Case Title: Miss Dhun DadabhoY Kapadia Vs. Commissioner of Income-Tax, Bombay
Date: 31/10/1966
Citation: 1967 AIR 614; 1967 SCR (2) 1
Parties: Petitioner – Miss Dhun DadabhoY Kapadia; Respondent – Commissioner of Income-Tax, Bombay
Advocates: Advocate Simranjeet Singh Sidhu, Advocate SS Sidhu
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 757 of 1965. Appeal from the judgment and order dated August 24/25, 1962 of the Bombay High Court in Income-tax Reference No. 12 of 1961.
R. J. Kolah and O. C. Mathur, for the appellant. S. K. Aiyar and R. N. Sachthey, for the respondent. S. T. Desai, O. C. Mathur, for interveners.
The Judgment of the Court was delivered by Bhargava, J. This appeal by certificate granted by the High Court of Bombay under section 66A(2) of the Indian Income- tax Act, 1922 (hereinafter referred to as "the Act") is directed against the answer returned by the High Court to the following question referred to it by the Income-tax Appellate Tribunal under s. 66(1) of the Act:-
"Whether having regard to the provisions of section 12B(ii), the assessee is entitled to claim a deduction from the full value of the consideration of Rs. 45.262.50 nP. received for the capital asset, the sum of Rs. 37,630 or any similar sum?"
In order to answer the question referred to the High Court, it appears to us that the nature of the transaction, which resulted in this receipt of Rs. 45.262/50P by the appellant, must be analysed and properly understood. The amount, it is the agreed case of the parties, was a capital gain. The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the Company. There was already a provision that, if the Company issued any new shares, every holder of old shares would be entitled to such number of ordinary shares as the Board may, by resolution, decide. This right was possessed by the appellant because of her ownership of the old 710 ordinary shares, and when the Board of Directors of the Company passed a resolution for issue of new shares, this right of the appellant matured to the extent that she became entitled to receive 710 new shares. This right could be exercised by her by actually purchasing those shares at the prescribed rate, or by renouncing those shares in favour of another person and obtaining monetary gain in that transaction. 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. 198/75P per share, together with the sum of Rs. 45,262/50P. 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 before those new shares were issued and before she realised any cash in respect of the right by renouncing it in favour of some other person. As we have indicated above, the value of the capital asset, after renouncement, would be 710 multiplied by Rs. 198/75P plus the sum of Rs. 45,262/ 50P, while the value of the asset, immediately before the renouncement, would be 710 multiplied by Rs. 253, there being no cash value at that time of the right to be taken into account. Thus, the capital gain or loss would be worked out at Rs. 45,262/50P after deducting from it the sum worked out at 710 multiplied by the difference between Rs. 253 and Rs. 198/75P. This last amount comes to a little more than the sum of Rs. 37,630 which the appellant claimed should be deducted from Rs. 45,262/50P in computing her capital gain. The claim made by the appellant was thus clearly justified, because the net capital gain by her in the transaction, which consisted of issue of new shares together with her renouncement of the right to receive new shares and make some money thereby, could only be properly computed in the manner indicated by us above.
In the alternative, the case can be examined in another aspect. At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the right to obtain 710 new shares. When she sold this right to obtain 710 new shares and realised the sum of Rs. 45,262/50P, she capitalised that right and converted it into money. The value of the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares, and consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the newright 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, 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, Bihar v. Dalmia Investment Co. Ltd. (1) The High Court, in dealing with this question, had expressed the view that principles of Accountancy applicable to valuation of such right to receive new shares issued by a company are not applicable when computation has to be made for purposes of taxation; but we are unable to accept this proposition. In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. The principles of accounting indicated by us above are clearly the principles 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. The application of those principles indicates that the claim of the appellant that the net capital gain by her is not represented by the whole amount of Rs. 45,262/50P realised by her on renouncement of her right to (1) [1964]7S.C.R.210;521.T.R.567.
receive the new shares was correct and that the net capital gain can only be properly computed after deducting the sum of Rs. 37,630 which approximately represents the loss incurred simultaneously by the appellant in her original asset of 710 old shares as a result of the depreciation in their value. The question referred to the High Court must, therefore, be answered in favour of the appellant. The appeal is, consequently, allowed, the answer returned by the High Court is set aside, and the question is answered in the affirmative. The appellant will be entitled to her costs in this Court as well as in the High Court.
V.P.S. Appeal allowed.