[Navin Jindal v. ACIT, (2010) 320 ITR 708 (SC)]
The assessee was a shareholder in Jindal Iron and Steel
Company Limited (‘JISCO’, for short). The said company announced in January,
1992, an issue of 12.5% equity secured PCDs (party convertible debentures) of
Rs.110 for cash at par to shareholders on rights basis and employees on
equitable basis. The issue opened for subscription on February 14, 1992, and
closed on March 12, 1992. As the assessee held 1500 equity shares of JISCO, the
assessee received an offer to subscribe to 1875 PCDs of JISCO on rights basis.
The assessee renounced his right to subscribe to the PCDs in favour of Colorado
Trading Company on February 15, 1992, at the rate of Rs.30 per right. The
assessee received, accordingly, Rs.56,250 for renunciation of the right to
subscribe to the PCDs. Against the aforesaid sale consideration, the assessee
suffered a diminution in the value of the original 1500 equity shares in the
following manner : the cum-rights price per share on January 3, 1992, was
Rs.625, whereas ex-rights price per share on January 6, 1992, was Rs.425,
resulting in a loss of Rs.200 per share. Consequently, the capital loss suffered
by the assessee was Rs.3,00,000 (1,500 x 200) as against the receipt of
Rs.56,250 on renunciation of 1875 PCDs.
During that year on August 7, 1991, the assessee sold 8460
equity shares of JSL at Rs.240 for a total consideration of Rs.20,30,400, whose
cost of acquisition was Rs.3,63,200 and, consequently, the transaction resulted
in a long-term gain for the assessee in the sum of Rs.16,67,200. Similarly, on
June 20, 1991, the assessee sold 7000 equity shares of Saw Pipes Limited (‘SPL’,
short) at the rate of Rs.103 each, for a total consideration of Rs.7,21,000 from
which the assessee deducted Rs.70,000 towards cost of acquisition, resulting in
a long-term gain of Rs.6,51,000. In all, under the caption, ‘long-term gain’ the
assessee earned Rs.23,18,200 (Rs.16,67,200 + Rs.6,51,000).
The Supreme Court observed that the question of loss was not
in issue in the civil appeals before it. The only question which it had to
decide was the nature of the loss. The Assessing Officer had accepted the
computation of loss on renunciation of the right to subscribe to the PCDs at
Rs.2,43,750, but treated the same as long-term capital loss.
The Supreme Court observed that S. 48 deals with the mode of
computation of income chargeable under the head ‘Capital gains’. Under that
Section, such income is required to be computed by deducting from the full value
of the consideration received as a result of the transfer of the capital asset,
the expenditure incurred wholly and exclusively in connection with such transfer
and the cost of acquisition of the asset. U/s.48(1)(b) of the Act, it is further
stipulated that where the capital gain arises from the transfer of a long-term
capital asset, then, in addition to the expenditure incurred in connection with
the transfer and the cost of acquisition of the asset, a further deduction, as
specified in S. 48(2) of the Act, which is similar to standard deduction,
becomes necessary.
The Supreme Court noted that the basic controversy in the
batch of civil appeals before it concerned the stage at which S. 48(2) of the
Act becomes applicable.
The Supreme Court noted that from the said figure of
Rs.23,31,200, the Assessing Officer had deducted the loss of Rs.2,43,680 as a
long-term loss and applied S. 48(2) deduction to the figure of Rs.20,87,450.
Consequently, the Assessing Officer worked out the net income at Rs.8,28,980 as
against the figure of Rs.6,77,530 worked out by the assessee. The above analysis
showed the controversy between the parties. The assessee treated Rs.2,43,750 as
a short-term loss, and, therefore, he applied the standard deduction u/s. 48(2)
to the long-term gain of Rs.23,18,200 from sale of shares of JSL and SPL,
whereas the Assessing Officer applied S. 48(2) deduction to the figure of
Rs.20,87,450 which is arrived at on the basis that the loss suffered by the
assessee of Rs.2,43,680 was a long-term loss.
The Supreme Court held that the right to subscribe for
additional offer of share/debentures on rights basis, on the strength of
existing shareholding in the company, comes into existence when the company
decides to come out with the rights offer. Prior to that, such right, though
embedded in the original shareholding, remains inchoate. The same crystallises
only when the rights offer is announced by the company. Therefore, in order to
determine the nature of the gain/loss on renunciation of right to subscribe for
additional shares/debentures, the crucial date is the date on which such right
to subscribe for additional shares/debentures comes into existence and the date
of transfer (renunciation) of such right. The said right to subscribe for
additional shares/debentures is a distinct, independent and separate right,
capable of being transferred independently of the existing shareholding, on the
strength of which such rights are offered.
The right to subscribe for additional offer of
shares/debentures comes into existence only when the company decides to come out
with the rights offer. It is only when that event takes place, that diminution
in the value of the original shares held by the assessee takes place. One has to
give weightage to the diminution in the value of the original shares, which
takes place when the company decides to come out with the rights offer. For
determining whether the gain/loss of renunciation of the right to subscribe is a
short-term or long-term gain/loss, the crucial date is the date on which such
right to subscribe for additional shares/debentures comes into existence and the
date of renunciation (transfer) of such right.
The Supreme Court was therefore of the opinion that the loss
suffered by the assessee amounting to Rs.2,43,750 was short-term loss. According
to the Supreme Court, the computation of income under the head ‘Capital gains’,
as computed by the assessee was correct.
