Law: Income Tax Act, 1961

Section: 45

Income-tax-----Capital gains---Shares and securities---Computation of capital gains---Issue of right shares---Sale of right to purchase right shares---Depreciation in value of original shares should be taken into account in computing capital gains--¬Indian Income Tax Act, 1961, S.45. Where right shares are issued, the value of the right shares may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares. A concomitant of the acquisition of the new right is the depreciation in the value of the old share. The capital gain would be represented only by the difference between the money realised on the transfer of the right and the amount lost in the form of depreciation in value of the original shares. The assessee-company held certain shares of E as investment. E declared bonus shares as well as right shares in the proportion of one share for every five shares held in both the cases. Simultaneously, it also issued new equity shares for the public. The assessee sold its right to purchase 29,000 right shares at Rs.3.50 per right share. The assessee found that the quotation of the shares of E went down from Rs.42.75 to Rs.30.25 per share as a result of the issue of the aforesaid right shares and bonus shares. The depreciation in the value amounted to Rs.12.50 per share. The assessee claimed that it suffered a short-term capital loss of Rs.9 per share. The Income-tax Officer calculated the cost of acquisition at Rs.1.79 per share and computed the capital gain. The Tribunal, however, held that the cost of acquisition of the right shares should be taken at Rs.6.25 per share. On a reference: Held, that in the instant case, after the issue of right shares, the quoted price of the right shares fell to Rs.30.25. Thus, there was a depreciation in the value of the right shares to the extent of Rs.12.50 per share. However, the computation of the cost of acquisition of right shares as made by the Tribunal at Rs.6.25 per share could not be interfered with since the assessee was prepared to accept it. Miss Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC) applied. CIT v. Patch (KA.) (1971) 81 ITR 413 (Bom.) and…

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