Court rules fall in value of original shares must be considered in capital gain calculation

The Court held that when rights shares or debentures are issued, any fall in the value of original shares must be considered in computing capital gain. If the value is not more than the cost invested, the sale amount cannot be taxed as capital gain. Since the original shares were treated as capital assets and there was no finding that the assessee was a dealer in shares, no capital gain remained for tax after considering the fall in value. The Court discharged the rule based on the above reasoning.

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Issues involved: Determination of whether the amount of Rs. 2,48,348 is a capital receipt or a revenue receipt under section 256(2) of the Income-tax Act, 1961.

Summary:
The case involved an investment company holding equity shares of another company, which issued fully convertible debentures on rights basis. The investment company subscribed to some debentures and transferred the right to subscribe to others, receiving Rs. 2,48,348. The Assessing Officer treated the entire amount as capital gain, but the Tribunal disagreed. The Tribunal held that if the value of the original shares falls below the cost invested, no capital gain remains for tax. The Revenue argued that the decisions relied upon were on rights shares, not debentures. The Court held that when rights shares or debentures are issued, any fall in the value of original shares must be considered in computing capital gain. If the value is not more than the cost invested, the sale amount cannot be taxed as capital gain. Since the original shares were treated as capital assets and there was no finding that the assessee was a dealer in shares, no capital gain remained for tax after considering the fall in value.

The Court discharged the rule based on the above reasoning.

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