 45 of the Income Tax Act, 1961.

3.The appellant, therefore, prays that the addition of Rs.94,52,025, as short term capital gains be deleted.

4.Without prejudice to the above, in case the appellants contention that no cost can be conceived for the acquisition of the right subscribe / renounce the said shares is not accepted, then the maximum amount of capital gain on the said shares would work out at the most to Rs. 9,72,338 as worked out by the appellant in annexure-C to the grounds of appeal to CIT (A).

5.Without prejudice to above:

a)the CIT(A) erred in not considering appellants request duly made in the grounds of appeal before CIT (A), that the matter be restored to the ACIT to be decided afresh after giving proper opportunity of being heard to the appellant.

b)Appellant craves to rely on its letter dated 21.12.95, attached with grounds of appeal to CIT (A) marked as annexure-F.

2)From the above, it is seen that all the grounds of appeal pertain to the issue of computation of income under the head Capital gains with regard to the total amount received by the assessee on renunciation of the right to receive right shares.  The relevant facts giving raise to the controversy may first be stated briefly.  The assessee company held 795600 shares of Morarjee Gokuldas Spinning & Weaving Co. ltd. (for short MGS).  These shares were held by the assessee company by way of investment.  On 22.06.1992, the Board of Directors of MGS decided to offer one right share for every three shares held at the rate of Rs. 125/- per share to the existing shareholders.  The shares of MGS were quoted com right till 28.6.92 and they became ex-right on 29.6.92.  The right to exercise the option to purchase right shares was to be exercised by the shareholders from 4.9.92 to 3.10.92.  With its share holding of 795600 shares, the assessee company became entitled to 265200 right shares.  The assessee company exercised its option to subscribe to 174450 right shares at the rate of Rs. 125 per share and on 9.9.92 sold its right to subscribe the balance 90450 right shares for a total consideration of Rs. 94,54,025 at the rate of Rs. 104.50 per share.

3)In the above mentioned factual scenario, the assessing officer sought to assess the receipt of Rs. 94,52,025 under the head capital gains.  The assessee claimed that the said income cannot be brought to the charge of tax under the head Capital gains as there was no cost of acquisition as held by the Honble Supreme Court in the case of Srinivasa Shetty 128 ITR 294.  Alternatively, the assessee also claimed that by virtue of the decision of Honble Supreme Court in the case of Ms. Dhun Dadabhoy Kapadia 63 ITR 651, the diminution in the market price of the said shares held by the assessee, referable to the right shares sold, has to be adopted as the cost of the right shares and income under the head Capital gains, if any, can be computed accordingly.  The assessees contention that there was no cost of acquisition of the right shares was rejected by the assessing officer.  However, the assessing officer examined the assessees claim that the Honble Supreme Court decision in the case of Ms. Dhun Dadabhoy Kapadia 63 ITR 651 was applicable in this case.  He asked the assessee to furnish material and evidence in support of its claim of the ex-right price of the shares so that the fall in the value of shares can be worked out to enable the assessing officer to apply the decision of Honble Supreme Court in the case of Ms. Dhun Dadabhoy Kapadia 63 ITR 651.  The assessee company claimed before the assessing officer that cum-right price of the shares was Rs. 250 per share and the ex-right price of the shares was Rs. 200.  However, the assessee did not furnish any supporting evidence.  The assessing officer addressed a letter dated 20.11.95 to the BSE requesting the stock exchange to furnish the relevant details and the BSE replied vide its letter dated 07.12.1995, which has been re-produced by the assessing officer in his order as under:-

with reference to your letter no. AC/5(6) MISC/95/96 dated the 28^th November, 1995, we give hereunder the information required by you in respect of the equity shares of under mentioned company as recorded in our books for the period specified by you:

4)In the present case, as mentioned above, the cum-right date was 28.6.92 and the ex-right date was 29.6.92.  The stock exchange remained closed from 11.6.92 to 15.7.92 on account of Securities scam and therefore, there was no quotation of the shares of MGS on 28.6.92 and on 29.6.92.  The quotations were available only on 10.6.92 and 16.7.92, which represent the last cum-right rate and first ex-right rate.  As per the letter of the BSE, both the rates were Rs. 250 per share, which showed that there was no diminution in the market rate of the shares.  The assessing officer confronted the assessee with these facts and asked the assessee to explain the matter.  The assessing officer has mentioned in his order that no explanation was filed by the assessee.  He, therefore, held that there was no diminution in the market rate of shares and consequently, he brought to the charge of the tax, the entire sale consideration of Rs. 94,52,025 as short term capital gains.  The assessment order was passed by the assessing officer on 21.12.95.

5)When the matter came up before the learned CIT (A), the assessee again forcefully argued that the capital gains, if any, has to be computed in consonance with the principles laid down by the Honble Supreme Court in the case Ms. Dhun Dadabhoy Kapadia (supra).  It was contended that the market rates indicated in the letter of the BSE are not much relevant as these rates are on 106.92 and 16.7.92, whereas for determining the diminution in the market rate of the shares, the relevant dates were 28.6.92 & 29.6.92.  However, on these dates the quotations were not available as the stock exchange remained closed from 11.6.92 to 15.7.92.  It was contended before the learned CIT (A) that if there is no cost of acquisition, as held by the assessing officer, no income can be brought to the charge of tax under the head Capital gains, having regard to the Honble Supreme Court judgment in the case of Srinivasa shetty (supra).  Alternatively, it was contended by the assessee before the learned CIT (A) that in the absence of market quotations on the relevant dates, the working of Capital gains / loss should be done on the basis of the principles of accountancy and commercial practices.  The assessee furnished a detailed working before the learned CIT (A).  The learned CIT (a) decided the controversy in the following manner at paras 9 to 11 of his order:-

9.It was further contended that during the course of assessment proceedings, the appellant vide letter dated 21.12.1995 had requested the assessing officer to grant a weeks time to make further submissions on this issue.  However, the assessing officer denied proper opportunity to the appellant to explain its case and instead passed the assessment order on 21.12.1995.  In this view of the matter, the assessing officers comments were called on the submissions made by the appellant vide this office letter dated 17.2.1998.

10.The assessing officer vide his report dated 2.3.1998, after discussing the matter with appellants representative, reiterated that the case was squarely covered by Ms. Dhun Kapadias case.  With regard to the computation of the value of the share on 29.6.92, noting the fact that BSE was closed from 11.6.1992 to 16.7.1992, the assessing officer stated that it would be difficult to arrive at the value of the shares on the date of renunciation.  However, in view of the letter from the BSE, the capital gain had rightly been calculated in the assessment order.

11.On a consideration of the submissions, I find that in Dhun Kapadias case, it is held that the diminution in the value of shares held on the date of declaration of rights is the cost for the purposes of calculating capital gains.  However, since the BSE has furnished the figures the same will have to be applied and it is observed that the last cum right quotation of the shares was Rs. 250/- on 10.6.1992.  Thereafter, despite the rights having been declared on 29.6.1992, there was no diminution in the price of these shares quoted on the BSE as the right rate continued at Rs. 250/- on 16.7.1992.  In this view of the matter, there is no need to resort to computing the cost of the shares as per the formulae quoted on behalf of the appellant.  Therefore, I do not consider it necessary to disturb the assessing officers findings in this case, which are confirmed.

6)From the above, it may be seen that the assessing officer as well as the learned CIT (A) accepted that the ratio laid down by the Honble Supreme Court in the case of Ms. Dhun Dadabhoy Kapadia (supra) was squarely applicable to the facts of the assessees case.  However, since there was no diminution in the market value of the shares, as certified by the BSE, the learned CIT (a) held that the assessee is not entitled to any relief as per the case of Ms. Dhun Dadabhoy Kapadia (supra). 

7)In the backdrop of the above mentioned facts, the learned counsel appearing for the assessee Sri S.E. Dastoor submitted before us that rights shares are offered at a price which is much below the market price of the shares, as otherwise there will be no takers for the right shares.  It is further submitted that after the issue of right shares, the market price of the shares of the company is bound to diminish and that there is no exception to this rule.  After issue of right shares, the total number of shares representing the paid up capital go up, whereas the assets of the company remain the same.  In support of this proposition, the learned counsel relied on the Honble Bombay High Court decision in the case of H. Holck Larsen vs. CIT 85 ITR 285 and invited our attention to the following observations of the Honble Bombay High Court at page 292 of the report:-

For a proper understanding of the course of transactions in question, it is necessary to appreciate the implications of the issue of right shares.  On the issue of such shares, the value of the old shares depreciates, because the assets of the company remain stationary, while the number of shares increases.  It is elementary that a company will not offer right shares for anything higher than the market price for, were it otherwise, the shareholder will prefer to purchase the shares in the open market.  Acquisition of right shares is the privilege of existing shareholders but a concomitant of this privilege is the depreciation in the value of the old holding.  The depreciation consequent upon the issue of right shares cannot be worked out by the application of a mathematical formula because several factors act and react on the prices of shares.  In some cases the depreciation may even be hypothetical because the increase of capital may open up new avenues to the company for making larger profits.  But it is in consideration of a consequential depreciation in the value of old shares that law gives to existing shareholders the right to obtain the new shares or to renounce that right.  Section 81 of Companies Act, 1956, provides to the extent it is material, that if a company proposes to increase its subscribed capital by allotment of further shares, such shares shall be offered to the existing shareholders of equity shares and the offer shall be deemed to include a right to renounce the shares.  The right to receive the new shares is, so to say, embedded in the older shares.

8)The learned counsel reiterated that the last cum-share quotation on 10.6.1992 was Rs. 250 per share.  Therefore, the Board of Directors of MGS passed a resolution on 22.6.92 offering one right share for every three shares held, at a rate of Rs. 125 per share.  It is submitted that this resolution would naturally result into increase of the cum-right share price till 28.06.92.  However, there was no quotation from 11.6.92 to 28.6.92.  Similarly, it is argued by the learned counsel that on 29.6.92, which is ex-right date, the market rate is bound to go down but no quotation was available for that date.  The learned counsel invited our attention to the market rates of the shares of MGS from 16.7.92 to 30.7.92 as available on record.  It is pointed out that on 16.7.92, which is the first ex-right date, the quotation was of Rs. 250 per share.  On the next day i.e. 17.7.92, the quotation was of Rs. 200.  It is argued that the assessee adopted the rate of 200 prevailing on 17.7.92 as the rate of Rs. 250 on 16.7.92 did not represent the correct factual position.  The learned counsel also brought to our notice that on the other day during the month of July, 92, the quotations were as under:-

9)The learned counsel appearing for the assessee contended that if averaging is done, the ex-right rate should be even less than 200.  It is, therefore, argued that assessee logically adopted the market rate of Rs. 200 for computing the income under the head Capital gains.  Sri Dastoor submitted that if the cost of the right to subscribe to right share is nil, as held by the department, then no Capital gains can be brought to the charge of tax in view of the Honble Supreme Court decision in the case of Srinivasa Shetty (supra).

10)The learned CIT / DR Shri S.C. Gupta forcefully supported the orders of the revenue authorities and contended that the authenticity of the certificate given by the BSE cannot be questioned.  It is argued that before applying the Honble Supreme Court decision in the case of Ms. Dhun Dadabhoy Kapadia (supra), the assessee must establish that there was diminution in the market rate of the shares.  If there is no diminution, the assessee cannot get advantage by way of deduction of any cost price.  The learned DR brought to our notice certain judicial pronouncements, which are compiled in the paper book filed by him.  These cases are on the point that if there is diminution in the market value of the shares after issue of right shares, such diminution can be assumed to be cost of the rights transferred.  The learned DR contended that fully opportunity was allowed to the assessee during the course of assessment proceedings as also appellate proceedings to substantiate its claim that the market rate of ex-right shares was Rs. 200 only.  However, the assessee failed to furnish any evidence whatsoever and thus the assessee could not controvert the certificate given by the BSE.  The learned DR, therefore, submitted that the revenue authorities were justified in bringing the Capital gains of Rs. 94,52,025 to the charge of tax.

11)In his rejoinder, the learned counsel appearing for the assessee submitted that the assessee made efforts to get the quotations from the BSE but could not succeed.  Even after the appeal was decided by the learned CIT (A), the assessee has been trying to get the information from the BSE but without success.  He filed before us copies of two letters address to BSE dated 8.12.05 and 17.8.06.  In the first letter, the assessee requested to provide stock prices of MGS for the period from 1.6.92 to 25.6.92.  In the second letter dated 17.8.06, the assessee referred to the earlier letter and mentioned that their representative has been visiting the office of the BSE and he was informed that the said information was not available, nor information was available pertaining to the volume of shares traded on various days during the relevant period.  The learned counsel for the assessee submitted that no reply has been received from BSE.

12)We have given our careful consideration to the rival submissions vis--vis the facts of the case.  At the outset, it must be mentioned that on issue of right shares, the market price of the shares of the company is bound to go down.  In the present case, the market rate of the share of MGS on 10.6.92 was Rs. 250 and on 22.6.92 right shares were offered at Rs. 125 per share, which is 50% of the market rate on the last quotation.  Since the offer of the right shares is at much below the market rate, so long as the shares are cum-right, the market rate of such shares would be higher for the simple reason that a share holder, holding three shares would be entitled to receive one share at half of the market rate.  However, when the shares become ex-right, the market rate is bound to go down.

13)The Honble Bombay High Court in the case of H. Hock Larsen (supra), has expressed similar view.  The difficulty in the present case in quantifying the difference between the cum-right and ex-right rate is that all transactions on the BSE were stopped during the period 11.6.92 to 15.7.92.  Therefore, there is no way to find out the market rate of the shares on the two relevant dates i.e. cum-right date (on 28.6.92) and the ex-right date (on 29.6.02).  At the same time, it would be unfair to the assessee to assume that there was no erosion in the market rate of the shares on account of the right issue.  In the peculiar circumstances mentioned above, in our view, the diminution in the market rate of the shares has to be estimated on an appropriate and logical consideration of the factual position.  The market rates during the period 16.7.92 to 30.7.02 have been indicated in this order.  The highest is Rs. 250 on 16.7.92, which is the first day of the opening of BSE after its closure from 11.6.92.  It is not known as to whether there were any transactions on that day it appears that the closing rate of 10.6.92 has been adopted to be the opening as well as the closing rate on 16.7.92.  At this juncture, we must make it clear that there is no question of doubting the authenticity of the certificate issued by the BSE on 7.12.95.  However, the authenticity of the certificate is for the prevailing rate on 10.6.92 and on 16.7.92.  These dates are far away from the dates on which the shares were cum-right and they became ex-right.  It would be of interest to refer to the quotations of the shares of MGS during the period from 1.6.92 to 10.6.92, which are as under:-

14)The least is Rs. 240 and the highest is Rs. 285.  If compared with the quotations in the month of July, it would be seen that in July, the least was Rs. 150 and the highest was Rs. 250 on the first day of opening of BSE.  The above figures are pointer to the fact that before the declaration of issue of right shares, the market rate of the shares ranged between Rs. 240 to 285.  After the shares became ex-right, the rates ranged between 150 to 250.  Considering the entire facts and circumstances cited above and the legal position, we are of the view that it would be fair and reasonable if the ex-right value of the shares is estimated at Rs. 225 and cum-right rate should be taken at Rs. 250.  We, therefore, hold that there was diminution to the extent of Rs. 25 per share.  The assessing officer is directed to re-compute the income under head short-term capital gains on the above basis and after allowing adequate opportunity to the assessee.

15)In view of our finding above, the ground of appeal pertaining to the assessees claim that if there is no cost of acquisition, no capital gain can be assessed, is only of academic interest and need not be dealt with.  We have already held that there was diminution in the shares and the cost has to be worked out by the assessing officer as per the provisions of law.  The last ground of appeal regarding lack of opportunity was not seriously contested by the learned counsel appearing for the assessee and in view of our finding already recorded above, this ground of appeal is rejected.

16)In the result, appeal is partly allowed.

Order pronounced on 8.11.2006