*connectedthinking pwc
Background
• In the case of Navin Jindal1 (“the assessee”), the Supreme Court has analysed whether loss arising on transfer of rights is in the nature of long-term or short-term capital loss
Facts
• The assessee held 1500 equity shares in Jindal Iron
& Steel Company Ltd. (“JISCO”) on the basis of which he was entitled to subscribe to 1875 Partly Convertible Debentures (“PCDs”).
• The assessee renounced the rights in favour of a company and received Rs. 56,250.
• The assessee relied upon the Supreme Court’s decision in the case of Miss Dhun Dadabhoy Kapadia2 and claimed the diminution in value of original shares as cost of acquisition while
1 Navin Jindal v. ACIT [2010-TIOL-03-SC-MUM]
2 Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC)
computing capital gains on renunciation of rights.
Accordingly, in the return of income (“ROI”) for AY 1992-93, the assessee claimed a short-term capital loss (“STCL”) of Rs. 243,750 on renunciation of rights.
• In addition to the above, the assessee had earned long-term capital gains (“LTCG”) on sale of shares of Rs. 2,318,200.
• As per section 48(2) of the Income-tax Act, 1961 (“the Act”), the assessee was entitled to a deduction of 60% of LTCG in excess of Rs. 15,000.
• The assessee claimed the deduction under section 48(2) of the Act on the LTCG before setting off the STCL on sale of rights.
• The AO contended that loss on sale of rights is a long-term capital loss (“LTCL”). Accordingly, the AO computed the deduction under section 48(2) of the Act on the net amount of LTCG after setting off the loss from sale of rights.
Period of holding of rights entitlement is independent of period of holding of original shares Tax & Regulatory Services
News Alert*
19 January, 2010
PricewaterhouseCoopers
Issue
• Whether loss resulting from renunciation of rights is a STCL or LTCL?
Supreme Court Ruling
The Supreme Court held as follows:-
• The 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 shares / debentures, on the strength of existing shareholding in the company, comes into existence when the company decides to come out with a rights offer. Prior to that, such rights though embedded in the original shareholding, remains inchoate. The same crystallises only when the rights offer is announced by the company.
• For the purposes of section 48 of the Act, one has to keep in mind that chargeability and computation go hand in hand, i.e. computation is an integral part of chargeability.
Therefore, it is only when the company decides to come out with a rights issue that the diminution in the value of original shares held by the assessee takes place.
• Hence, in order to determine the nature of gains / loss on renunciation of right to subscribe for additional shares / debenture, the crucial dates are the date on which such right to subscribe for additional shares / debentures comes into existence and the date of transfer of such right.
• Accordingly, the loss on renunciation of rights by the assessee was held to be in the nature of STCL.
Conclusion
For the purpose of computing the nature of gains in hands of the assessee from renunciation of rights, the date on which the rights came into existence is of relevance and not the date of original shareholding on the basis of which such rights are issued.
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