Rights issue subscription rights can be taxable property when renounced and valued for gift-tax purposes.

A shareholder's right to subscribe to additional shares under a rights issue, once the company increased its capital and made the statutory offer, was treated as an existing enforceable property right in praesenti. Its renunciation in favour of another person was therefore a transfer of property and could amount to a taxable gift under the Gift-tax Act, 1958. The right was also held capable of valuation because subscription rights in rights issues have recognised market value and can be dealt with separately in the market. The references were answered against the assessee and in favour of the revenue.

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Issues: (i) Whether the right of an existing shareholder to subscribe to further shares offered under a rights issue, and the renunciation of that right in favour of another person, constituted "property" and an "existing movable or immovable property" capable of being the subject of a gift under the Gift-tax Act, 1958. (ii) Whether such renounced right was capable of valuation for gift-tax purposes.

Issue (i): Whether the right of an existing shareholder to subscribe to further shares offered under a rights issue, and the renunciation of that right in favour of another person, constituted "property" and an "existing movable or immovable property" capable of being the subject of a gift under the Gift-tax Act, 1958.

Analysis: Once the company resolved to increase its capital and issued the statutory offer to existing shareholders, a present enforceable right accrued to those shareholders to take up the additional shares in the proportion offered. The statutory scheme also conferred the power to renounce that right in favour of another person. That right was therefore not a mere expectancy in future property, but an existing and tangible right in praesenti. Since the Gift-tax Act defines "gift" broadly to include transfer of existing property, the renunciation of that right amounted to a transfer of property capable of attracting gift-tax.

Conclusion: The right was existing property and its renunciation constituted a taxable gift.

Issue (ii): Whether such renounced right was capable of valuation for gift-tax purposes.

Analysis: The right attached to the shares had a recognized market value and was capable of being bought and sold. Business practice in rights issues shows that such subscription rights are separately dealt with and can fetch market quotations. The valuation adopted by the taxing authorities was therefore not without legal basis, and the right could be assessed by reference to its market value.

Conclusion: The right was capable of valuation for gift-tax purposes.

Final Conclusion: The references were answered against the assessee and in favour of the revenue, holding that the renunciation of rights shares was a taxable gift and that the right was capable of valuation.

Ratio Decidendi: A statutory right conferred on an existing shareholder to subscribe to further shares under a rights issue is existing property in praesenti, and its renunciation in favour of another is a transfer of property liable to gift-tax and assessable by market value.

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