TMI Blog2006 (11) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... said right shares, since such right was embedded. in the purchase of old shares. (b) Further the BSE was not operating on June 29, 1992, the day on which shares became ex-right, due to financial irregularity by some exchange members and hence, there was. no market quotation available of the said shares on the day, then became ex-right; (c) Further, the price prevailing on July 16, 1992 on which date, the market reopened cannot be considered as an ex-right price because market had reopened only after prolonged abnormal closure; (d) Consequently, any gain arising on renouncing of right shares cannot be charged to tax as it is a case to which computation provisions cannot apply at all, and such a case was not intended to fall within the changing section 45 of the Income-tax Act, 1961. 3. The appellant, therefore, prays that the addition of Rs. 94,52,025, as short-term capital gains be deleted. 4. Without prejudice to the above, in case the appellant's contention that no cost can be conceived for the acquisition of the right to subscribe/renounce the said shares is not accepted, then the maximum amount of capital gain on the said shares would work out at the most to Rs. 9,72, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight shares sold, has to be adopted as the cost of the right shares and income under the head "Capital gains", if any, can be computed accordingly. The assessee's contention that there was no cost of acquisition of the right shares was rejected by the Assessing Officer. However, the Assessing Officer examined the assessee's claim that the Hon'ble Supreme Court decision in the case of Miss Dhun Dadabhoy Kapadia was applicable in this case. He asked the assessee to furnish material and evidence in support of its claim of the ex-right price of the shares so that the fall in the value of shares can be worked out to enable the Assessing Officer to apply the decision of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia. The assessee company claimed before the Assessing Officer that cum-right price of the shares was Rs. 250 per share and the ex-right price of the shares was Rs. 200. However, the assessee did not furnish any supporting evidence. The Assessing Officer addressed a letter dated 20-11-1995 to the BSE requesting the stock exchange to furnish the relevant details and the BSE replied vide its letter dated 7-12-1995, which has been re-produced by the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992. It was contended before the learned CIT(A) that if there is no cost of acquisition, as held by the Assessing Officer, no income can be brought to the charge of tax under the head "Capital gains", having regard to the Hon'ble Supreme Court judgment in the case of B.C. Srinivasa Shetty. Alternatively, it was contended by the assessee before the learned CIT(A) that in the absence of market quotations on the relevant dates, the working of "Capital gains/loss" should be done on the basis of the principles of accountancy and commercial practices. The assessee furnished a detailed working before the learned CIT(A). The learned CIT(A) decided the controversy in the following manner at paras 9 to 11 of his order:- "9. It was further contended that during the course of assessment proceedings, the appellant vide letter dated 21-12-1995 had requested the Assessing Officer to grant a week's time to make further submissions on this issue. However, the Assessing Officer denied proper opportunity to the appellant to explain its case and instead passed the assessment order on 21-12-1995. In this view of the matter, the Assessing Officer's comments were called on the submissions made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no exception to this rule. After issue of right shares, the total number of shares representing the paid up capital go up, whereas the assets of the company remain the same. In support of this proposition, the learned counsel relied on the Hon'ble Bombay High Court decision in the case of H. Holck Larsen v. CIT [1972] 85 ITR 285 and invited our attention to the following observations of the Hon'ble Bombay High Court at page 292 of the report:- "For a proper understanding of the course of transactions in question, it is necessary to appreciate the implications of the issue of right shares. On the issue of such shares, the value of the old shares depreciates, because the assets of the company remain stationary, while the number of shares increases. It is elementary that a company will not offer right shares for anything higher than the market price for, were it otherwise, the shareholder will prefer to purchase the shares in the open market. Acquisition of right shares is the privilege of existing shareholders but a concomitant of this privilege is the depreciation in the value of the old holding. The depreciation consequent upon the issue of right shares cannot be worked out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, argued that assessee logically adopted the market rate of Rs. 200 for computing the income under the head "Capital gains". Sri Dastoor submitted that if the cost of the right to subscribe to right share is nil, as held by the department, then no "Capital gains" can be brought to the charge of tax in view of the Hon'ble Supreme Court decision in the case of Srinivasa Shetty. 10. The learned CIT/DR Shri S.C. Gupta forcefully supported the orders of the revenue authorities and contended that the authenticity of the certificate given by the BSE cannot be questioned. It is argued that before applying the Hon'ble Supreme Court decision in the case of Miss Dhun Dadabhoy Kapadia, the assessee must establish that there was diminution in the market rate of the shares. If there is no diminution, the assessee cannot get advantage by way of deduction of any cost price. The learned DR brought to our notice certain judicial pronouncements, which are compiled in the paper book filed by him. These cases are on the point that if there is diminution in the market value of the shares after issue of right shares, such diminution can be assumed to be cost of the rights transferred. The learned DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in quantifying the difference between the cum-right and ex-right rate is that all transactions on the BSE were stopped during the period 11-6-1992 to 15-7-1992. Therefore, there is no way to find out the market rate of the shares on the two relevant dates i.e. cum-right date (on 28-6-1992) and the ex-right date (on 29-6-2002). At the same time, it would be unfair to the assessee to assume that there was no erosion in the market rate of the shares on account of the right issue. In the peculiar circumstances mentioned above, in our view, the diminution in the market rate of the shares has to be estimated on an appropriate and logical consideration of the factual position. The market rates during the period 16-7-1992 to 30-7-2002 have been indicated in this order. The highest is Rs. 250 on 16-7-1992, which is the first day of the opening of BSE after its closure from 11-6-1992. It is not known as to whether there were any transactions on that day. It appears that the closing rate of 10-6-1992 has been adopted to be the opening as well as the closing rate on 16-7-1992. At this juncture, we must make it clear that there is no question of doubting the authenticity of the certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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