TaxTMI 
TaxTMI 
2023 (10) TMI 1431
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Gains of Business/profession". It has claimed capital loss on account of sale of non-convertible portion of debentures of M/s Vardhman Spinning & General Mills Ltd. amounting to Rs. 9,87,485/-. Further it has claimed capital loss due to fall in value of equity share of M/s Vardhman Spinning & General Mills Ltd. amounting to Rs. 1,94,54,400/-. Thus total loss amounting to Rs. 2,04,41,885/- was claimed to be carry forward to next year under the head "Capital Gain". Besides that, the assessee company has reported dividend income of Rs. 11,62,438/- and interest income of Rs. 1,63,695/- and after claiming expenses and deductions under section 80-M has reported taxable income of Rs. 2,45,900/-. The return of income was processed under section 143(1) of the Act at the returned income of Rs. 2,45,900/- on 31/03/1994. 3. Thereafter, the AO while completing the assessment proceedings for subsequent year i.e.; A.Y. 1995-96 observed that in the impugned A.Y. i.e.; 199394, the assessee has claimed capital loss of Rs. 2,04,41,885/- on account of sale of non-convertible portion of debenture of M/s Vardhman Spinning & General Mills Ltd. and due to fall i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er: "The facts in this regard are that the appellant was holding 177886 equity shares of M/s. Vardhman Spinning & General Mills Ltd. on 11.11.92. The Company on that date (i.e. 11.11.92 being the record dale) under section 81 of the Companies Act announced a Rights Issue of Partly Convertible Debentures to the existing shareholders in the ratio of 1 Debenture for every 2 shares held as on record date. Therefore, the appellant was entitled to apply for 88933 rights to PCD on the basis of its original shares. The appellant retained 24085 rights, and renounced the balance 64848 rights @ Rs. 120A per right and received Rs. 7781760/- as rights renunciation premium. The market quotation of equity share of Vardhman Spinning & General Mills Ltd. in Ludhiana Stock Exchange were as under: Last Cum Right Quotation On 30.10.92 Rs. 610.00 per share Last First Ex-right Quotation on 11.11.92 Rs. 400.00 per share Rs. 210.00 per share The appellant deducted this fall in the value on relatable original shares from the right renunciation premium received by it by relying on the Judgment of the Hon'ble Supreme Court in the case of Miss Dhun Dada....
X X X X Extracts X X X X
X X X X Extracts X X X X
....decision in the case of ITC Ltd Vs. DCIT reported in 80 TTJ 15 (Cal), wherein the Hon'ble Third Member concurred with the Accountant Member that the capital gains or losses, on renunciation of rights entitlements, are to computed in the manner approved by the Hon'ble Supreme Court in the matter of Ms Dhun Dada Bhoy Kapadia Vs. CIT (1967) 63 ITR 651 (SC). In respectfully deference to the judgment of Hon'ble Supreme Court in the case of Dhun Dadabhoy Kapadia, I allow the ground of appeal in favour of the appellant and direct the assessing officer to allow the loss by fall in value of shares of Rs. 1,94,54,400 as claimed by the appellant. Following the ratio of Hon'ble Bombay High Court in the case of K.A. Patch, the loss by fall in value is also allowable to the appellant if considered as a trader as business loss. However, in view of my order dated 3.3.03 in appeal No. ROT 1/2002-03 holding that the appellant was not a trader in shares and the shares held by the appellant were investments, loss by way of fall in value of shares claimed by the appellant would be Capital loss. 8. Against the original order passed by the Ld. CIT(A), Ludhia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on sale of non-convertible debentures ignoring the fact that the assessee was not an investor but trader in shares/debentures." 2. That the learned CIT(Appeals) has erred in law and facts in allowing capital loss on renunciation of right in shares ignoring the fact that the assessee was a trader and not an investor and natural loss could not have been allowed to a trader." The impugned appeal has been preferred against the order of the CIT(Appeals) passed u/s 154 of the Act. The background is that originally the CIT(Appeals) decided the appeal vide his order dated 3.3.03 whereby the abovesaid grounds remained to be disposed of. On the application by the assessee u/s 154 of the Act, the CIT(Appeals) has passed in impugned order which revenue is contesting. 3. In brief, the background of the impugned dispute is as follows: The assessee company filed its return of income for the assessment year 1993-94 declaring a net taxable income of Rs. 2,45,895/-. The assessee declared income/loss under the heads profits & gains of business, capital gains as well as income from other sources. Under the head capital gains', the assessee declared a loss ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....investor. It was held by the AO that any gain or loss that will arise under the head "income from business or profession" will arise only where there has been a actual transfer of share and in this case as there has been no transfer and its just a notional loss and therefore the notional loss of Rs. 1,94,54,400/- arising due to loss of fall in value of equity share of M/s Vardhman Spinning & General Mills Ltd. will not be allowed to be carry forward. 11. The assessee again moved in appeal before the Ld. CIT(A), Ludhiana who vide the impugned order dt. 29/02/2016 has dismissed the appeal of the assessee and the relevant findings are contained in para 2.5 which read as under: "2.5 I have considered the facts, the basis of the disallowance made and the argument of the AR during the course of assessment as well as appellate proceedings. The Hon'ble ITAT in its consolidated order for A.Y. 1993-94 and A.Y. 1994-95 in ITA No. 437 and 438 in the appellant's own case held that income derived by the assessee is assessable under the head income from business and profession and not under the head capital gains and the same was not to be set off against brought for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the number of shares increased and it was in consideration of the said depreciation in her original holdings that she had been given the right to purchase these new ordinary shares or to renounce them in favour of some other person to make up the loss suffered on the original shares. It was on consideration on these facts that it was held that the net capital gain by her was not represented by the whole amount of it and that the net capital gain can only be computed after deducting the amount of loss incurred by her in her original asset of old shares. Further, in the case of CIT vs. K. A. Patch (Bombay) (Supra), the assessee on receipt of offer of 'rights issue', exercised the option to sell his right to subscribe to new shares and under the circumstances, it was held that it was necessary to set-off fall in value of original shares held by the assessee i.e. the depreciation in old shares on account of rights issue of shares was set-off against amount realized by sale of right. However, in the case of the appellant, the loss in the fall in value of equity shares is merely a notional loss as there has been no actual transfer of the shares. Therefore, the AO was justified in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... various Courts including the Hon'ble Apex Court. In all these cases there was notional loss only. 17. The assessee in support of its contention relies on the following judgments; * Miss Dhun Dadabhoy Kapadia vs. CIT, (1967) 63 ITR 651 (SC) "A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be represented by the amount realised by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares". * CIT Vs. K.A. Patch, (1971) 81 ITR 413 (Bom) "We had pointed out to Mr. Joshi that the facts of our case were not only similar, but identical, to those before the Suprem....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clearly the principle that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with which we are concerned...." 11. Thus, applying the principles laid down by the apex Court in the case of Miss Dhun Dadabhoy Kapadia (supra) the Court does not find any case made out to interfere with the decision of the Tribunal holding that the assessee was entitled to the short-term capital loss claimed by the assessee. Therefore, in the facts and circumstances of the case the contention regarding the apex Court decision not being applicable due to change in the scheme of the Act does not merit acceptance. Similarly, the submission regarding the entitlement being to shares in the case before the apex Court and in the present case the entitlement being to convertible debentures is a distinction without any difference in principle.". * Navin Jindal vs. ACIT, (2006) 280 ITR 608 (P&H). The facts are as under; "The assessee held 1,500 shares in M/s. Jindal Strips Company. The company decided to issue rights shares and offered 1,875 rights shares at the rate of Rs. 100 per share with an option of renouncem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....market value of the existing shares should be deducted from the amounts received, relying on the decision of the apex court in the case of Miss Dhun Dodabhoy Kapadia v. CIT. The Hon'ble Court held that "In view of the decision of the apex court in Miss Dhun Dadabhoy Kapadia v. CIT[1967] 63 ITR 651 and the decision of the Bombay High Court in CIT v. Motichand Construction Co. P. Ltd. [2003] 261 ITR 70, we find that the law is well-settled on the point and, therefore, we hold that the assessee is entitled to claim the capital loss that had arisen due to transfer of rights issue to partly convertible debentures". 18. It was submitted that a perusal of the above judgments clearly reflect that the facts therein are identical to that of the assessee. The assessee also, as reproduced above, calculated gain as difference between amount realized on transfer of rights and the amount of depreciation in old shares. In view of the factual and legal position as enumerated above and prevailing at that point of time, the assessee claims that the loss incurred by it due fall in value of the shares as a result of renunciation of rights be allowed as business loss. 19. Per contra, the Ld. D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion should be set off against the said sum of Rs. 27,500/- and if that was done, there would be a loss of Rs. 39,250/-. The ITO as well as the Appellate Commissioner held that the said sum of Rs. 27,500/- was business profit and was liable to tax. The Tribunal upheld the second contention of the assessee and held that as against the realisation of Rs. 27,500/- by sale of his right, it was necessary to set off the fall in the value of the original 1750 shares and on that basis there was a loss and no profit. Against the decision of the Tribunal, a reference was made before the Hon'ble Bombay High Court at the instance of the Commissioner of Income Tax, Bombay. 21. In the aforesaid factual matrix of the case, the Hon'ble High Court held that there is no dispute that the original 1,750 shares were held by the assessee as his stock-in-trade. The assessee has given up his contention that Rs. 27,500 was a capital gain. There is therefore no dispute that the profit, if any, made by reason of the sale of the assessee's 350 shares of the rights issue would be his business profit and taxable as such. The only question is as to the method of calculating the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The Hon'ble High Court then refers to the judgment of the Hon'ble Supreme Court at pages 654-55 of the report as follows : "At the time, therefore, when the appellant renounced her right to take these new shares, the capital asset which she actually possessed consisted of her old 710 shares plus this right to take 710 new shares. At the time of her transaction, her old shares were valued at Rs. 253 per share, so that the capital asset in her possession can be treated to be the cash value of 710 multiplied by Rs. 253 of the old shares plus this right to obtain new shares. After she had transferred this right to obtain new shares, the capital assets that came into her hands were the 710 old shares, which became valued at Rs. 198.75 per share, together with the sum of Rs. 45,262.50. The net capital gain or loss to the appellant obviously would be the difference between the value of the capital asset and the cash in her hands after she had renounced her right and realised the cash value in respect of it, and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realised any cash in r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the right for which she realised the cash. This method of looking at the transaction also leads to the same conclusion which we have indicated in the preceding paragraph. The view that we have taken finds support from the principle laid down by this court for valuation of bonus shares issued by a company to holders of original shares in the case of Commissioner of Income-tax v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567/[1964] 7 SCR 210 (SC)" 23. The Hon'ble High Court held that the above observations of the Supreme Court appearing at page 654 hold that the correct method for evaluating the capital gain was to find out the aggregate of the ex-right value of the holding of the old shares and the actual cash received by the sale of the right to the new rights shares and deduct therefrom the cum-right value of the holding of the old shares. At page 655 of the report the observations put it in a different way when it is stated that the capital gain has to be ascertained by as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... held. The assessee was therefore became entitle to apply for 88,933 partially convertible debenture on the basis of its original shareholding. The assessee retained 24,085 rights and renounce the balance 64,848 right @ Rs. 120/- per right and received a sum of Rs. 77,81,760/- as right renunciation premium. There is no dispute that the said amount is chargeable to tax as business profit. The assessee has however worked out the fall in the value of original shares amounting to Rs 2,72,36,160/- and has claimed the same as an eligible deduction while offering its income to tax. The same has however resulted in a net business loss of Rs 1,94,54,400/- which it has sought to carried forward to subsequent years. The said fall in the value has been worked out based on the market quotation in Ludhiana Stock Exchange wherein prior to the right issue, on 30/10/1992 last cum right price of the shares were Rs. 610/- per share and the first Ex-right price of the share on 11/11/1992 was Rs. 400/- per share resulting in fall in the price of the share by Rs. 210/- per share. The cum right price and ex-right price per share has not been disputed by the Revenue nor the quantu....