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SUPREME COURT OF INDIA
Miss Dhun Dadabhoy Kapadia, Appellant
Versus
Commissioner of Income-tax. Bombay, Respondent.
Trustees of the Estate of Late F. E. Dinshaw and others, Interveners.
Civil Appeal No 757 of 1965, dated 31-10-1966.
Advocates appeared
Mr. R. J. Kolah, Advocate and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., for Appellant, M/s. S. K. Riyar and R. N. Sachthey, Advocates, for Respondent; Mr. S. T. Desai, Senior Advocate, (Mr. O. C. Mathur, Advocate of M/s J. B. Dadachanji and Co., with him), for Interveners
CAPITAL GAIN - DEDUCTION - RIGHT TO RECEIVE NEW SHARES - DEPRECIATION IN VALUE OF OLD SHARES - WHETHER DEDUCTIBLE FROM CAPITAL GAIN - S. 12B (2) (II) - INCOME-TAX ACT, 1922.
Fact of the Case:
The appellant held 710 ordinary shares of Tata Iron and Steel Company Ltd. (Company). Under a special resolution, she became entitled to purchase 710 new ordinary shares at Rs. 105 per share. She renounced her right to the shares and sold them in the open market for Rs. 45,262.50. The appellant claimed that the capital gain should be computed after deducting the depreciation in the value of her old shares, which amounted to Rs. 37,630.
Finding of the Court:
The court held that the appellant was entitled to deduct the depreciation in the value of her old shares from the capital gain realized on the sale of her right to receive the new shares. The court reasoned that the right to receive the new shares was a capital asset and that the depreciation in the value of the old shares was a loss incurred in the acquisition of that asset. The court also held that the principles of accounting applicable to valuation of such rights are applicable when computation has to be made for purposes of taxation.
Issues: Whether the appellant was entitled to deduct the depreciation in the value of her old shares from the capital gain realized on the sale of her right to receive the new shares.
Ratio Decidendi: The court held that the right to receive the new shares was a capital asset and that the depreciation in the value of the old shares was a loss incurred in the acquisition of that asset. The court also held that the principles of accounting applicable to valuation of such rights are applicable when computation has to be made for purposes of taxation.
Final Decision: The court answered the question referred to it in the affirmative, holding that the appellant was entitled to deduct the depreciation in the value of her old shares from the capital gain realized on the sale of her right to receive the new shares.
Judgment
BHARGAVA, J. : This appeal by certificate granted by the High Court of Bombay under S. 66A (2) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the Act") is directed against the answer returned by the High Court to the following question referred to it by the Income-tax Appellate Tribunal under S. 66 (1) of the Act:-
"Whether, having regard to the provisions of S. 12B (2) (ii), the assessee is entitled to claim a deduction from the full value of the consideration of Rs. 45,262.30 nP received for the capital asset, the sum of Rs. 37,630 or any similar sum ?"
2. The case arose out of proceedings for assessment of the appellant for the assessment year 1957-58, the corresponding previous year being the financial year 1956-57. The appellant was holding 710 ordinary shares of the Tata Iron and Steel Company Ltd. (hereinafter referred to as "the Company"), which she had inherited some time prior to 1st January, 1954, as an investment. It was admitted that she was not a dealer in shares. Under a special resolution passed at an Extraordinary General Meeting of the Company on 12th March 1956, the appellant, as holder of 710 ordinary shares, become entitled to purchase new ordinary shares issued in the ratio of one new ordinary share for one existing ordinary share as held on 26th April 1956. In pursuance of this resolution, an offer was made to the appellant by the Company by its circular letter, dated 15th May 1956, that she was, in terms of the resolution, entitled to apply for 710 new ordinary shares to be paid for at the rate of Rs. 105 per new ordinary share. This payment was to represent Rs. 75 as the face value of the share and Rs. 30 as premium. She was also given the option of either taking the shares wholly or partly, or renouncing them either wholly or partly, in favour of any other person or persons. The appellant chose to renounce her right to all the 710 ordinary shares instead of taking the shares herself, and when renouncing the shares, she sold them in the open market on 12th June 1956, as a result of which she actually realised a sum of Rs. 45.262.50 nP. It was common ground before the Income-tax authorities as well as the Tribunal that this amount received by her was a capital gain and the whole of this amount was sought to be taxed as capital gain received by the appellant. On behalf of the appellant, the plea was that, on the issue of the new ordinary shares, the value of her old ordinary shares depreciated, because the assets of the Company remained stationary, while the number of shares increased. It was in consideration of this depreciation in her original holdings that she was given the right to purchase these new ordinary shares, or to renounce them in favour of some other person and make up the loss which she would suffer on her original shares. The Board of Directors of the Native Stock and Shares Association Ltd. had passed a resolution that the transactions in these shares were to be cum-right up to and including 1st June 1956, and were to be ex-rights from 4th June 1956, onwards. The intervening days, 2nd and 3rd June, being official holidays, there were to be no transactions on those days. The market quotation of the old Tata ordinary shares was Rs. 253 per share on 1st June 1956, and fell to Rs. 198.75 nP. on 4th June 1956. There was thus, a fall in the market quotation of ok shares of Rs. 54.26 nP. per share. It was claimed by the appellant that, as a result of this depreciation in the price of her old ordinary shares, she suffered a capital loss in those shares to the extent of Rs. 37,630, and she was entitled to set off this loss against the capital gain of Rs. 45,262.50 nP. which she realised on selling her right to take the new ordinary shares. In the alternative, the case was put forward on the basis that the right to receive these new ordinary shares was a right which was embedded in her odd ordinary shares, and consequently, when she realised the sum of Rs. 45,262.50 nP. by s
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