Bombay High Court
Assistant Commissioner Of Income Tax vs Alpana Investments (P) Ltd. (Alpana ... on 20 August, 1993
Equivalent citations: (1994)48TTJ(MUMBAI)525
ORDER
V. K. SINHA, A. M :
These are two appeals. ITA No. 3060/Bom/1987 has been filed by the assessee against the order under S. 263 of the IT Act passed by the CIT, setting aside the assessment order for asst. yr. 1984-85 in so far as it related to the computation of income chargeable under the head capital gains and directing the ITO to make a fresh assessment after properly verifying all the relevant facts and circumstances, in accordance with law. Subsequently a fresh assessment order was passed by the Assessing Officer on 29th March, 1989 bringing to tax capital gains on sale of rights of Rs. 23,75,230, and at the same time disallowing the assessees claim for short-term capital loss of Rs. 47,40,400. Thereafter, the CIT(A) allowed the assessees claim for loss under the head capital gains of Rs. 47,40,400, with result that there was a net loss under the head short-term capital gains of Rs. 23,64,770 (Rs. 47,40,400 minus Rs. 23,75,230). The Department has filed appeal in ITA No. 6525/Bom/90 against the order of the CIT(A). Both appeals are being disposed of by this common order for the sake of convenience.
2. The Departments appeal will be taken up first. The Assessing Officer has observed in the assessment order that the assessee was holding 94,800 shares of Maheshwari Mills Ltd., on which the assessee got right to subscribe 47,400 convertible debentures issued by Maheshwari Mills Ltd. The assessee renounced the same and consequently realised an amount of Rs. 23,75,230. Against this profit the assessee claimed notional loss which arose as a result of the cum-right price of the share at Rs. 195 falling to ex-right price of Rs. 145. Thus there was a depreciation of Rs. 50 per share, and it totalled to Rs. 47,40,000 on the assessees shareholdings of 94,800 shares. A loss under the head short-term capital gains was, therefore, claimed by the assessee amounting to Rs. 23,64,770 (Rs. 47,40,000 minus Rs. 23,75,230).
3. The Assessing Officer observed that the assessee was holding more than 49% of the total number of shares of Maheshwari Mills Ltd., and, therefore, had control over the majority of the shares. He found that the market quotation during the period of cum-right were less than Rs. 1995 claimed by the assessee. The transactions had taken place between connected companies and he took a view that they were not genuine. He also observed that the quotations of stock exchange had been managed by the assessee-company by entering into transaction with the sister companies. He distinguished the facts of the present case from the facts in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC). Inasmuch as in the present case the right was for convertible debentures, whereas, in that case it was a case of right share. For these reasons he held that the entire amount realised on sale of right to subscribe for debentures was a profit in the course of its business and not a capital gain. As the assessees business was of a investment company, he disallowed the claim of notional loss made by the assessee.
4. The CIT(A) went into the matter in greater details. He noted that M/s. Maheshwari Mills Ltd. had issued convertible debentures of Rs. 125 each with the shareholders whose names appeared on the register of Members as on 30th Jan., 1983. For this purpose the share transfer register of M/s. Maheshwari Mill Ltd. had been closed from 28th Jan., 1983 to 31st Jan., 1983. The shares of M/s. Maheshwari Mills Ltd., were quoted on the Ahmedabad Stock Exchange. The transactions upto 27th Jan., 1983 were on cum-right basis, whereas, from 28th Jan., 1983 onwards they were on ex-right basis. The price of Rs. 195 on 27th Jan., 1983 on cum-right basis declined to Rs. 145 on 28th Jan., 1983 on ex-right basis, resulting in depreciation of Rs. 50 per share. The total depreciation on 94,800 equity shares amounted to Rs. 47,40,000. The assessee-company did not subscribe to the right convertible debentures but sold the rights for a consideration of Rs. 23,75,230.
5. The CIT(A) referred to the decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (supra), where the assessee, not being a dealer in shares, renounced right shares for a certain sum, which was sought to be fully taxed as capital gains. It was held that the assessee was entitled to deduct from the capital gains an amount of loss suffered by way of depreciation in the old shares. This decision was followed by the Bombay High Court in the case of CIT vs. K. A. Patch (1971) 81 ITR 413 (Bom).
6. The CIT(A) went through the details gathered by the assessee and found that the assessee had sold rights to more than 60 parties through its brokers at Ahmedabad on different dates and at varying rates. He also observed that the Assessing Officer had found that the purchasing parties were not connected in any manner with the assessee-company. He, therefore, held that there was no reason to doubt the genuineness of the transaction relating in the sale of rights.
7. Regarding the rates of shares, the CIT(A) perused "daily official list" of the share prices issued by the Ahmedabad Stock Exchange, as well as the register of shares transfers of M/s. Maheshwari Mills Ltd. He made some further enquiries also and the Ahmedabad Stock Exchange confirmed the last rate for ex-right and first rate for ex-right as given by the assessee. The register of shares transfers showed that the shares stated to have been purchased at the rate of Rs. 195 had been sent for transfer. He was, therefore, satisfied that the relevant rates quoted on the Stock Exchange at Ahmedabad were genuine rates.
8. On the above finding of facts and applying the ratio of the two decisions narrated above, the CIT(A) held that the assessee company was fully justified in claiming that it had suffered depreciation of Rs. 47,40,000 in the original block of 94,800 equity shares of M/s. Maheshwari Mills Ltd. The assessees claim of having incurred a short term capital loss of Rs. 23,64,770 on the transfer of rights was sustained and the Assessing Officer was directed to allow the same. The Revenue objects to this finding and is now in appeal before us.
9. The learned Departmental Representative submitted before us that the finding of fact of the CIT(A) that the rates of cum-right shares and ex-right shares quoted on the Ahmedabad Stock Exchange were not being disputed, what was being disputed was the legal issue only. In this context he invited our attention to a decision of the Tribunal in ORC Holding Pvt. Ltd. in ITA No. 136/Bom/91 dt. 28th June, 1991, where in similar circumstances it had been held that there would be no computation of loss under the head capital gains, since, as far as the assessee was concerned there was no cost of the rights. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. B. C. Srinivasa Shetty (1981) 128 ITR 294 (SC).
10. The learned counsel for the assessee on the other hand submitted that a similar issue had been considered by the Tribunal in the case of Kalpana Textiles Pvt. Ltd. ITA No. 2230/Bom/1988 dt. 7th May, 1992. There also the assessee company held 20,600 shares of Maheshwari Mills Ltd., and rights to partially converted debentures of Rs. 125 each were issued. These were reannounced for a consideration of Rs. 6,69,500 received by the assessee company. The Tribunal held, following the judgment of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia (supra), that the capital gains should be worked out after setting off a notional loss of Rs. 10,30,000 on account of depreciation and the shareholdings of the assessee company due to the issue of rights.
11. The learned counsel for the assessee further submitted that the ratio of the judgment of the Supreme Court in the case of B. C. Srinivasa Shetty (supra) was not applicable to the present case since this was a case where the cost of the rights renounced by the assessee could not be very well ascertained. Reliance was placed on the decision of the Supreme Court in the case of Miss Dhun D. Kapadia (supra), as well as Bombay High Court in the case of CIT vs. K. A. Patch (supra).
12. We have considered the rival submissions carefully. As far as the facts of the present case are concerned, they are similar to the facts in the case of M/s. Kalpana Textile Pvt. Ltd. (supra), where the Tribunal has already accepted the assessees contention, as described above. The learned Departmental Representative, has, however, submitted that the decision of the Supreme Court in the case of B. C. Srinivasa Shetty (supra) had not been brought to the notice of the Tribunal in that case, and that this is a case where the cost could not be ascertained. After careful consideration we are unable to accept the contention that the cost cannot be ascertained. This will be clear from the following extract from the judgment of the Bombay High Court in the case of CIT vs. K. A. Patch (supra) at page 418 :
"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 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 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 the right."
12. In view of the above, we hold that the cost of the rights can be ascertained in the present case, and, therefore, the judgment in the case of B. C. Srinivasa Shetty (supra) is not applicable to the facts. It will also be worthwhile to mention that in any case, if the cost cannot be ascertained, then, the Department cannot bring to tax the profits of Rs. 23,75,230 as has been done in the assessment order.
13. In the light of the above, we would concur the decision of the Tribunal in the case of M/s. Kalpana Textile Pvt. Ltd. (supra), and hold that the notional loss of Rs. 47,40,000 should be set off against the capital gains of Rs. 23,75,230, resulting in a net short-term capital loss of Rs. 23,64,770.
14. In the result, Departments appeal is dismissed.
15. We now come to assessees appeal in ITA No. 3060/Bom/87 against the order under S. 263.
16. The learned counsel for the assessee very fairly submitted that in case the Departments appeal in ITA No. 6525/Bom/90 was dismissed, then, the assessees appeal would be infructuous and may be filed as such. We, therefore, file this appeal as infructuous.
17. For statistical purposes the appeal will be treated as dismissed.