Court rules cost of right shares not included in capital gains calculation

The Andhra Pradesh High Court ruled in a case concerning the calculation of assessable capital gains for the assessment years 1977-78 and 1978-79. The court held that the cost of right shares should not be included in determining capital gains. It differentiated between bonus shares and right shares, noting that the principle of spreading cost over bonus shares did not apply to right shares. As the shares sold were not right shares but derived from originally subscribed or bonus shares, the Revenue's computation of the shares' actual cost was upheld. The judgment favored the Revenue, affirming the correctness of the assessments conducted.

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Issues:
1. Determination of the cost of right shares for working out assessable capital gains.

Analysis:
The judgment delivered by the Andhra Pradesh High Court pertains to two references made by the Income-tax Appellate Tribunal concerning the assessment years 1977-78 and 1978-79. The central question before the court was whether the cost of right shares should be considered in calculating assessable capital gains. The assessee had subscribed to shares in a company and subsequently sold some of these shares. The dispute arose regarding the determination of the actual cost of the shares sold, particularly in relation to right shares offered by the company. The assessee contended that the principle of spreading the original cost of shares over bonus shares should also apply to right shares. However, the Revenue disagreed with this contention, leading to the matter being brought before the court for consideration.

In analyzing the issue, the court observed that the principle established by the Supreme Court in a previous case regarding the spread of cost over bonus shares was not directly applicable to right shares. The court differentiated between bonus shares, which are issued without consideration, and right shares, which are issued upon payment and entitlement based on existing shareholding. The court noted the absence of legal precedent supporting the application of the same principle to right shares as to bonus shares. Since the shares sold were not right shares but rather originated from the originally subscribed or bonus shares, the Revenue's computation of the actual cost of the shares sold was deemed correct by the court. Consequently, the capital gains were determined accurately for assessment purposes, and the court found no error in the assessments conducted by the tax authorities.

Therefore, the court answered the question referred in both references in favor of the Revenue and against the assessee, concluding that the cost of right shares should not be factored into the calculation of assessable capital gains. The judgment highlights the distinction between bonus shares and right shares in terms of cost determination and affirms the correctness of the Revenue's approach in this particular case.

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