Composite capital gain on renounced rights shares must be netted against depreciation in existing shares.

A shareholder who renounces the right to subscribe for new shares realises a capital receipt from an accretion to existing shareholding, but the taxable gain must be computed as the net result of the composite transaction. Ordinary commercial accounting principles apply, so the receipt from the renunciation is reduced by the diminution in value of the original shares caused by the issue of rights shares. On that basis, the depreciation suffered by the existing shares is deductible in determining the real capital gain, and the net gain alone is brought to tax.

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Issues: Whether, in computing capital gains arising from the sale of the right to take up new shares, the assessee was entitled to deduct the depreciation suffered by her existing shares on the issue of the rights shares.

Analysis: The right to subscribe for the new shares was an accretion to the assessee's existing shareholding and formed part of the capital asset held by her. When that right was renounced for money, the transaction had to be viewed as one composite capital transaction in which the value of the old shares had simultaneously fallen. For the purpose of determining the real capital gain, ordinary commercial accounting principles were applicable, and the gain could not be computed by isolating the receipt from the corresponding diminution in value of the original shares. The net result of the transaction therefore required the receipt from the renunciation to be reduced by the loss represented by the fall in the value of the original shares.

Conclusion: The assessee was entitled to deduct the depreciation in the value of her original shares in computing the taxable capital gain, and the question was answered in her favour.

Ratio Decidendi: Where a shareholder realises money by renouncing a right attached to existing shares, the taxable capital gain is the net gain from the composite transaction and must be computed by applying ordinary commercial accounting principles, including the diminution in value of the original shares occasioned by the issue of the rights shares.

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