RAJIV PIRAMAL INVESTMENTS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2006-LL-1108]

Citation 2006-LL-1108
Appellant Name RAJIV PIRAMAL INVESTMENTS (P) LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 08/11/2006
Assessment Year 1993-94
Judgment View Judgment
Keyword Tags opportunity of being heard • computation of income • revenue authorities • cost of acquisition • sale consideration • subscribed capital • paid-up capital • stock exchange • value of share • charge of tax • original cost • rights shares • special bench • capital gain • market price • market value • actual cost • market rate • right share • total cost
Bot Summary: Further the BSE was not operating on 29th June, 1992, the day on which shares became ex-right, due to financial irregularity by some exchange members and hence, there was no market quotation available of the said shares on the day, then became ex-right; Further, the price prevailing on 16th July, 1992 on which date, the market reopened cannot be considered as an ex-right price because market had reopened only after prolonged abnormal closure; Consequently, any gain arising on renouncing of right shares cannot be charged to tax as it is a case to which computation provisions cannot apply at all, and such a case was not intended to fall within the charging s. 45 of the IT Act, 1961. On 22nd June, 1992, the Board of Directors of MGS decided to offer one right share for every three shares held at the rate of Rs. 125 per share to the existing shareholders. The assessee company claimed before the AO that cum-right price of the shares was Rs. 250 per share and the ex-right price of the shares was Rs. 200. On the issue of such shares, the value of the old shares depreciates, because the assets of the company remain stationary, while the number of shares increases. 81 of Companies Act, 1956, provides to the extent it is material, that if a company proposes to increase its subscribed capital by allotment of further shares, such shares shall be offered to the existing shareholders of equity shares and the offer shall be deemed to include a right to renounce the shares. In the present case, the market rate of the share of MGS on 10th June, 1992 was Rs. 250 and on 22nd June, 1992 right shares were offered at Rs. 125 per share, which is 50 per cent of the market rate on the last quotation. Since the offer of the right shares is at much below the market rate, so long as the shares are cum-right, the market rate of such shares would be higher for the simple reason that a shareholder, holding three shares would be entitled to receive one share at half of the market rate.


K.K. BOLIYA, A.M. NOTE Attention is invited to impotant decision of Ahmedabad Bench in case of Asstt. CIT vs. Affection Investment Ltd. (2003) 80 TTJ (Ahd) 278. In this case it was observed that in case where cum-right price or ex-right price of share before and after announcement of right offer is more than actual cost of acquisition of share, depreciation in market value of share as result of right offer cannot be treated as real loss in original cost of acquisition and such difference cannot be regarded as cost of acquisition of right. proportionate cost of acquisition of "Right offer" has to be apportioned from total cost of acquisition of original shares in reasonable and rational manner according to accepted commercial practices. judgment of Supreme Court in case of Miss Dhun Dadbhoy Kapadia cannot, therefore, be interpreted or read so as to mean that cost of acquisition of such fractional right embedded in old shares can exceed actual and total cost of acquisition of old shares in which right to have right share was embedded. principle laid down by Supreme Court was that proportionate cost of acquisition of "Right offer" should be deducted for computing capital gains and such proportionate cost should be ascertained as per accepted commercial practices. But working, formula or mode of apportionment will differ from cast to case. cost of acquisition of right offer will, therefore, have to be apportioned from total cost of acquisition of share in reasonable and equitable manner. ORDER Pursuant to recommendations of Division Bench by its order dt. 5th Aug., 2004, Hon ble President, Tribunal constituted this Special Bench and referred whole case to Special Bench for disposal. As entire appeal has been referred to Special Bench for disposal, it would be appropriate to reproduce below grounds of appeal raised by assessee : "1. On facts and in circumstances of case and in law, CIT(A) erred in upholding action of Asstt. CIT in assessing sum of Rs. 94,52,025 as short-term capital gains on renouncing of right shares of M/s Morarjee Gokuldas Spinning & Weaving Mills Ltd. 2. He failed to appreciate and ought to have held that : (a) appellant has not incurred any cost on acquisition of right to subscribe/renounce shares as appellant did not have to pay any amount i n acquiring said right shares, since such right was embedded in purchase of old shares. (b) Further BSE was not operating on 29th June, 1992, day on which shares became ex-right, due to financial irregularity by some exchange members and hence, there was no market quotation available of said shares on day, then became ex-right; (c) Further, price prevailing on 16th July, 1992 on which date, market reopened cannot be considered as ex-right price because market had reopened only after prolonged abnormal closure; (d) Consequently, any gain arising on renouncing of right shares cannot be charged to tax as it is case to which computation provisions cannot apply at all, and such case was not intended to fall within charging s. 45 of IT Act, 1961. 3. appellant, therefore, prays that addition of Rs. 94,52,025, as short-term capital gains be deleted. 4. Without prejudice to above, in case appellant s contention that no cost can be conceived for acquisition of right to subscribe/renounce said shares is not accepted, then maximum amount of capital gain on said shares would work out at most to Rs. 9,72,338 as worked out by appellant in Annex. C to grounds of appeal to CIT(A). 5. Without prejudice to above : (a) CIT(A) erred in not considering appellant s request duly made in grounds of appeal before CIT(A), that matter be restored to Asstt. CIT to be decided afresh after giving proper opportunity of being heard to appellant. (b) Appellant craves to rely on its letter dt. 21st Dec., 1995, attached with grounds of appeal to CIT(A) marked as Annex. I." 2. From above, it is seen that all grounds of appeal pertain to issue of computation of income under head "Capital gains" with regard to total amount received by assessee on renunciation of right to receive right shares. relevant facts giving raise to controversy may first be stated briefly. assessee company held 795600 shares of Morarjee Gokuldas Spinning & Weaving Mills Ltd. (for short MGS). These shares were held by assessee company by way of investment. On 22nd June, 1992, Board of Directors of MGS decided to offer one right share for every three shares held at rate of Rs. 125 per share to existing shareholders. shares of MGS were quoted cum-right till 28th June, 1992 and they became ex-right on 29th June, 1992. right to exercise option to purchase right shares was to be exercised by shareholders from 4th Sept., 1992 to 3rd Oct., 1992. With its shareholding of 795600 shares, assessee company became entitled to 265200 right shares. assessee company exercised its option to subscribe to 174450 right shares at rate of Rs. 125 per share and on 9th Sept., 1992 sold its right to subscribe balance 90450 right shares for total consideration of Rs. 94,54,025 at rate of Rs. 104.50 per share. 3 . In above-mentioned factual scenario, AO sought to assess receipt of Rs. 94,52,025 under head "Capital gains". assessee claimed that said income cannot be brought to charge of tax under head "Capital gains" as there was no cost of acquisition as held by Hon ble Supreme Court in case of CIT vs. B.C. Srinivasa Shetty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC). Alternatively, assessee also claimed that by virtue of decision of Hon ble Supreme Court in case of Miss Dhun Dadabhoy Kapadia vs. CIT (19 67 ) 63 ITR 651 (SC), diminution in market price of said shares held by assessee, referable to right shares sold, has to be adopted as cost of right shares and income under head "Capital gains", if any, can be computed accordingly. assessee s contention that there was no cost of acquisition of right shares was rejected by AO. However, AO examined assessee s claim that Hon ble Supreme Court decision in case of Miss Dhun Dadabhoy Kapadia (supra) was applicable in this case. He asked assessee to furnish material and evidence in support of its claim of ex-right price of shares so that fall in value of shares can be worked out to enable AO to apply decision of Hon ble Supreme Court in case of Miss Dhun Dadabhoy Kapadia (supra). assessee company claimed before AO that cum-right price of shares was Rs. 250 per share and ex-right price of shares was Rs. 200. However, assessee did not furnish any supporting evidence. AO addressed letter dt. 20th Nov., 1995 to BSE requesting stock exchange to furnish relevant details and BSE replied vide its letter dt. 7th Dec., 1995, which has been reproduced by AO in his order as under : "With reference to your letter No. AC/5(6)/Misc./95/96 dt. 28th Nov., 1995, we give hereunder information required by you in respect of equity shares of under mentioned company as recorded in our books for period specified by you : Ex- Last Name of First right cum-right company Ex-right rate Date rate 250.00 250.00 Morarjee Gokuldas 29- Spinning & Weaving Co. 6-1992 (10-6- (16-7- Ltd. 1992) 1992)" 4. In present case, as mentioned above, cum-right date was 28th June, 1992 and ex-right date was 29th June, 1992. stock exchange remained closed from 11th June, 1992 to 15th July, 1992 on account of "securities scam" and therefore, there was no quotation of shares of MGS on 28th June, 1992 and on 29th June, 1992. quotations were available only on 10th June, 1992 and 16th July, 1992, which represent last cum-right rate and first ex-right rate. As per letter of BSE, both rates were Rs. 250 per share, which showed that there was no diminution in market rate of shares. AO confronted assessee with these facts and asked assessee to explain matter. AO has mentioned in his order that no explanation was filed by assessee. He, therefore, held that there was no diminution in market rate of shares and consequently, he brought to charge of tax, entire sale consideration of Rs. 94,52,025 as short-term capital gains. assessment order was passed by AO on 21st Dec., 1995. 5 . When matter came up before learned CIT(A), assessee again forcefully argued that capital gains, if any, has to be computed in consonance with principles laid down by Hon ble Supreme Court in case Miss Dhun Dadabhoy Kapadia (supra). It was contended that market rates indicated in letter of BSE are not much relevant as these rates are on 10th June, 1992 and 16th July, 1992, whereas for determining diminution i n market rate of shares, relevant dates were 28th June, 1992 and 29th June, 1992. However, on these dates quotations were not available as stock exchange remained closed from 11th June, 1992 to 15th July, 1992. It was contended before learned CIT(A) that if there is no cost of acquisition, s held by AO, no income can be brought to charge of tax under head "Capital gains", having regard to Hon ble Supreme Court judgment in t h e case of Srinivasa Shetty (supra). Alternatively, it was contended by assessee before learned CIT(A) that in absence of market quotations on relevant dates, working of "capital gains"/loss" should be done on basis of principles of accountancy and commercial practices. assessee furnished detailed working before learned CIT(A). learned CIT(A) decided controversy in following manner at paras 9 to 11 of his order : "9. It was further contended that during course of assessment proceedings, appellant vide letter dt. 21st Dec., 1995 had requested AO to grant week s time to make further submissions on this issue. However, AO denied proper opportunity to appellant to explain its case and instead passed assessment order on 21st Dec., 1995. In this view of matter, AO s comments were called on submissions made by appellant vide this office letter dt. 17th Feb., 1998. 10. AO vide his report dt. 2nd March, 1998, after discussing matter with appellant s representative, reiterated that case was squarely covered by Miss Dhun Kapadia s case. With regard to computation of value of share on 29th June, 1992, noting fact that BSE was closed from 11th June, 1992 to 15th July, 1992, AO stated that it would be difficult to arrive at value of shares on date of renunciation. However, in view of letter from BSE, capital gain had rightly been calculated in assessment order. 11. On consideration of submissions, I find that in Dhun Kapadia s case, it is held that diminution in value of shares held on date of declaration of rights is cost for purposes of calculating capital gains. However, since BSE has furnished figures same will have to be applied and it is observed that last cum-right quotation of shares was Rs. 250 on 10th June, 1992. Thereafter, despite rights having been declared on 29th June, 1992, there was no diminution in price of these shares quoted on BSE as right rate continued at Rs. 250 on 16th July, 1992. In this view of matter, there is no need to resort to computing cost of shares as per formulae quoted on behalf of appellant. Therefore, I do not consider it necessary to disturb AO s findings in this case, which are confirmed." 6 . From above, it may be seen that AO as well as learned CIT(A) accepted that ratio laid down by Hon ble Supreme Court in case of Miss Dhun Dadabhoy Kapadia (supra) was squarely applicable to facts of assessee s case. However, since there was no diminution in market value of shares, as certified by BSE, learned CIT(A) held that assessee is not entitled to any relief as per case of Miss Dhun Dadabhoy Kapadia (supra). 7 . In backdrop of above-mentioned facts, learned counsel appearing for assessee Sri S.E. Dastoor submitted before us that rights shares are offered at price which is much below market price of shares, as otherwise there will be no takers for right shares. It is further submitted that after issue of right shares, market price of shares of company is bound to diminish and that there is no exception to this rule. After issue of right shares, total number of shares representing paid-up capital go up, whereas assets of company remain same. In support of this proposition, learned counsel relied on Hon ble Bombay High Court decision in case of H. Holck Larsen vs. CIT (1972) 85 ITR 285 (Bom) and invited our attention to following observations of Hon ble Bombay High Court at p. 292 of report : "For proper understanding of course of transactions in question, it is necessary to appreciate implications of issue of right shares. On issue of such shares, value of old shares depreciates, because assets of company remain stationary, while number of shares increases. It is elementary that company will not offer right shares for anything higher than market price for, were it otherwise, shareholder will prefer to purchase shares in open market. Acquisition of right shares is privilege of existing shareholders but concomitant of this privilege is depreciation in value of old holding. depreciation consequent upon issue of right shares cannot be worked out by application of mathematical formula because several factors act and react on prices of shares. In some cases depreciation may even be hypothetical because increase of capital may open up new avenues to company for making larger profits. But it is in consideration of consequential depreciation in value of old shares that law gives to existing shareholders right to obtain new shares or to renounce that right. Sec. 81 of Companies Act, 1956, provides to extent it is material, that if company proposes to increase its subscribed capital by allotment of further shares, such shares shall be offered to existing shareholders of equity shares and offer shall be deemed to include right to renounce shares. right to receive new shares is, so to say, embedded in older shares." 8. learned counsel reiterated that last cum-share quotation on 10th June, 1992 was Rs. 250 per share. Thereafter, Board of Directors of MGS passed resolution on 22nd June, 1992 offering one right share for every three shares held, at rate of Rs. 125 per share. It is submitted that this resolution would naturally result into increase of cum-right share price till 28th June, 1992. However, there was no quotation from 11th June, 1992 to 28th June, 1992. Similarly, it is argued by learned counsel that on 29th June, 1992, 1992. Similarly, it is argued by learned counsel that on 29th June, 1992, which is ex-right date, market rate is bound to go down but no quotation was available for that date. learned counsel invited our attention to market rates of shares of MGS from 16th July, 1992 to 30th July, 1992 as available on record. It is pointed out that on 16th July, 1992, which is first ex-right date, quotation was of Rs. 250 per share. On next day i.e. 17th July, 1992, quotation was of Rs. 200. It is argued that assessee adopted rate of Rs. 200 prevailing on 17th July, 1992 as rate of Rs. 250 on 16th July, 1992 did not represent correct factual position. learned counsel also brought to our notice that on other days, during month of July, 1992, quotations were as under : Date Rate 20-7-1992 225 21-7-1992 175 22-7-1992 175 23-7-1992 150 27-7-1992 160 28-7-1992 225 29-7-1992 200 30-7-1992 200 9 . learned counsel appearing for assessee contended that if averaging is done, ex-right rate should be even less than Rs. 200. It is, therefore, argued that assessee logically adopted market rate of Rs. 200 for computing income under head "Capital gains". Sri Dastoor submitted that if cost of right to subscribe to right share is nil, as held by Department, then no "capital gains" can be brought to charge of tax in view of Hon ble Supreme Court decision in case of Srinivasa Shetty (supra). 1 0 . learned CIT/Departmental Representative Shri S.C. Gupta forcefully supported orders of Revenue authorities and contended that authenticity of certificate given by BSE cannot be questioned. It is argued that before applying Hon ble Supreme Court decision in case of Miss Dhun Dadabhoy Kapadia (supra), assessee must establish that there was diminution in market rate of shares. If there is no diminution, assessee cannot get advantage by way of deduction of any cost price. learned Departmental Representative brought to our notice certain judicial pronouncements, which are compiled in paper book filed by him. These cases are on point that if there is diminution in market value of shares after issue of right shares, such diminution can be assumed to be cost of rights transferred. learned Departmental Representative contended that full opportunity was allowed to assessee during course of assessment proceedings as also appellate proceedings to substantiate its claim that market rate of ex-right shares was Rs. 200 only. However, assessee failed to furnish any evidence whatsoever and thus assessee could not controvert certificate given by BSE. learned Departmental Representative, therefore, submitted that Revenue authorities were justified in bringing "capital gains" of Rs. 94,52,025 to charge of tax. 1 1 . In his rejoinder, learned counsel appearing for assessee submitted that assessee made efforts to get quotations from BSE but could not succeed. Even after appeal was decided by learned CIT(A), assessee has been trying to get information from BSE but without success. He filed before us copies of two letters addressed to BSE dt. 8th Dec., 2005 and 17th Aug., 2006. In first letter, assessee requested to provide stock prices of MGS for period from 1st June, 1992 to 25th June, 1992. In second letter dt. 17th Aug., 2006, assessee referred to earlier letter and mentioned that their representative has been visiting office of BSE and he was informed that said information was not available, nor information was available pertaining to volume of shares traded on various days during relevant period. learned counsel for assessee submitted that no reply has been received from BSE. 12. We have given our careful consideration to rival submissions vis-a- vis facts of case. At outset, it must be mentioned that on issue of right shares, market price of shares of company is bound to go down. In shares, market price of shares of company is bound to go down. In present case, market rate of share of MGS on 10th June, 1992 was Rs. 250 and on 22nd June, 1992 right shares were offered at Rs. 125 per share, which is 50 per cent of market rate on last quotation. Since offer of right shares is at much below market rate, so long as shares are cum-right, market rate of such shares would be higher for simple reason that shareholder, holding three shares would be entitled to receive one share at half of market rate. However, when shares become ex-right, market rate is bound to go down. 1 3 . Hon ble Bombay High Court in case of H. Holck Larsen (supra), has expressed similar view. difficulty in present case in quantifying difference between cum-right and ex-right rate is that all transactions on BSE were stopped during period 11th June, 1992 to 15th July, 1992. Therefore, there is no way to find out market rate of shares on two relevant dates i.e. cum-right date (on 28th June, 1992) and ex- right date (on 29th June, 2002). At same time, it would be unfair to assessee to assume that there was no erosion in market rate of shares on account of right issue. In peculiar circumstances mentioned above, in our view, diminution in market rate of shares has to be estimated on appropriate and logical consideration of factual position. market rates during period 16th July, 1992 to 30th July, 2002 have been indicated in this order. highest is Rs. 250 on 16th July, 1992, which is first day of opening of BSE after its closure from 11th June, 1992. It is not known as to whether there were any transactions on that day. It appears that closing rate of 10th June, 1992 has been adopted to be opening as well as closing rate on 16th July, 1992. At this juncture, we must make it clear that there is no question of doubting authenticity of certificate issued by BSE on 7th Dec., 1995. However, authenticity of certificate is for prevailing rate on 10th June, 1992 and on 16th July, 1992. These dates are far away from dates on which shares were cum-right and they became ex-right. It would be of interest to refer to quotations of shares of MGS during period from 1st June, 1992 to 10th June, 1992, which are as under : Date Rate 1-6-1992 275 2-6-1992 285 3-6-1992 255 4-6-1992 240 5-6-1992 260 8-6-1992 260 9-6-1992 260 10-6-1992 250 14. least is Rs. 240 and highest is Rs. 285. If compared with quotations in month of July, it would be seen that in July, least was Rs. 150 and highest was Rs. 250 on first day of opening of BSE. above figures are pointer to fact that before declaration of issue of right shares, market rate of shares ranged between Rs. 240 to 285. After shares became ex-right, rates ranged between 150 to 250. Considering entire facts and circumstances cited above and legal position, we are of view that it would be fair and reasonable if ex-right value of shares is estimated at Rs. 225 and cum-right rate should be taken at Rs. 250. We, therefore, hold that there was diminution to extent of Rs. 25 per share. AO is directed to recompute income under head 'Short-term capital gains on above basis and after allowing adequate opportunity to assessee. 15. In view of our finding above, ground of appeal pertaining to assessee s claim that if there is no cost of acquisition, no capital gain can be assessed, is only of academic interest and need not be dealt with. We have already held that there was diminution in shares and cost has to be worked out by AO as per provisions of law. last ground of appeal regarding lack of opportunity was not seriously contested by learned counsel appearing for assessee and in view of our finding already recorded above, this ground of appeal is rejected. 16. In result, appeal is partly allowed. *** RAJIV PIRAMAL INVESTMENTS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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