Law: Income Tax Act, 1961

Section: 256,45

(a) Income tax-----Capital gains ---Assessee an investment company ---Assessee holding equity shares in company A---Company A issuing debentures on rights basis to its existing shareholders in ratio of one debenture for one equity share held ---Assessee subscribing to some debentures and transferring right subscribe to some other debentures for which it received a certain amount--¬Right to subscribe to debentures is a capital asset---After including receipt total value of shares is less than cost invested in shares by assessee--¬Loss in value of original shares more than amount received by assessee--¬Amount received for transferring right to subscribe to debentures not assessable to tax as capital gains---Indian Income Tax Act, 1961, Ss.45 & -256(2). When rights shares or debentures are issued, there can be a fall in the value of original shares and that cannot be ignored, while computing the capital gain on sale of such rights shares or debentures. If their value, that is, the amount received on the transfer of the right to subscribe to debentures is included in the value of shares and the total value of shares is not more than the cost invested in the share capital, the sale amount of rights shares or debentures cannot be assessed to tax on capital gains. The assessee, an investment company, held 33,000 equity shares of a company IRI. IRI issued debentures on rights basis to its existing shareholders in the ratio of one debenture for one equity share held. The assessee subscribed to 6,000 debentures and transferred the right to subscribe to 27,000 debentures, for which it received an amount of Rs.2,48,348. The assessee claimed before the Income-tax Officer that the right to subscribe to debentures was a capital asset and that as there was no cost of acquisition the sale proceeds were not exigible to tax on capital gains. Though the Income-¬tax Officer had accepted the cost of debentures at nil, lie m\ed the entire amount of Rs.2,48,348 as capital gains. On appeal, the Commissioner (Appeals) treated the sale proceeds as a revenue receipt and assessed it as such. On further appeal, the tribunal held that the debentures were received against capital assets…

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