1998 (9) TMI 43 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the Tribunal's conclusion on the method of working out the cost of shares of Rajesh Textile Mills Limited.
2. Determination of the cost of acquisition of shares of Rajesh Textile Mills Limited.
3. Applicability of the Supreme Court's decision in Dhun Dadabhoy Kapadia's case.

Issue-wise Detailed Analysis:

1. Validity of the Tribunal's Conclusion on the Method of Working Out the Cost of Shares of Rajesh Textile Mills Limited:
The Tribunal concluded that the cost of the shares of Rajesh Textile Mills Limited, acquired by the assessee, was fixed at the point of acquisition and irrelevant to when the shares were sold. The Tribunal relied on its earlier decision in the case of the assessee's father and another case, ITO v. Suhashbhai Vadilal Family Trust. The Tribunal's decision was based on the established fact that the shares of Rajesh Textile Mills Limited were received as rights shares on the holding of shares in Sayaji Mills Limited. The Tribunal held that the cost of these shares should include the depreciation in the value of the shares of Sayaji Mills Limited.

2. Determination of the Cost of Acquisition of Shares of Rajesh Textile Mills Limited:
The assessee sold 500 shares of Rajesh Textile Mills Limited, which were acquired due to holding shares in Sayaji Mills Limited. The cost of these shares included the face value and the depreciation in the value of Sayaji Mills Limited shares. The Commissioner of Income-tax initially rejected the assessee's claim, distinguishing between the cost of shares to the assessee and his father, based on the holding period. However, the Tribunal held that the cost of acquisition was the face value plus the depreciation in the value of Sayaji Mills Limited shares, which was Rs. 108.75 per share. This depreciation was directly linked to the issuance of shares in Rajesh Textile Mills Limited, as evidenced by the fluctuation in the market value of Sayaji Mills Limited shares.

3. Applicability of the Supreme Court's Decision in Dhun Dadabhoy Kapadia's Case:
The Supreme Court's decision in Dhun Dadabhoy Kapadia's case was pivotal in determining the cost of acquisition. The Tribunal applied the ratio of this decision, which held that the cost of acquisition should account for the depreciation in the value of the original shares when new shares are issued. The Tribunal noted that the fall in the value of Sayaji Mills Limited shares was a direct result of the issuance of Rajesh Textile Mills Limited shares. The Revenue's argument that the ratio of Dhun Dadabhoy Kapadia's case did not apply because the rights issue was of a different company was rejected. The special arrangement between Sayaji Mills Limited and Rajesh Textile Mills Limited created a situation akin to a rights issue, impacting the value of Sayaji Mills Limited shares.

Conclusion:
The Tribunal rightly held that the cost of shares of Rajesh Textile Mills Limited included the price paid and the depreciation in the value of Sayaji Mills Limited shares. The assessee was entitled to claim this deduction, and the Tribunal's decision was affirmed. The question referred was answered in the affirmative, against the Revenue and in favor of the assessee, with no order as to costs.