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TMI Blog1962 (8) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... cial resolutions were passed - (1) for increase of the capital of the company; and (2) for the issue of 12,85,000 new ordinary shares of ₹ 75 each resulting from such increase, to be offered in the first instant at a premium of ₹ 30 per share to the holders of the existing ordinary shares on the register of members of the company on such date as may be fixed by the directors in the ratio of one new ordinary share for one existing ordinary share held by such holders respectively and upon the other terms and conditions mentioned in the said special resolutions. 3. The directors resolved that the shareholders, whose names appeared on the register of members on April 26, 1956, would be entitled to the aforesaid offer. On 15th May, 1956, the managing agents of the Tata Co. addressed a circular letter to all the members, whose names appeared on the register of members on 26th of April, 1956. The assessee was one of those members to whom this circular letter was addressed. It is exhibit A on the record and it shows that an option was given to the assessee either to subscribe to the new issue or renounce her right to so subscribe in favour of any other person of her choice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her original shares." The said figure of ₹ 53 was a rough calculation of the difference between the quotation of the shares cum-right at ₹ 253 and ex-right at ₹ 198.75 nP. (the actual difference being ₹ 54.25 nP.). In addition to this contention, before the Income Tax Appellate Tribunal two other contentions were also raised. On the authority of certain books on principles of accounting, it was claimed that the cost of the right, which was sold by the assessee, came to about ₹ 73 per share and, therefore, no capital gain arose to the assessee, but on the other hand, she, having sold the right at ₹ 63.75 nP. per share, there was, in fact, capital loss resulting to her. At any rate, it was contended that the cost of the right should be taken either at ₹ 53.00 or at ₹ 54.25 nP. and on that footing the capital gain resulting therefrom to the assessee should be calculated. None of these contentions have been accepted either by the Income Tax authorities or by the Tribunal. On an application made by the assessee under sub-section (1) of section 66 the Tribunal has, after stating the case, referred to this court the following question : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would come to about ₹ 73 to ₹ 76 and this should be taken to be the actual cost of the right within the meaning of sub- clause (ii) of sub-section (2) of section 12B of the Act for the purpose of determining the capital gains arising to the assessee as a result of the transaction in question. Mr. Kolah further contends that when the computation of capital gains is so made, the result really is that there had been capital loss to the assessee and not capital gain. The assessee should be allowed to carry forward the capital loss to be adjusted in future years as and when she would be in a position to do so under the provisions of the Act. Mr. Kolah also referred us to certain observations in Emerald & Co. Ltd. v. Commissioner of Income Tax, Dalmia (Now Rishab) Investment Co. Ltd. v. Commissioner of Income Tax and Baijnath Chaturbhuj v. Commissioner of Income Tax. 8. Mr. Joshi, on the other hand, states that he does not dispute that according to the principles of commercial accounting, a value can be attributed to the right given to a shareholder to subscribe to the new capital but, according to him, these principles have no place in taxation matters. What is to be decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise, since the transactions involve the stock and the rights as a unit. After the warrant are issued and the stock is selling ex-rights, problem arise which require an apportionment of the cost of the originally acquired stock between the stock and the rights; this is done on the basis of the market value of the right and the market value of the stock ex-rights at the time of the issuance of the rights, and it is for this purpose that the aforesaid four authorities suggest different methods of theoretical valuation of the stock rights obtained by the shareholders on record. The reason for placing a theoretical value is that as a result of issuing additional capital, there is a dilution of the stock-holders' investment in shares already held resulting in the depreciation in value of the stock already held. The theoretical value given to the right very nearly represents the fall in price of the old stock that entitles a shareholder to subscribe to the new issue. Now, the necessity to so value arises in different ways. For instance, a person who is a trader or dealer in shares and securities, to appreciate the result of the trading of the year, had to value his stock in trade at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st day of March, 1956, and such profits and gains shall be deemed to be the income of the previous year in which the sale...... took place..... (2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale.... of the capital asset is made namely : (i) expenditure incurred solely in connection with such sale... (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10, and 12." 13. It is not in dispute that the right to subscribe to 710 new shares sold by the assessee for a consideration of ₹ 45,262.50 nP. was a capital asset. It is also not in dispute that she, having inherited the 710 shares prior to January 1, 1954, is entitled to substitute the market value of January 1, 1954, as the actual cost of the old shares. For the purpose of the case, it is not disputed that the market value was or quotation of the old Tata Shares stood at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of those rights. At the time the shares were acquired, the shares were not being sold cum-rights and, therefore, it cannot be said that in that price any amount is included as costs of these rights. The ownership of the shares confers various privileges on the shareholder. He has a privilege to participate in the dividends as and when declared; he has a privilege to participate in the management of the company as provided in the Companies Act; he can share in the assets of the company if the company goes into liquidation and he has also a privilege of getting the right to subscribe to the issuance of new capital as and when issued. These rights are still with the assessee and none of them has been taken away. 16. In our opinion, therefore, the Tribunal was right in holding that the entire amount of ₹ 45,262.50 nP. was a capital gain resulting to the assessee from the transaction in question. The decisions, which we have been referred to by Mr. Kolah, in our opinion, are hardly of any assistance in deciding the question, which we have to consider. None of them deal with the question which we have to deal with in the present case. We, therefore, do not propose to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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