2006 (11) TMI 233 - AT - Income Tax

Appeal granted: Recalculate capital gains post rights issue, stress on reasonable estimations

Rajiv Piramal Investments (P.) Limited. Versus Assistant Commissioner Of Income-tax, Circle 5 (6).

The Tribunal partially allowed the appeal, directing the Assessing Officer to recalculate the short-term capital gains by estimating a diminution of Rs. ... Capital Gains Issues Involved:1. Assessment of short-term capital gains on renouncing of right shares.2. Cost of acquisition of the right to subscribe/renounce shares.3. Market quotation and its relevance for computation.4. Application of the Supreme Court's decisions in relevant cases.5. Adequacy of opportunity provided to the appellant by the Assessing Officer.Detailed Analysis:1. Assessment of Short-Term Capital Gains:The primary issue was whether the sum of Rs. 94,52,025 received by the assessee on renouncing the right shares of M/s. Morarjee Gokuldas Spinning & Weaving Mills Ltd. should be assessed as short-term capital gains. The Assessing Officer (AO) assessed this amount under the head 'Capital gains,' contending that the income was taxable. The assessee argued against this, citing that there was no cost of acquisition for the right shares, referencing the Supreme Court's decision in CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294.2. Cost of Acquisition of the Right to Subscribe/Renounce Shares:The assessee claimed no cost was incurred in acquiring the right shares as the right was embedded in the purchase of old shares. The AO rejected this claim but considered the Supreme Court's decision in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, which allows for the diminution in the market price of shares to be adopted as the cost of the right shares. However, the AO found no diminution in market value based on the BSE's data, which showed no change in the share price before and after the rights issue.3. Market Quotation and Its Relevance for Computation:The BSE was closed from 11-6-1992 to 15-7-1992 due to a securities scam, and no market quotations were available for the relevant dates (28-6-1992 and 29-6-1992). The AO used the last available cum-right price (10-6-1992) and the first available ex-right price (16-7-1992), both being Rs. 250, to conclude no diminution in market value. The assessee contended that the market price on 29-6-1992 should be considered lower due to the rights issue, referencing historical market data post-reopening of the BSE.4. Application of Supreme Court Decisions:Both the AO and CIT(A) acknowledged the applicability of the Supreme Court's decision in Miss Dhun Dadabhoy Kapadia's case. However, they concluded that since there was no demonstrated diminution in market value, the entire sale consideration was taxable. The Tribunal, however, noted that the market price of shares generally diminishes after a rights issue and found it unreasonable to assume no diminution occurred. They estimated the ex-right value at Rs. 225 and cum-right value at Rs. 250, determining a diminution of Rs. 25 per share.5. Adequacy of Opportunity Provided to the Appellant:The assessee argued that the AO did not provide adequate opportunity to present further evidence, as the assessment order was passed on the same day as their request for additional time. The Tribunal found no serious contest on this ground and rejected it, emphasizing their focus on the substantive issue of market value diminution.Conclusion:The Tribunal directed the AO to recompute the short-term capital gains based on an estimated diminution of Rs. 25 per share, providing partial relief to the assessee. The appeal was partly allowed, acknowledging the principle of diminution in share value post-rights issue and applying it to the facts of the case. The Tribunal's decision emphasizes the need for logical and fair estimation in the absence of precise market data.