By K. B. Bhujle | Advocate
New Page 2
Reported :
48. Capital gains : Transfer
: A.Y. 1993-94 : Renunciation of right to subscribe to rights shares :
Short-term capital loss : Renunciation in favour of general public : Does not
amount to transfer : Loss notional : Not deductible.
[CIT v. United Breweries
Ltd., 325 ITR 485 (Kar.)]
As a holding company of a
company M, the assessee had the right to subscribe to 61,26,394 rights shares in
M. The assessee subscribed only to 22,75,650 shares and renounced the right to
subscribe 1,54,100 shares for a consideration of Rs.22,84,000. As a result the
right to subscribe to the balance 38,50,744 rights shares was lost. The assessee
claimed that before the rights issue of shares, the market quotation of shares
in M was Rs.80 per share and after the rights issue was completed the market
price came down to Rs.70 per share. The assessee therefore contended that on
account of this diminution in the value of shares by Rs.10 per share the
assessee incurred a loss to right to subscribe to 38,50,744 shares at the rate
of Rs.10 per share and that the total net loss was Rs.3,62,23,440. The Assessing
Officer rejected the claim of the assessee. The Tribunal allowed the assessee’s
claim.
On appeal by the Revenue the
Karnataka High Court reversed the decision of the Tribunal and held as under :
“(i) There was no
transfer of the rights in the rights shares in question by the transferor to
the transferee. In other words, the rights were renounced by the assessee in
favour of unknown persons and that too for ‘nil consideration’. Though the
transferor was the assessee, the act of transfer was not complete inasmuch
as there was no transfer in favour of the transferee. Transfer in favour of
an unknown person could not be a transfer.
(ii) When a share can be
sold at a profit either in the open market or at the face value at Rs.10,
there was no question of suffering of loss in the facts of the case. The
loss was only notional. As there was no transfer by way of renunciation, the
question of allowing capital loss in respect of notional loss would not
arise.”
