TMI Blog1991 (2) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-3-1981, this company made a declaration of dividends of 47 cents per share. The company simultaneously issued bonus shares in the ratio of one bonus share for every 4 shares held. The assessee thus became entitled to receive 21,356 bonus shares. The company also issued right shares in the ratio of 3 right shares for every 20 shares. The right shares were issued at a premium of HK $ 9.50. Together with the face value of the share, each right share would have cost the assessee $12 per share. The rights received in all were 12,830. The assessee could not subscribe to the right shares as necessary funds were not made available by the RBI and for that reason sold the rights. The sum realised was Rs. 52,340. The issue before the ITO was what pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficit on the sale of rights. But if the decisions of the Supreme Court and the various High Courts are understood and applied correctly, the computation of capital gains/loss would present no difficulties. The first step in the determination of capital gain/loss in a case like this is to deduct from the fall in the value suffered by the shares, the dividend declared. In this case, the value of the shares was HK $ 21.30 cum-rights, cum-bonus and cum-dividend and the value exright, ex-bonus, ex-dividend was HK $16.30. Thus, the fall in price was HK $ 5 per share. From this, dividend declared of 0.47 cents has to be excluded and that would leave us with a figure of $ 4.53 and this amount has two components, namely, the value of the rights and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hods were suggested to the Court by the parties to the litigation for determination of the cost of bonus shares of the assessee. One method was to take the cost of the original shares and to spread it over the original shares and bonus shares collectively. The other was the method of finding out the fall in the price of the original shares on the issue of bonus shares and attributing to the latter shares that fall and to value them thereby. The Court categorically rejected the second method as incorrect and impracticable. This method would therefore not be available to the Revenue to determine the fall in the price of share and as a result of issue of bonus shares. The correct method is the one suggested by the assessee to the Department an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res taken collectively. This is the method that has been found suitable by the Supreme Court and the Bombay High Court, only for the purpose of determining the surplus on the sale of bonus shares which could be brought to tax. This method has no universal application and is relevant only for determination of cost to the assessee of bonus shares. What we are concerned with in this case is the diminution in value the shares would have suffered, as a result of the issue of bonus shares as only by deducting the same the value of the rights could be ascertained. To illustrate, let us take the market value of the shares whose cost to the assessee is Rs.10 as Rs. 100. The company declares a bonus in the ratio of 1: 1. The shareholder gets another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er words, the notional cost per share after the issue of bonus should be around HK $ 16.42 per share. We have in this connection also to take note of the fact that once bonus shares are issued and the shares become ex-bonus, the value of the shares inclusive of the bonus are likely to register an increase. This is also true of value of shares-cum-Dividend and ex-Dividend vis-a-vis its proportionate cost. Thus, on the basis of the above calculation, the shares ex-bonus would nationally be 16.42. It will not be unreasonable to record the value of these shares at HK $17. Thus the diminution in value per share on account of the rights can at best be 70 cents, i.e., cost ex-bonus HK $17 - cost ex-bonus, ex-rights HK$ 16.30 per share and this is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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