Capital gains on renounced rights require apportionment of original share cost; later cost-of-acquisition amendment is prospective only.

For capital gains computation, the cost attributable to rights embedded in existing shares must be derived by reasonable apportionment of the actual cost of the original shares, rather than treated as having an independent cost exceeding that base. The later amendment governing cost of acquisition of rights over financial assets was stated to operate from 1 April 1995 and therefore not to apply to the earlier assessment year. The note also records that valuation of renounced rights must reflect a rational and equitable allocation of the original share cost, with the indexed cost methodology applied where relevant.

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Issues: (i) whether the amendment governing the cost of acquisition of rights over financial assets applied retrospectively to the assessment year in question; and (ii) whether the cost of rights renounced on issue of FCDs could be taken at a figure higher than the actual cost of the original shares, or had to be determined by apportioning the actual cost of the original shares in a reasonable and equitable manner.

Issue (i): whether the amendment governing the cost of acquisition of rights over financial assets applied retrospectively to the assessment year in question

Analysis: The amended provision dealing with cost of acquisition of rights was held to operate from 1 April 1995 and, therefore, was not applicable to the assessment year under appeal. The computation had to be examined under the unamended law applicable to the relevant year, and the later amendment could not be invoked to determine the assessee's rights for the earlier period.

Conclusion: The amendment was prospective and did not govern the assessment year in question, which was decided in favour of the assessee and against the Revenue.

Issue (ii): whether the cost of rights renounced on issue of FCDs could be taken at a figure higher than the actual cost of the original shares, or had to be determined by apportioning the actual cost of the original shares in a reasonable and equitable manner

Analysis: The principles governing capital gains computation required deduction of the actual cost of acquisition, and where a right embedded in an existing share was renounced, the cost attributable to that right had to be apportioned from the cost of the original share on a rational and commercial basis. The reasoning accepted that the earlier decision on renunciation of rights could not justify a cost of rights exceeding the total cost of the original shares. However, the valuation adopted by the Tribunal at a flat figure of Rs. 35 per share was not accepted; instead, the actual cost of the original shares was to be apportioned by reference to the depreciation in value and the indexed cost methodology where applicable.

Conclusion: The cost of rights had to be computed by apportioning the actual cost of the original shares in a reasonable and equitable manner, and not by treating the rights as having an independent cost higher than the original shares; this was partly in favour of the Revenue.

Final Conclusion: The appeals were disposed of by affirming the applicability of the unamended capital-gains framework for the relevant assessment year while correcting the method of valuation so that the cost of the renounced rights would be derived only from a proper apportionment of the original share cost.

Ratio Decidendi: For capital-gains purposes, the cost attributable to an embedded right must be determined by a reasonable apportionment of the actual cost of the original capital asset, and a later amendment fixing the cost of such rights at nil does not apply retrospectively unless the statute clearly so provides.

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