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TMI Blog2003 (2) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... ttempt to dodge the ever watchful eyes of law on the basis of misinterpretation of judgment of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) divorced from its context and facts. 1.1 The Hon'ble apex Court in this case observed that "Right offer" of acquiring 710 new shares of TISCO was embedded in the 710 original/old shares of TISCO held by Miss Dhun D. Kapadia. The cost of original/old shares as per third proviso to sub-s. (2) of s. 12B of the IT Act, 1922, was Rs. 341 per share, which included the cost of "rights" embedded in the original share. Miss Kapadia instead of subscribing the new issues opted to sell/renouce "Right offer" to third party in open market for a total consideration of Rs. 45,252. The assessee claimed that for working out capital gain on sale/renunciation of "rights", proportionate cost of acquisition of rights worked out by the assessee at Rs. 53 per share i.e., Rs. 37,630 should be deducted from sale consideration of Rs. 45,252. The Hon'ble Supreme Court observed that the cum-right price of shares of TISCO immediately prior to issue of right offer was Rs. 253 and right price soon after the issue of right off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than the total/actual cost of acquisition of original/old shares held by them. The present cases involved consideration of claim of such short-term capital losses on sale/renunciation of "Right offers" The AO disallowed such claim of losses. The CIT(A) allowed the same. 2. The Revenue has raised the following identical grounds in all these appeals: "1.1. The learned CIT(A) has erred in law and on facts in deleting the short-term capital gain of Rs. 5,60,000 in ITA No. 3706/A/1997; Rs. 1,86,000 in ITA No. 3709/A/1997, Rs. 8,06,000 in ITA No. 3713/A/1997 and Rs. 42,000 in ITA No. 3714/A/1997, when as per admitted facts on record assessee received the aforesaid amount on sale of right renunciation forms for which no cost was incurred. 1.2. The learned CIT(A) has erred in law and on facts in directing to allow the carry forward of short-term capital loss of Rs. 12,88,000 in ITA No. 3706/A/1997; Rs. 4,29,000 in ITA No. 3709/A/1997; Rs. 18,55,180 in ITA No. 3713/A/1997 and Rs. 96,000 in ITA No. 3714/A/1997 on sale of right renunciation forms when as per admitted facts on record assessee actually benefited by receipt of Rs. 5,60,000 in ITA No. 3706/Ahd/1997; Rs. 1,86,000 in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the value of shares becoming ex-right has to be considered, that should be worked out with reference to the actual cost of acquisition. 1.8. The learned CIT(A) has erred in law and on facts in not following the appeal order of CIT(A)-V, Ahmedabad, dt. 21st Jan., 1996, in the case of Sunil Siddharthbhai for asst. yr. 1993-94 of the same group on identical facts and circumstances, wherein it was held that decision of Hon'ble Supreme Court in the case of Dhun Dababhoy Kapadia was not applicable on the facts and circumstances of the case and taking into consideration changed position of law for taxation of capital gains under 1961 Act as applicable to the assessee's case. In doing so learned CIT(A) has ignored the decision of Hon'ble Gujarat High Court in the case of Taraben R. Patel & Anr. vs. ITO & Ors. (1995) 127 CTR (Guj) 187 : (1995) 215 ITR 323 (Guj) wherein it has been categorically held that on identical facts the appellate authorities will not depart from previous decisions at his sweet will in absence of material circumstances or without giving reasons for such departure. 1.9. The learned CIT(A) has further erred in law and on facts in relying on other judgments in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contract Act, 1956, as not being transacted on the floor of the stock exchange. 3.1. The learned CIT(A) has erred in law and on facts in holding that the amendment brought under the provisions of s. 55(2)(aa) in the matter of determination of the value of rights to financial assets was not explanatory and clarificatory in nature and hence not applicable to all pending proceedings. 3.2. The learned CIT(A) has erred in law and on facts in not appreciating that in view of the judgment of Hon'ble Supreme Court in the case of CWT vs. Shravankumar Swaroop & Ors. (1994) 122 CTR (SC) 380 : (1994) 210 ITR 886 (SC) and judgment of Hon'ble Gujarat High Court in the case of CIT vs. Chandulal Venichand (1994) 188 CTR (Guj) 257 : (1994) 209 ITR 7 (Guj) to the proposition that the amendment brought as aforesaid being for rationalisation and simplification of existing provisions was clarificatory in nature and thus applicable to all pending proceedings. 4.1. The learned CIT(A) has erred in law and on facts in not at all considering the deciding the alternative submission filed in the course of appeal hearing that the amount received by assessee on sale of right renunciation form, was clearly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group companies at the rate of Rs. 200 per right. The sale proceeds of Rs. 5,60,000 so received by way of consideration for the aforesaid transfer of right offer was credited as profit in the P&L a/cs. At the time of filing of the original return, no income attributable to aforesaid sale consideration of right offer transferred by the assessee was shown in view of the judgment of the Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) in which it was held that where cost of acquisition cannot be envisaged, no tax on capital gain can be levied. However, in the revised return the assessee claimed a loss of Rs. 12,88,000 in relation to the aforesaid transfer of right offer on the basis of interpretation of the judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT. The value of shares of Arvind Mills Ltd. on 23rd July, 1992, as quoted on Ahmedabad Stock Exchange immediately prior to announcement of right offer was Rs. 246 per share. The first ex-right quotation as on 24th July, 1992, was Rs. 180. Thus there was a fall of Rs. 66 per share as a result of announcement of right offer by Arvind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Miss Dhun Dadabhay Kapadia on similar basis. The loss was worked out as under: Rs. 'Sale consideration received on sale of 4,033 rights @ 200 per right 8,06,600 Cost of the rights worked out @ 660 per right 26,61,780 Loss 18,55,180 ITA No. 3714/Ahd/1997: Anangbhai Ajaybhai In this case also the assessee made a claim for short-term capital loss of Rs. 36,340 on sale of right offer by filing a revised return on 30th March, 1994. The assessee owned 14,952 shares of Arvind Mills Ltd. He, therefore, became entitled to get 1,495 debentures in the ratio of 1:10 of shares held. The assessee renounced such right offer and transferred the same in favour of one of its group concerns at the rate of Rs. 200 per right. The assessee received Rs. 15,800. The loss was claimed on similar basis by computing the cost of right at Rs. 660. The short-term capital loss of Rs. 36,340 was worked out on similar basis. 5. The AO in the assessment orders of the respondent-companies has observed that all these assessees were owning certain shares of Arvind Mills Ltd. The average cost of such shares owned by all of them ranged between Rs. 20 to Rs. 22 per share as per their respective balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order only with a view to point out the glaring mistake in the working of short-term capital loss claimed by the assessee on sale of such right offer. The AO, however, observed that the assessee is not entitled to any deduction in respect of short-term capital loss claimed on the basis of misinterpretation of the judgment of the Hon'ble apex Court in the case of Miss Dhun Dadabhoy Kapadia. 5.4. The AO has also given a detailed chart on pp. 10 and 11 of the assessment order in the case of Ajax Investments Ltd., giving complete details of rights of FCD transferred by various companies of this group in favour of Arvind Polycoat Ltd. M/s Arvind Polycoat Ltd. is also a company of the same group who had availability of finances with them. They made major investments in the right issue of Arvind Mills Ltd. by purchasing rights for FCD at the rate of Rs. 200 per FCD from various other companies of the same group. The details of other group companies who had invested in the right issue of Arvind Mills Ltd. by purchase of rights from other group companies, could not be gathered by the AO till completion of assessments in question. He has, however, observed that the whole scheme of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in the case of B.C. Srinivasa Setty but later on they have filed the revised return and claimed capital loss by calculating notional depreciation in value of shares. No reasonable explanation for filing the revised return by changing the stand as mentioned above was furnished during the assessment proceedings. It has also been observed that various other persons of the same group viz., Chinubhai Chimanbhai and Ashokbhai Chimanbhai for asst. yr. 1993-94 have sold their rights to FCD of Arvind Polycoat Ltd. and have contended that there will be no cost of acquisition of such rights and consequently there will be no capital gains tax in view of Supreme Court decision in the case of B.C. Srinivasa Setty. These assessees have not claimed any capital loss on the basis of Miss Dhun Dadabhoy Kapadia's case. The AO observed that the assessees have wrongly and deliberately applied the ratio of Miss Dhun Dadabhoy Kapadia's case in the present cases by filing the revised returns only with a view to claim set off of capital loss against current and future capital gains. The assessee has transferred such right offer to companies of the same group. In this process these assessees hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sells shares at the rate of Rs. 80 which costed him only Rs. 20 or Rs. 22 per share should not attract any tax on capital gains arising as a result of sale thereof. Such a view is against commonsense and is also contrary to claim provisions of law. 5.9. The AO on p. 18 of the said assessment order has placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) in which it has been observed that the intention should be found out from the language used by the legislature and if strict literal construction leads to an absurd result a result not intended to be subserved by the object of the legislation, then if another construction is possible apart from strict literal construction, then that construction should be preferred. The AO has observed on p. 19 of the said assessment order that instead of following the spirit of decision in the case of Miss Dhun Dadabhoy Kapadia, the assessee has tried to use this decision as a tool for tax evasion. The assessee has stretched few words from the judgment of the Hon'ble Supreme Court too far and out of context and has come out with a conclusion which was tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Drinks (P) Ltd. vs. CIT 1978 CTR (Ori) 35 : (1978) 112 ITR 721 (Ori) and CIT vs. Indian Overseas Bank (1984) 41 CTR (Mad) 212 : (1985) 151 ITR 446 (Mad). Applying the principles laid down in these judgments the AO has observed that in the instant cases it has been found that the assessee's original investment in shares has appreciated by three times and in addition to such appreciation, the assessee has also received the amount by way of sale of right offer, for which no purchase price was paid by the assessee. Thus, there is neither any loss in the value of investments when compared with the cost price nor there is any other loss to the assessee. The entire exercise of computation of loss undertaken by the assessee is hypothetical and theoretical. No businessman will say that when your investment appreciates there-fold and you also receive substantial amount on sale of rights, you are incurring losses. Because if this is loss, then everyone will like to have such loss, where one can make huge money without paying any taxes. 5.13. The AO thereafter on p. 23 of the said assessment order has also observed that the transaction of transfer of rights to FCDs has contrary to the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose cost can be determined on the basis of depreciation in the valuation of original shares consequent upon declaration of right by the company and such depreciation in value will be deemed to be the cost of acquisition of the right, which the assessees sold/renounced in favour of third party for a consideration. (c) The Tribunal further held that the depreciation in value of shares as a result of right offer computed by the assessee at Rs. 66 per share cannot be accepted. The rates of spot delivery are better indicator of the actual market value of the shares. The Tribunal accepted that the depreciation in the value of shares consequent to the declaration of right will have to be calculated as under: (i) Last quotation of 24th July, 1992, as cum-right on sport basis Rs. 215 (ii) First quotation ex-right Rs. 180 Depreciation Rs. 35 (d) The Tribunal after taking into consideration the totality of the facts and circumstances directed the AO to compute the capital loss suffered by the assessee on the basis of the ratio of the decision of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia by taking depreciation in the value of shares from cum-right to ex-rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o all those cases are absolutely identical and similar. Shri Shah contended that the earlier decisions of the Tribunal on identical facts are binding. The successor Bench must follow the earlier decisions. The view taken by the Tribunal in the above referred cases is fully supported by the judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia. He also drew our attention to the judgment of the Hon'ble Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1963) 48 ITR 882 (Bom) with a view to bring to our notice the relevant facts of the said case. The provision of s. 12B of the old IT Act, 1922, have also been reproduced on p. 891 of the said report. It was pointed out that the language of s. 12B so far as it relates to computation of capital gains is almost similar as contained in the corresponding provisions of the IT Act, 1961. 9.1. The learned counsel referred to the judgment of the Hon'ble Supreme Court in the case of CIT vs. Dalmia Investment Co.. The headnote of the said judgment is reproduced below: "Where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is a dealer in shares, their real cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shareholder would be simple. The working out of the cost would be to add the number of bonus shares to the number of the old shares and spread out the cost of the old shares over the aggregate of the old and the bonus shares. The result would be the average price of each share of the combined lot of the old and the bonus shares. He also invited our attention to various examples given at pp. 420 and 421 of 81 ITR. It was pointed out that if the principle in Dhun Dadabhoy Kapadia's case is held applicable in each of these two examples, what would be the taxable gain would be Rs. 5, though in example No. 1 the profit is Rs. 22.50 and in example No. 2 there is a loss of Rs. 50. The learned counsel contended that the method of averaging out of the cost as laid down in the three cases dealing with bonus shares, may, with some reservations, apply only if, in the case of a rights issue, the shareholder actually applied for the share offered to him, pays to the company the money payable in respect of these shares and obtains the shares from the company. The Hon'ble Bombay High Court observed that this is a case where the assessee did not himself apply for any of 350 right shares offere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when there is no finding that the assessee is a dealer in shares and considering the decisions of their Lordships, relied upon by the Tribunal, if after including that gain, the value of the shares on that date falls short of the cost invested in the shares, no capital gain remains for tax." 9.7. The learned counsel then referred to the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Suhasbhai Vadilal (1999) 157 CTR (Guj) 577 : (1999) 239 ITR 362 (Guj) it was held in the aforesaid case that: "the shares in R were given to the shareholders of S as a matter of right, depending upon their holding and at the ratio of 1:1. Though they were not rights issues properly so-called of S the fact remained that the shares of S carried with them the right to receive the shares of R in view of the special arrangement made between the two companies and the resolution passed by R linking its issue directly with the holding of the shares in S. When this right to receive the shares of R went with the shares of S, their value was Rs. 543.75 per share, but soon after shares of R were issued, the value of share of S diminished to Rs. 410 per share. The depreciation in value of share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of justice, which we see in plenty in this case. This Court in the case of Sub-Inspector Rooplal vs. Lt. Governor held thus: 'At the outset, we must express our serious dissatisfaction in regard to the manner in which a coordinate Bench of the Tribunal has overruled, in effect, an earlier judgment of another coordinate Bench of the same Tribunal. This is opposed to all principles of judicial discipline. If at all, the subsequent Bench of the Tribunal was of the opinion that the earlier view taken by the coordinate Bench of the same Tribunal was incorrect, it ought to have referred the matter to a larger Bench so that the difference of opinion between the two coordinate Benches on the same point could have been avoided. It is not as if the latter Bench was unaware of the judgment of the earlier Bench but knowingly it proceeded to disagree with the said judgment against all known rules of precedents. Precedents which enunciate rules of law from the foundation of administration of justice under our system. This is a fundamental principle which every presiding officer of a judicial forum ought to know, for consistency in interpretation of law alone can lead to public confidence in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court should, ordinarily, follow the judgment of another Division Bench of that High Court. In extraordinary cases, where the later Division Bench finds it difficult, for stated reasons, to follow the earlier Division Bench judgment, the proper course is to order that the papers be placed before the Chief Justice of High Court for constituting a larger Bench. (g) State of A.P. vs. V.C. Subbarayaddu & Ors. AIR 1998 SC 848: In this case it was held that a Division Bench disagreeing with earlier Bench ruling should as a matter of propriety refer the matter to the larger Bench. (h) CIT vs. Crescent Films (P) Ltd. (2001) 171 CTR (Mad) 239 It was held by the Hon'ble Madras High Court in this case that a decision is to be regarded as a precedent for its ratio decidendi and not for the facts in relation to which such ratio was laid down. (i) Vishnu Traders vs. State of Haryana & Ors. 1995 Supp (1) SCC 461 It was observed by the Hon'ble Supreme Court that the need for consistency of approach and uniformity in the exercise of judicial discretion respecting similar causes requires that all similar matters should receive similar treatment except where factual differences require a dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in the case of Miss Dhun Dadabhoy Kapadia are as under: Sale value of FCDs @ Rs. 200 per right Short-term loss claimed by taking cost at Rs. 660 per right Niranjan Narottambhai 11,46,600 26,37,180 Acropolish Investments 1,22,35,400 2,81,41,420 Amazon Investments Ltd. 3,06,07,200 7,03,96,560 Avon Investments Ltd. 4,80,000 11,04,000 Sanjaybhai Shrenikbhai 7,60,000 17,48,000 Shrenikbhai Kasturbhai 11,41,200 26,23,760 12. The Tribunal vide its order, dt. 20th April, 1999, in the case of Amazon Investments Ltd. and order, dt. 17th Aug., 1999, in other five cases directed the AO to compute the loss suffered by the assessees by taking depreciation in the value of share being difference between cum-right and ex-right value on spot rate basis at Rs. 35 per share as against Rs. 66 per share worked out by the assessees, on the basis of judgment in the case of Miss Dhun Dadabhoy Kapadia. 13. The corresponding figures of sale price of rights sold in the present cases and short-term capital loss claimed by these assessees are as under: Sale value of FCDs @ Rs. 200 per right Short-term capital loss claimed by taking cost of right at Rs. 660 per right Affection Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned: 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment'." (b) Gujarat State Co-op. Bank Ltd. vs. CIT (2001) 167 CTR (Guj) 34 : (2001) 250 ITR 229 (Guj) at p. 265: "As per the settled legal position, a decision is an authority for what it actually decides and not necessarily for what logically follows from it. Equally well settled is the principle that a decision to be law under Art. 141 must not be a mere conclusion by which the case is disposed of. Because, a conclusion, a mere conclusion, may be on facts, it may not and does not necessarily involve consideration of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Cordozo) by matching the colour of one case against the colour of another. The decision, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right incurred, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases." (h) CIT vs. J.H. Gotla: The relevant extract from the headnote are reproduced below: "If a strict and literal construction of the statute leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then, that construction should be preferred to the strict literal construction. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature the Court might modify the language used by the legislature so as to achieve the intention of the legislature and prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal in the aforesaid cases that the decision of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia rendered under the old IT Act, 1922, will be applicable to the cases adjudicated under the provisions of IT Act, 1961, because the phraseology used in s. 12B of the 1922 Act is in pari materia with the language used in corresponding provisions contained in IT Act, 1961. (c) We also agree with the findings given by the Tribunal in the aforesaid cases that the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty is not applicable in relation to determination of capital gains/loss arising due to transfer/renunciation of rights in favour of third party for a consideration. (d) However, with utmost respect, we are unable to agree with the findings given by the Tribunal in the case of Amazon Investments Ltd. & Ors., that the cost of acquisition of right over FCDs in the present cases should be taken at Rs. 35 per share or at the rate of Rs. 350 per right offer on the basis of depreciation in the value of shares consequent to the depreciation of right offer. But we agree with the aforesaid determination of the figure of depreciation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal to the Hon'ble Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia was whether the Tribunal was right in rejecting the claim of the applicant to deduct from the computation of capital gain the cost of right determined in accordance with the accepted principles of accountancy in the light of provisions of s. 12B of the 1922 Act. The Hon'ble Supreme Court laid down a principle of law that in working out the capital gain or loss on renunciation/sale of right the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purpose. The Hon'ble Supreme Court did not lay down that the cost of this fractional interest viz., right offer forming part of original shares held by the assessee can exceed total cost of acquisition of such shares of which such right offer is only a part thereof. In the present cases, the average actual cost of shares held by these assessees ranged between Rs. 20 to Rs. 22 per share as per their respective balance sheets. It is unimaginable that the cost of small fractional interest viz., right offer can be taken at Rs. 35 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian Companies Act. The Tribunal was right in holding that the entire amount of Rs. 45,262.50 was a capital gain. 20.5. The Hon'ble Supreme Court in the aforesaid case reported in 63 ITR 651, inter alia specifically noted the fact at p. 652 that the appellant Miss Dhun Dadabhoy Kapadia was holding 710 ordinary shares of TISCO, which she had inherited sometime prior to 1st Jan., 1954, as an investment. The Hon'ble Supreme Court held as under: "The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the company. There was already a provision that, if the company issued any new shares, every holder of the old shares would be entitled to such number of ordinary shares as the board may, by resolution, decide. This right was possessed by the appellant because of the ownership of the old 710 ordinary shares, and when the board of directors of the company passed a resolution for issue of new shares this right of the appellant matured to the extent that she became entitled to receive 710 new shares. This right could be exercised by her by actually purchasing those shares at the prescribed rate, or by renouncing those shares in favour of another p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that right and converted it into money. The value on the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in his manner also, it is clear that the net capital gain by her would be represented by the amount realised by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " and "indexed cost of any improvement" had respectively been substituted. The expressions "indexed cost of acquisition" and "indexed cost of any improvement" have been defined in the Explanation below s. 48. Sec. 55(2)(b), as it existed in the relevant year [i.e., prior to insertion of s. 55(2)(aa)(ii) w.e.f. 1st April, 1995] further provides that for the purposes of s. 48, "cost of acquisition" in relation to any capital asset which became the property of the assessee before the 1st April, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on 1st April, 1981, at the option of the assessee. 22. In the case of Miss Dhun Dadabhoy Kapadia the fall in market quotation of shares as a result of right offer was taken as proportionate cost of rights because the market value of the shares including the right was Rs. 253 per share which was less than the actual cost of Rs. 341 per share as per third proviso to s. 12B(2) of the IT Act, 1922. The depreciation in the share being difference between cum-right price and ex-right price of Rs. 54.25 per share further resulted in the actual loss suffered by the assessee in its deemed cost of acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the old shares can exceed the actual and total cost of acquisition of the old shares in which the right to have right share was embedded. The cost of acquisition of right offer is a part of the total cost of acquisition of the share. In the case of Miss Dhun Dadabhoy Kapadia as against the deemed cost as on 1st Jan., 1954, of old shares at the rate of Rs. 341 per share, only a fractional or proportionate cost of embedded right to acquire PCDs pursuant to right offer was taken at the rate of Rs. 53 per "Right offer". Such claim made by the assessee at the rate of Rs. 53 was found to be reasonable on the basis of difference in the cum-right price and ex-right price before and after the issue of right offer of Rs. 54.25 per share, on the facts of that case. The principle laid down by the Hon'ble Supreme Court was that proportionate cost of acquisition of "Right offer" should be deducted for computing capital gains and such proportionate cost should be ascertained as per accepted commercial practices. But the working, the formula or the mode of apportionment will differ from cast to case. The cost of acquisition of the right offer will, therefore, have to be apportioned from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such manner as they think most beneficial to the company.' Mr. Kolah further contends that in the said cost of Rs. 341 is included the cost of the right conferred on the assessee under s. 105C of the Companies Act. When the board of directors of the company decided by passing the resolution of 12th March, 1956, to issue additional capital, that right became crystallised. Referring us to certain observations in four books on principles of accountancy, viz., Accountancy by Pickles and Dunkerley, 2nd edition, p. 1167, Accountants' Handbook by Rufus Wixon & W.G. Keel, 4th edition, pp. 13,22, A Dictionary for Accountants by Eric L. Kohler, 1951, edition, at p. 369, and Principles of Accounting-Intermediate by Finney & Miller, 5th edition at p. 299, Mr. Kolah contended that the value of this right, according to the principles of accountancy stated in these four books would come to about Rs. 73 to Rs. 76 and this should be taken to be the actual cost of the right within the meaning of sub-cl. (ii) of sub-s. (2) of s. 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 has himself contended before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit or loss on the amount thereof resulting in the case of each holder of the old shares should be ascertained at the time when he sells his old shares but, of course, after the actual cost of the old shares is reduced by the depreciation suffered in respect of the old share at the time of the sale of the right which sprang out of the old share, the depreciation being the shortfall ascertained by deducting the ex-right price from the cum-right price at the time of the issue of the rights shares. Mr. Dastur contended that the method suggested by Mr. Joshi, dealing with bonus shares, may with some reservations, apply only if, in the case of a rights issue, the shareholder actually applied for the share offer to him, pays to the company the money payable in respect of those shares and obtains the shares from the company." It is clear from the aforesaid submissions that the cost of acquisition of rights shares to be determined in accordance with the commercial practice or in any reasonable or rational manner is to be a part of the actual cost of original/old shares. The apportioned cost of right share embedded in the cost of original share will have to be deducted out of the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the headnote is reproduced below: "Held, affirming the decision of the High Court, that the grant of the mining lease was transfer of a "capital asset" within the meaning of s. 45 of the IT Act, 1961. The cost of acquisition of the land would include the "cost of acquisition" of the mining right under the lease and the date of acquisition of the right to grant lease had to be the same as the date of acquisition of the freehold rights. The amount paid by the appellant to purchase the land was for acquiring a bundle of rights in the land including the right to grant a lease. The cost of acquisition had to be apportioned in each case on the basis of evidence. The determination of the cost of the right to excavate clay in the land in terms of money might be difficult but was nonetheless of a money value and the best valuation possible had to be made." The ownership over the shares consist of a bundle of rights including the right to have dividend right to have bonus shares or right shares as and when declared, etc. When a part of this bundle or rights, viz., which in the instant case is a right offer embedded in the bundle of rights contained in the shares is transferred, the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share. Unless fall in market value or depreciation in market value of shares as a result of announcement of right offer is compared with the actual cost of acquisition, the question relating to apportionment of cost of acquisition of original share cannot properly be decided in conformity with the principles laid down by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia and in the case of A.R. Krishnamurthy. Moreover, it is not a case of transfer of a right offer but in this case the assessee acquired the shares of Rajesh Textile Mills Ltd. pursuant to arrangement made before those two companies. In this case also the determination of cost of acquisition was made by spreading over the cost of original shares by adopting an equitable and reasonable mode of apportionment. It has been held by the Hon'ble Supreme Court in the case of Dalmia Investments Co. Ltd. that the mode of cost accounting in a case where cost of original shares have to be apportioned, may have to be different in each case, but in essence and principle there is no difference. The Hon'ble Supreme Court in the case of A.R. Krishnamurthy also observed that the amount paid by the appellant to purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares. The cost of acquisition of such capital asset comprising of old shares along with the right embedded therein was Rs. 341 per share and the formula of depreciation in the market value being the difference between the cum-right price and ex-right price was applied only for apportionment of such cost of acquisition. According to that formula the proportionate cost of right offer came to Rs. 54.25 per share as against which the assessee claimed deduction for cost of acquisition of such right at the rate of Rs. 53 on the basis of accounting principles, which was held to be reasonable on the basis of such formula." The proportionate cost of right offer was thus determined by the Hon'ble Supreme Court by measuring the amount of depreciation in the value of her original shares. It is noteworthy to repeat that the deemed cost of acquisition in this case as on 1st Jan., 1954, which was deductible for computing capital gain on sale of such shares was Rs. 341 per share. The value immediately prior to right offer i.e., cum-right price was Rs. 253 per share which further declined to Rs. 198.75 per share after right offer. Thus, there was a real loss in the original cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares over the old shares and the new shares (viz., bonus shares). At p. 580 of the said judgment, the Hon'ble Supreme Court has observed as under: "The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost old price of the original shares as the cost price of the old shares and bonus shares taken together. This method is suggested by the Department in this case. Since the bonus shares in this case rank par passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the Department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of Rs. 66 per share or at the rate of Rs. 35 per share held by the Tribunal in the case of Amazon Investments Ltd. in fact exceeds the actual cost of original shares. The average cost of acquisition of share, in the case of Ajax Investments Ltd. is Rs. 20 per share and in the case of Aligator Investments Ltd. it is Rs. 21 per share and in the case of Affection Investments Ltd. it is Rs. 22 per share only. The cost of right share will have to be determined by apportioning the total cost of acquisition of these shares in which such right to acquire FCDs are embedded. Therefore, the cost of Rs. 20 or Rs. 21 or Rs. 22 being the cost of acquisition of shares in the hands of these three respondent-companies will have to be apportioned in an equitable manner with a view to determine the proportionate cost of right offer. The proportionate cost of right offer embedded in the original share cannot exceed the total cost of acquisition of the share but it has to be a reasonable proportionate part thereof. The clear provisions relating to computation of capital gain provide that the cost of acquisition which normally means the purchase price for acquisition of that capital asset should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of finding a solution to the new problems. That is how the law advances. That is the area or field of judicial creativity to fill in the gap between the existing law and the law as it ought to be. If you have proper perception and proper values, those will influence your thought process and the exercise which you perform in the form of judicial creativity would be tempered more by morality and ethics. Complete justice or true justice must encompass within it morality and ethics. Mathematically stated "absract law plus morality or ethics is equal to justice". That is the task which we Judges are required to perform in the course of administration of justice. This is the kind of role which the judiciary has to perform and by judiciary because it is together we form the machinery for the administration of justice. The interpretation of laws have to be purposive. When I say purposive, it means the interpretation has to be to subserve the object of the enactment of the law keeping in view the supreme law, the Constitution. Every law has to accord with the Constitution, otherwise it suffers the defect of invalidity or unconstitutionality and therefore, even while construing st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose who are unwilling or unable to profit by it'. Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers." As stated earlier, some of the expert brains in the country involved in tax planning activities appear to have advised large number of big groups of concerns throughout the country to use the judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia as a device for reduction of their tax liabilities. In this context it may be relevant here to mention that the Tribunal "C" Bench Delhi (then comprising of one of us, namely, B.M. Kothari, AM and B.S. Saluja, JM) forwarded a statement dt. 2nd Dec., 1997, to the then Hon'ble President, ITAT, for constituting a Special Bench under s. 255(3) of the Act for disposal of ITA No. 2994/Del/1996 and ITA No. 5770/Del/1996. In ITA No. 2994/Del/1996, the assessee claimed short-term capital loss of Rs. 2,10,00,000 on sale/renunciation of right entitlement in favour of another company of that very group. Likewise in ITA No. 577/Del/1996, the assessee claimed short-term capital loss of Rs. 16,80,000 on sale/renunc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the IT Act, 1961, to constitute a Special Bench to decide these appeals involving similar points. We have made this humble attempt to decide these appeals in conformity with the clear provisions of law and in consonance with the principles of law laid down by the Hon'ble apex Court in the case of Miss Dhun Dadabhoy Kapadia, read with the principles laid down in the case of Dalmia Investment Co. Ltd. followed in Kapadia's case and the principles laid down by the Hon'ble Supreme Court in the case of A.R. Krishnamurthy and various other judgments cited supra. However, in the interest of fairness and justice, we direct the AO to stay the operation of this order till the expiry of time-limit for filing an appeal before the Hon'ble High Court under s. 260A of the IT Act, 1961. 35. After giving our deep and thoughtful consideration to the entire relevant facts, we are of the considered opinion that the cost of acquisition of "Rights" over FCDs transferred/renounced by these assessees should be computed by apportioning the actual cost of original/old shares in a reasonable and equitable manner by following the principles laid down by the Hon'ble apex Court in various cases referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 1st April, 1981, if the assessees exercise such an option permissible under s. 55(2)(b)(i) of the Act. 35.2. It may also be relevant here to mention that the entire system of taxation of long-term capital gains has been changed by the Finance Act, 1992. The scope and effect of the amended provisions inserted by the Finance Act, 1992, applicable from asst. yr. 1993-94, have been elaborated in the Departmental Circular No. 636, dt. 31st Aug., 1992. The relevant extracts from the said circular contained in paras. 35 to 35.2 are reproduced below: "Taxation of capital gains--35. The Finance Act, 1992, has recast the system of taxation of long-term capital gains. At present an asset is considered to be long-term if it is held for a period of more than 36 months except for shares of a company, where the period of holding should be more than 12 months. This definition continues to be the same in the changed format. In the scheme prior to 1st April, 1992, a basic deduction of Rs. 15,000; and a fixed percentage of the balance amount of capital gains was allowed as deduction under s. 48(2). The percentage depended on the nature of the asset and the statues of the assessee, but was unrela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the year under consideration viz., asst. yr. 1993-94 will be 16.28 per cent of indexed cost of acquisition of original/old shares. 35.4. The cost of acquisition of shares of Arvind Mills Ltd. by these respondent-assessees viz., Affection Investments Ltd., Aligator Investments Ltd. and Ajax Investments Ltd. as discussed in the assessment orders of these respondent-companies was Rs. 22 per share, Rs. 21 per share and Rs. 20 per share, respectively. The actual cost of acquisition in the case of Shri Anangbhai Ajaybhai has not been given in the assessment order. The AO should verify the actual average cost of acquisition of original shares in cases of all four respondent-assessees. He should, thereafter ascertain the indexed cost of acquisition of such shares on the basis of cost inflation index notified for the purpose of computing the capital gains from asst. yr. 1993-94 and onwards. Such indexed cost of acquisition will be apportioned in the ratio of 16.28 per cent. In other words, 16.28 per cent of such indexed cost of acquisition of original shares will be regarded as cost of acquisition of right shares for purpose of computing the capital gains on sale/renunciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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