Income Tax Appellate Tribunal - Kolkata
Income-Tax Officer vs Oberoi Properties (P.) Ltd. on 13 December, 1985
Equivalent citations: [1986]16ITD206(KOL)
ORDER
Y. Upadhyay, Vice President
1. The appeal of the department and the appeal of the assessee are taken together and disposed of by a common order.
2. The assessee is a limited company. The assessee was a shareholder in East India Hotels Ltd. The assessee was holding 67,110 equity shares of Rs. 10 each of the said company as on 1-4-1979. The East India Hotels Ltd. by its letter dated 9-1-1979 informed the shareholders that by virtue of the special resolution passed by the company at its annual general meeting on 29-8-1979, they are going to offer 28,55,500 new equity shares of Rs. 10 each for cash and out of the said shares 16,05,500 would be offered as right shares to the existing members in the proportion of one new equity share for every existing five equity shares and another resolution in the same meeting was passed by which bonus shares were issued to the shareholders in the proportion of one equity share for every five equity shares held by the members of the company. The record date was fixed for the issue of right and bonus issues on 27-10-1979. The assessee-company was offered 16,106 right shares. The assessee-company sold 4,000 right for right shares whereas the right for 12,106 shares lapsed. The assessee sold right for 4,000 shares at the rate of Rs. 3.50 per share and the total consideration of Rs. 14,000 was treated as short-term capital gain. The ITO was not satisfied with the value attributed to the right which was sold by the assessee. The ITO, in short, noted that the assessee received (1) right shares, (2) bonus shares, and (3) there was a public offer by the company. The ITO took the market value of the old shares as quoted at Rs 42.75. He calculated the ex-bonus price by dividing the market value of old shares by the number of shares held by the assessee including bonus shares. The cost of shares including bonus, thus, was determined at Rs. 35.62. He found the ex-right bonus value as quoted on the stock exchange at Rs. 30.25. The difference between Rs. 35.62 and Rs. 30.25 was determined by him at Rs. 5.37 per share. He found that the right issue was one-third of the total holding. He, accordingly, took the cost of the right shares at Rs. 1.79. Under the circumstances, he took the short-term capital gain at Rs. 6,840 (Rs. 14,000 minus Rs. 7,160).
3. On appeal, the Commissioner (Appeals) found that the value of the right calculated by the ITO at Rs. 5.37 was correct. However, he found that the ITO was not correct in including the public issue for ex-right purposes. He, therefore, divided Rs. 5.37 equally for right and bonus and directed that the cost of the right sold by the assessee should be taken equally. However, he found that the number of right share issue was more than the public issue. He, therefore, took the cost of right at Rs. 3.50 and, accordingly, urged that there was no capital gain.
4. The department as well as the assessee are in appeal against the order of the Commissioner (Appeals). Shri Bhattacharjee, the counsel of the assessee, stated the facts and urged that the Commissioner (Appeals) was not justified in attributing the cost of the right at Rs. 3.50. Shri Bhattacharjee stated the facts in detail and urged that after the record date the shares were quoted as ex-bonus and right. Before the issue of right and bonus, the shares were quoted at R s. 42.75. After the issuance of right and bonus, the shares of the company were quoted at Rs. 30.25. Therefore, the value for right and bonus was attributed by the public on the floor of the stock exchange at Rs. 12.50 per share. This was attributable for the value of bonus as well as right. Under the said circumstances, the value taken by the Commissioner (Appeals) at Rs. 3.50 per share was not correct.
5. Shri S.K. Jha, the senior departmental representative, on the other hand, very strongly supported the order of the ITO and stated that the Commissioner (Appeals) was not justified in ignoring the public issue and, moreover, he was not justified in taking the value of the right at Rs. 3.50. Under the said circumstances, Shri Jha urged that the order of the ITO on this issue may be maintained.
6. The dispute is regarding the value of the right for right shares which has been renunciated by the assessee for the shares issued by the East India Hotels Ltd. The East India Hotels Ltd., by its letter dated 9-11-1979 indicated to the shareholders that the company has issued right as well as bonus shares in the same meeting held on 29-8-1979 in the ratio of one right or bonus for every five shares held by the shareholders. The record date was fixed as on 27-10-1979. The assessee was entitled for 16,106 right shares. The assessee sold 4,000 right for the right shares whereas the right for 12,106 right shares lapsed. The assessee sold the right at the rate of Rs. 3.50 per share for Rs. 14,000 and treated the same as short-term capital gain. The ITO treated the cost of the right shares at Rs. 7,160. The cost per share was determined by the ITO at the rate of Rs. 1.79 per share. The ITO first calculated the cum-right value and thereafter deducted the ex-right bonus value and divided the same by three, on the ground that the East India Hotels Ltd. issued right, bonus and public issue. The calculation of the ITO was modified by the Commissioner (Appeals) who excluded the public issue and came to the conclusion that by the public issue the right of a shareholder is not affected. Further, he after considering the fact that the right issue was more than the public issue, took the higher value for the cost at Rs. 3.50 per share.
7. The calculation of the value of the rights which has been renunciated by the assessee-company for 4,000 right shares is very simple. The right and bonus issues were made in the same general meeting held on 29-8-1979. The record date for right and bonus was the same as on 27-10-1979. Therefore, it is clear that the right and bonus both were allotted to the shareholders in the ratio of one for every five shares held on the original share. This could be explained by way of an example. A shareholder of East India Hotels Ltd. was holding 100 shares on 27-10-1979. Therefore, by virtue of the resolution dated 29-8-1979, the said shareholder was entitled for 20 right and 20 bonus shares. After the issuance of the right and bonus shares, the total holding of the shareholder would become 140 shares. The cum-right and bonus price in the stock exchange was Rs. 42.75 on 25-10-79 whereas the ex-right-bonus price in the stock exchange on 29-10-1979 was quoted at Rs. 30.25 per share. Therefore, the difference of the two, i.e., Rs. 12.50 was attributable for the right as well as bonus shares. The right and bonus were issued in the same proportion. By example it has been indicated that a shareholder holding 100 shares of the company got 20 shares each by way of right and bonus. Under the said circumstances, the value which the public at large dealing in stock exchange determined for right and bonus at Rs. 12.50 per share was attributable for right as well as bonus equally. Under the said circumstances, Rs. 6.25 can be attributed for the value of right and the same amount can be attributed for the value of bonus.
8. The assessee has sold the right for 4,000 right shares and, therefore, the value regarding the cost of those shares can be calculated at the rate of Rs. 6.25 per share. This conclusion is well supported by the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651.
9. In the result, the assessee's appeal is allowed partly and the departmental appeal is dismissed.