Case: Miss Dhun Dadabhoy Kapadia Vs. Commissioner Of Income-Tax, Bombay

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 assets 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 nP. per share, together with the sum of Rs. 45.262.50 nP. The net capital gain or loss to the appellant obviously would be the difference between to 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 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. 198.75 nP. plus the sum of Rupees 45,262.50 nP., 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. 45.262.50 nP after deducting from it the sum worked out at 710 multiplied by the difference between Rs.253 and Rs. l98.75 nP This last amount comes to a little more than the sum of Rs 37,630 which the appellant claimed should be deducted from Rupees 45.262.50 nP 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. 4. 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. 45,262.50 nP., 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 new right was the depreciation in the value of the old shares and the deprecations 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. 5. 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., 1944-52 ITR 567 : (AIR 1964 SC 1464 ). 6. 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 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. The application of those principle indicates that the claim of the appellant that the net capital gain by her is not represented by the whole amount of Rs.45,262.50 nP. realised by her on renouncement of her right to 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]6. 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 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. The application of those principle indicates that the claim of the appellant that the net capital gain by her is not represented by the whole amount of Rs.45,262.50 nP. realised by her on renouncement of her right to 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 appellant3. 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. 45,262.50 nP. 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 assets 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 nP. per share, together with the sum of Rs. 45.262.50 nP. The net capital gain or loss to the appellant obviously would be the difference between to 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 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. 198.75 nP. plus the sum of Rupees 45,262.50 nP., 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. 45.262.50 nP after deducting from it the sum worked out at 710 multiplied by the difference between Rs.253 and Rs. l98.75 nP This last amount comes to a little more than the sum of Rs 37,630 which the appellant claimed should be deducted from Rupees 45.262.50 nP 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 above4. 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. 45,262.50 nP., 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 new right was the depreciation in the value of the old shares and the deprecations 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 paragraph5. 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, Bihar v. Dalmia Investment Co. Ltd.,2 ITR 567 : (AIR 1964 SC 1464  )