Gujarat High Court
Commissioner Of Income Tax vs Suhashbhai Vadilal on 21 September, 1998
Equivalent citations: [1999]239ITR362(GUJ)
Author: A.R. Dave
Bench: A.R. Dave
JUDGMENT R.K. Abichandani, J.
1. The Tribunal has referred the following question for the opinion of this Court under s. 256(1) of the IT Act, 1961 ('the Act') :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the order passed by the CIT under s. 263 of the IT Act, 1961, was liable to be vacated insofar as it related to the method of working out of the cost of the share in Rajesh Textile Mills Ltd. ?"
2. In the relevant asst. yr. 1975-76, the assessee sold 500 shares of Rajesh Textile Mills Ltd. for Rs. 51,125 against the cost price of Rs. 1,04,375 claiming loss of Rs. 53,250, which was allowed by the ITO. The CIT(A), however, by his order passed under s. 263 of the said Act, rejected the assessee's claim as regards the sale of shares in Rajesh Textile Mills Ltd., that as the shares in Rajesh Textile Mills Ltd. were received as right shares on the holding of shares in Sayaji Mills Ltd., the cost of shares of Rajesh Textiles Mills Ltd. was the cost of such shares plus depreciation in the value of shares of Sayaji Mills Ltd. at the rate of Rs. 108.75 per share. The CIT drew distinction between the cost of shares of Rajesh Textile Mills Ltd. to the assessee and the cost of similar such shares to his father, whose similar claim was earlier allowed, by saying that while the assessee's father had sold the shares immediately, the assessee had held on the shares of Rajesh Textile Mills Ltd. for 12 years and therefore, in his case the cost would be different.
The Tribunal held that the cost of the shares of Rajesh Textile Mills Ltd., which the assessee acquired, got fixed at the point of acquisition and it was irrelevant when the shares were sold. The Tribunal relied upon the earlier decision dt. 6th January, 1982 of the Tribunal in the case of the assessee's father as well as its decision dt. 6th January, 1982 in ITO vs. Suhashbhai Vadilal Family Trust for the asst. yr. 1980-81.
3. (i) Certain aspects of the case which are not disputed and which emerge from the record are that the company known as Sayaji Mills Ltd. passed a resolution on 6th June, 1961 at the meeting of the board of directors resolving that an extraordinary general meeting of the shareholders of that company be convened on 12th July, 1961 to accord consent to the board of directors of the company for selling to the new company proposed to be registered under the name of 'Rajesh Textile Mills Ltd.', the entire unit of the company located in Bombay known as 'Sayaji Mills No. 2' at the price and on the terms and conditions contained in the draft agreement of sale placed before the Board. It was also resolved that the managing directors were authorised and directed to take all the steps for the formation of the purchasing company and to pay for the time being out of the funds of Sayaji Mills Ltd. all expenses for the proposed company. In the extraordinary general meeting which was held on 12th July, 1961 of the Sayaji Mills Ltd., the draft agreement for sale of unit known as 'Sayaji Mills No. 2' to the new company, i.e., Rajesh Textile Mills Ltd., was approved and the directors were authorised to complete the sale.
(ii) On 6th August, 1961, the board of directors of Rajesh Textile Mills Ltd. being the new company which came into existence, made a resolution in respect of the application made to Controller of Capital Issue, seeking his consent to the issue of 50,000 equity shares to shareholders of Sayaji Mills Ltd. in connection with the purchase of its unit, i.e. Sayaji Mills No. 2. It was resolved that, "50,000 equity shares of the face value of Rs. 100 each be offered to the holders of equity shares of Sayaji Mills Ltd. appearing on the register of members of that company on 21st August, 1961 in the proportion of one such share of that company held by such member and that the sum of Rs. 100 should be required to be paid in respect of each such share applied for with the application, subject to the terms of consent order of the Controller of Capital Issues when received". Admittedly, the consent of the Central Government was obtained in respect of the issuance of the share capital of Rajesh Textile Mills Ltd. as per its application and the shareholders of Sayaji Mills Ltd. became entitled to get the shares of Rajesh Textile Mills Ltd. in the ratio of 1 : 1.
(iii) One other admitted fact which emanates from the record is that Rajesh Textile Mills Ltd issued letters on 8th August, 1961 to various shareholders of Sayaji Mills Ltd. in accordance with its resolution, which entitled them to get the shares of Rajesh Textile Mills Ltd. in proportion to their holding in Sayaji Mills Ltd. The shares of Sayaji Mills Ltd. were quoted in the stock exchange and from the list maintained by the stock exchange, it was brought on record that the shares of Sayaji Mills Ltd. were quoted at Rs. 543.75 each as on 18th August, 1961. This position continued up to 22nd August, 1961. However, on 15th September, 1961, the value of shares of Sayaji Mills Ltd. came down to Rs. 410 (ex-right-cum-dividend), when the right to receive the shares of Rajesh Textile Mills Ltd. which is described in the record as 'ex-right', was realised. Though stricto sensu, the 'right issue' would relate to the issue by a company of such shares to its own shareholders, the expression has been used in the present case by the authorities including the Tribunal to describe the right attached to the shares of Sayaji Mills Ltd. to receive the shares of Rajesh Textile Mills Ltd., in view of the special arrangement made between the companies. After the right issue, the shares of Sayaji Mills Ltd. without any right to get the shares of Rajesh Textiles Mills. Ltd. depreciated. It is an admitted fact that there was a fall of Rs. 108.75 in the price of a share of Sayaji Mills Ltd., being the difference between its quotation as on the date when it carried the right to receive a share of Rajesh Textile Mills Ltd., and later on when it ceased to carry such right.
4. The present assessee had sold 500 shares of Rajesh Textile Mills Ltd., which he had acquired in view of the above arrangement against his holding in Sayaji Mills Ltd. for Rs. 51,125 in the asst. yr. 1975-76. While calculating the cost price of these 500 shares, he added to the face value of Rs. 50,000 being the amount at which they were offered to him as a shareholder of Sayaji Mills Ltd., the depreciation in the value of his shares in Sayaji Mills Ltd., which was, as aforesaid Rs. 108.75 when the shares came to be sold without the right to receive the shares of Rajesh Textile Mills Ltd. The assessee accordingly, claimed a loss of Rs. 53,250.
5. Earlier, in the asst. yr. 1962-63, in context of similar such shares of Rajesh Textile Mills Ltd. being sold by the assessee's father (who had on 22nd February, 1962 sold 2,450, shares of Rajesh Textile Mills Ltd. at Rs. 200 per share), the question had arisen before the Tribunal in the income tax proceedings for the asst. yr. 1962-63 as to whether the assessee could claim capital loss or depreciation on account of the fall in the value of the shares of Sayaji Mills Ltd., amounting to Rs. 108.75 per share. At that time, the assessee had contended relying upon the ratio of the decision of the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) that the fall in the value of shares of Sayaji Mills Ltd. was directly linked with the issue of shares in Rajesh Textile Mills Ltd. It was contended that the fall in the price of shares of Sayaji Mills Ltd. was closely linked with the issuance of shares of Rajesh Textile Mills Ltd. and the entire arrangement was a part of the same transaction. The Tribunal held that the fall in the value of shares of Sayaji Mills Ltd. was a direct result of the issue of shares of Rajesh Textile Mills Ltd. It was held that the sale of Sayaji Mills No. 2 being unit of Sayaji Mills Ltd. to Rajesh Textile Mills Ltd. and the decision to issue shares in the new company to the shareholders of Sayaji Mills Ltd and the consequent fall in the shares of Sayaji Mills Ltd. were all closely integrated and inter-connected matters. It was noted that the Revenue did not appear to have disputed that fact before the authorities. The Tribunal applying the ratio of the decision in the case of Miss Dun Dadabhoy Kapadia (supra) held that the net capital gain by the assessee in the transaction consisted of new shares, i.e., the shares in Rajesh Textile Mills Ltd. minus the difference between the value of the shares of Sayaji Mills Ltd. before obtaining the new shares in Rajesh Textile Mills Ltd. and the value of shares of Sayaji Mills Ltd. after the issue of such new shares. It was held that in the alternative, the assessee was entitled to deduct the depreciation in the value of shares of Sayaji Mills Ltd. as per the ratio of the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia's case (supra). The Tribunal in that case, also considered the contention that the ratio of Miss Dhun Dadabhoy Kapadia's case (supra) will not apply in a case where the new shares purchased are not the right issue of the same company. It was observed by the Tribunal that the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia (supra) was considering the transaction as a whole in order to arrive at the net capital gain and the only thing that was relevant was whether the right to receive the shares was depending upon the holding of shares whether it be in one company or of two different companies. It was held that the ratio of the decision in Miss Dhun Dadabhoy Kapadia's case (supra) was fully applicable to the case of the assessee (who was the father of the present assessee).
The aforesaid reasoning of the Tribunal in its order dt. 6th January, 1973, which was made in a similar case of the present assessee's father in respect of the asst. yr. 1962-63 and which is not shown to have been challenged, was followed in the present assessee's case by the Tribunal in its order from which the aforesaid question has arisen and that is why we have set out the reasons which had weighted with Tribunal in the case of the assessee's father.
6. Under s. 45 of the Act, any profits or gains arising from the transfer of a capital asset effected in the previous year was chargeable to income-tax under the head 'Capital gains' and would be deemed to be the income of the previous year in which the transfer took place, save as otherwise provided in the provisions mentioned therein. The mode of computation and deductions for the purpose of working out capital gains is laid down in s. 48, as per which the expenditure incurred wholly and exclusively in connection with such transfer as well as cost of acquisition of the capital asset and the cost of any improvement thereto is required to be deducted from the full value of the consideration received or accruing as a result of transfer of capital asset. The question, therefore, is as to what was the cost of acquisition of the shares of Rajesh Textile Mills Ltd., which were acquired by the assessee by virtue of his holding the shares of Sayaji Mills Ltd., in view of the arrangements made between the two companies and the resolutions passed by them, which entitled the shareholders of Sayaji Mills Ltd. to a right to get the shares of Rajesh Textile Mill Ltd. Even though the shares of Rajesh Textile Mills Ltd. could not be described as 'rights issue' properly so called, yet the fact remained that by virtue of the arrangements made between the two companies, shareholders of Sayaji Mills Ltd. became entitled to get shares of Rajesh Textile Mills Ltd. in the proportion of 1 : 1 as resolved and offered by Rajesh Textile Mills Ltd., in favour of the shareholders of Sayaji Mills Ltd. Therefore, in context of the right of getting the shares of Rajesh Textile Mills Ltd., the shareholders of Sayaji Mills Ltd stood on the same footing as they would stand in getting any rights issue of their own company which would have effect on the value of their holding in the Sayaji Mills Ltd. In other words, the shares in Sayaji Mills Ltd. with a right to acquire the shares in Rajesh Textile Mills Ltd. would have a different market value than their market value at a point where the shares of Sayaji Mills Ltd. did not carry such right to receive the shares of Rajesh Textile Mills Ltd. This precisely is the difference that occurred and was quantified at Rs. 108.75 at the relevant time reflecting the difference between value of the shares of Sayaji Mills Ltd., soon after the resolution was made by Rajesh Textile Mills Ltd. of offering their shares as a matter of right to the shareholders of Sayaji Mills Ltd. which resulted in the higher price of shares of Sayaji Mills Ltd. quoted at Rs. 543.75, which fell to Rs. 410-ex-rights-cum-dividend, when quoted without such right. This fluctuation in view of the arrangements between the companies and in the peculiar facts of the case was similar to that which would occur when the right shares of the same company in which the shares are held, are issued.
7. In Miss Dhun Dadabhoy Kapadia's case (supra) the Supreme Court while dealing with a matter where the assessee had renounced her right to get the new shares for a price, held that the assessee could exercise her right by actually purchasing the shares at the prescribed rate or by renouncing the same in favour of another person and obtaining monetary gain in that transaction. At the time when the assessee renounced her right to take the new shares, the capital asset which she actually possessed consisted of her existing holding plus the right to take the new shares and this would mean that at the time of transaction the value of her old shares plus the right to obtain new shares, together constituted the capital asset. After the right was transferred, the capital asset in the hands of the assessee would be the old shares, the value of which had fallen together with the amount realised on transfer of her right. The Supreme Court held that the net capital gain or loss to the assessee 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 the new shares were issued and before she realised any cash in respect of the right by renouncing it in favour of some other person. It was further held by the Supreme Court, while examining the case from an alternative angle, that 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 have been 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 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. Thus, the net capital gain by the assessee would be represented by the amount realised 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.
The learned counsel appearing for the Revenue, however, argued that the ratio of the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia's case (supra) cannot be invoked by the present assessee because in the present case, the rights issue was of shares belonging to a different company. This distinction though apparently attractive, falls to the ground when we take note of the admitted fact that in view of the special arrangement made between the newly formed company of Rajesh Textile Mills Ltd. and Sayaji Mills Ltd., a situation was brought about whereby the shareholders of Sayaji Mills Ltd. became entitled to receive as a matter of right in the proportion of 1 : 1, the shares of Rajesh Textile Mills Ltd. It is the entitlement to receive the shares of Rajesh Textile Mills Ld. that clearly had an impact on the value of the shares of Sayaji Mills Ltd. This peculiar nexus which was established by the two companies brought about a fact situation akin to what would happen when a company issues shares in favour of its own shareholders by way of rights issue.
8. The next contention of the learned counsel for the Revenue was that the shares issued by Rajesh Textile Mills Ltd. could have had no effect on the financial position of Sayaji Mills Ltd. What is important in the present case is to ascertain the cost of acquisition of the shares of Rajesh Textile Mills Ltd. acquired by the assessee by virtue of his holding in the Sayaji Mills Ltd. The entitlement was fixed in the ratio of 1 : 1 and this got attached with the value of shares of Sayaji Mills Ltd., which fluctuated between the two points, namely-at the point at which the shares Sayaji Mills Ltd. started to carry with them the right to receive the shares of Rajesh Textile Mills Ltd. and the other point at which they ceased to carry that right. This situation was real, and on the ratio of the decision in the case of Miss Dhun Dadabhoy Kapadia (supra) would constitute an important and relevant base for ascertaining the cost of acquisition of the shares of Rajesh Textile Mills Ltd. by the assessee, who not only paid the price for which they were offered but also suffered the depreciation in the value of shares of Sayaji Mills Ltd. at Rs. 108.75 being the difference between the aforesaid two points, namely, the value of Sayaji Mills Ltd.'s share when it carried the right and later when it ceased to carry the right. Therefore, the contention of the learned counsel for the Revenue cannot be accepted.
9. It was also contended that at the relevant time Sayaji Mills Ltd. had transferred one of its units to Rajesh Textile Mills Ltd. and that may have caused the fall in the value of shares of Sayaji Mills Ltd. That is nobody's case so far and as can be seen from the order of the Tribunal in the case of assessee's father on which reliance is placed by the Tribunal in its present order passed in case of the assessee, there was absolutely no dispute over the fact that the fall in the value of shares of Sayaji Mills Ltd. was a direct result of the issue of shares of Rajesh Textile Mills Ltd. as recorded in para 3 of the order of the Tribunal which was made on 6th January, 1973 in a similar case of assessee's father and which reasoning has been adopted by the Tribunal in the assessee's case. Therefore, the contention now raised on behalf of the Revenue of this nature cannot be countenanced.
10. The learned counsel appearing for the Revenue then finally argued that if the transaction of transferring the right shares of Rajesh Textile Mills Ltd. had taken place around the time when they were issued, then alone the ratio of the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia's case (supra) could be invoked. However, since the shares of rights issue have been sold after a lapse of 12 years by the assessee, the ratio of that decision will not apply because by passage of time the temporary impact on the shares of Sayaji Mills Ltd. by issue of the shares of Rajesh Textile Mills Ltd. would be wiped out. We do not think this is the way in which one should assess the cost of acquisition of the shares. The cost of the acquisition of shares of Rajesh Textile Mills Ltd. by the assessee crystallised itself when the amount at which they were offered was paid and the depreciation in the holding of the assessee in respect of shares of Sayaji Mills Ltd. with which the new shares were directly attached in the ratio of 1 : 1 was suffered at the rate of Rs. 108.75 by the assessee. As held by the Supreme Court in Miss Dhun Dadabhoy Kapadia's case (supra) 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 depreciation in the value of the old shares the assessee must be deemed to have invested money in acquisition of the new right. The capital gain by the assessee was, therefore, the money realised on the transfer of the shares of Rajesh Textile Mills Ltd. minus the amount paid by him for those shares as well as the amount lost in the form of depreciation of his shares in Sayaji Mills Ltd. in order to acquire the share of Rajesh Textile Mills Ltd. The real question is as to what was the cost of acquisition of the share of Rajesh Textile Mills Ltd. to the assessee. Was it mere Rs. 100 per share or more. The evidence shows that the shares in Rajesh Textile Mills Ltd. were given to the shareholders of Sayaji Mills Ltd. as a matter of right, depending upon their holding and at the ratio of 1 : 1. Though they were not rights issues properly so-called of Sayaji Mills Ltd., the fact remains that the shares of Sayaji Mills Ltd. carried with them right to receive the share of Rajesh Textile Mills Ltd. in view of the special arrangement made between the two companies and the resolution passed by Rajesh Textiles Ltd. linking its issue directly with the holding of the shares in Sayaji Mills Ltd. When this right to receive the shares of Rajesh Textile Mills Ltd. went with the share of Sayaji Mills Ltd., their value was Rs. 543.75 per share, but soon after shares of Rajesh Textile Mills Ltd. were issued, the value of shares of Sayaji Mills Ltd. which thus followed, carried with right diminished to Rs. 410 per share. The depreciation in value of shares of Sayaji Mills Ltd. to the extent of Rs. 108.75 was directly related to the issuance of shares by Rajesh Textile Mills Ltd. and that depreciation was the amount lost to the assessee in acquiring the new shares of Rajesh Textile Mills Ltd. To the extent of this depreciation which in the instant case was Rs. 108.75 as per the fact found, the assessee must be deemed to have invested money in the acquisition of the shares of Rajesh Textile Mills Ltd. Therefore, the cost of acquisition having been so crystallised the passage of time when these new shares were sold, would not make the difference in that cost.
11. We are, therefore, of the view that the assessee was entitled to claim deduction of the amount of depreciation in the value of his share in Sayaji Mills Ltd. being the loss incurred by him in his capital asset in the transaction in which he acquired the shares in Rajesh Textile Mills Ltd. The Tribunal, therefore rightly held that as the shares in Rajesh Textile Mills Ltd. were received as a matter of right on the holding of the shares in Sayaji Mills Ltd. by the assessee, the cost of shares of Rajesh Textile Mills Ltd. was the price that was paid for such shares plus the depreciation in the value of such shares of Sayaji Mills Ltd. (against which they were issued) at the rate of Rs. 108.75 per share. The question referred to us is, therefore, answered in the affirmative against the Revenue and in favour of the assessee. The reference stands disposed of accordingly with no order as to costs.