Rights attached to stock-in-trade must be valued with the underlying shares, with depreciation set off against rights-sale proceeds.

Where rights to subscribe to new shares attached to stock-in-trade are sold, the gain is computed by treating the rights and the underlying shares as part of one commercial unit. The proceeds from the rights sale must be reduced by the depreciation in the value of the existing shares, measured by comparing their cum-right and ex-right values at the time of the rights issue. A separate revenue loss claim based on year-end market rates is not the correct basis, because the relevant values are those immediately before and after the rights issue.

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Issues: Whether, in computing the taxable profit arising from the sale of rights to subscribe to new shares, the amount realised had to be reduced by the depreciation in value of the existing shares from which the rights sprang, and whether any separate revenue loss was allowable on that basis.

Analysis: The assessee held the original shares as stock-in-trade and sold only the rights to subscribe to the new shares. The governing principle applied was that the right to take up the new shares was not an isolated gain dissociated from the old holding, but part of the composite value of the existing shares at the time the rights issue was made. The proper method, therefore, was to ascertain the depreciation in the old shares by comparing their cum-right and ex-right values and to set that depreciation against the proceeds realised on sale of the rights. The Court found no material distinction between this situation and the principle laid down by the Supreme Court in the rights-issue case relied upon, and held that the Tribunal had wrongly ignored the required set-off. The separate figure claimed as revenue loss was also not computed on the correct basis, because the relevant market values were those immediately before and after the rights issue, not the year-end market rates.

Conclusion: The amount realised on sale of the rights could not be taxed without first giving credit for the depreciation in the old shares, and the assessee was not entitled to the separately claimed loss on the basis adopted in the reference.

Final Conclusion: The reference was answered in the assessee's favour on the method of computation, and the Tribunal's approach was rejected because the rights-sale proceeds had to be adjusted against the fall in value of the existing shares.

Ratio Decidendi: Where rights attached to existing stock-in-trade are sold, the taxable gain is to be computed by treating the rights and the underlying shares as part of the same commercial transaction and by allowing the depreciation in the original shares to be set off against the rights-sale proceeds.

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