Navin
Jindal Vs. Assistant Commissioner of Income Tax [2010] INSC 31 (11 January
2010)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.634 OF 2006
Navin Jindal ...Appellant(s) Versus Assistant Commissioner of Income Tax
...Respondent(s) With Civil Appeal Nos.635/2006, 636/2006, 637/2006 and
639/2006
S.H.
KAPADIA,J.
Heard
learned counsel on both sides.
In this
batch of civil appeals, the narrow issue which arises for determination is the
nature of the loss suffered by the appellant(s) [assessee(s)] - whether
Rs.2,43,750/- was a short-term capital loss, as contended on behalf of the
assessee(s), or whether the said loss was a long-term loss, as contended on
behalf of the Revenue? In the lead matter, being Civil Appeal No.634 of 2006,
we are concerned with Assessment Year 1992-1993 corresponding to the Financial
Year ending 31st March, 1992.
..2/- - 2
- The assessee was a shareholder in Jindal Iron and Steel Company Limited
[`JISCO', for short]. The said Company announced in January, 1992, issue of
12.5% equity secured PCDs [Partly 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 14th February, 1992, and closed on 12th March,
1992. As the assessee held 1500 equity shares of JISCO, assessee received an
offer to subscribe to 1875 PCDs of JISCO on Rights Basis. Assessee renounced
his right to subscribe to PCDs in favour of Colorado Trading Company on 15th
February, 1992, at the rate of Rs.30/- per Right. Assessee received,
accordingly, Rs.56,250/- for renunciation of right to subscribe to PCDs.
Against the afore-stated sale consideration, assessee suffered diminution in
the value of the original 1500 equity shares in the following manner: the
cum-right price per share on 3rd January, 1992, was Rs.625/-, whereas ex-Rights
price per share on 6th January, 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/- [1500 x 200] as against the receipt of Rs.56,250/- on
renunciation of 1875 PCDs.
To
complete the chronology of events, on 7th August, 1991, assessee sold 8460
equity shares of JSL at Rs.240/- for the 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, ..3/- - 3 - on 20th June, 1991, assessee sold 7000 equity shares of
Saw Pipes Limited ("SPL", for short) at the rate of Rs.103/- each,
for 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" assessee
earned Rs.23,18,200/- [Rs.16,67,200 + Rs.6,51,000]. These figures are not in
dispute, though there is a small variation in arithmetical calculations made by
the two sides, which is insignificant.
The
quantum of loss is not in issue in these civil appeals. The only question which
this Court has to decide is the nature of the loss. The Assessing Officer
accepted the computation of loss on renunciation of right to subscribe to PCDs
at Rs.2,43,750/- but treated the same as long-term capital loss. As a
consequence, the Assessing Officer reduced the amount of long-term capital loss
by the amount of statutory deduction under Section 48(2) of the Income Tax Act,
1961. It is this calculation which is the subject-matter of challenge by the
assessee(s) in this batch of civil appeals.
To answer
the above question, we need to quote hereinbelow the relevant provisions of the
Income Tax Act, 1961, [`Act', for short] having a bearing on the issue in
dispute:
"2(29A).`Long-term
capital asset' means a capital asset which is not a short-term capital asset.
...4/- -
4 - 2(42A). `Short-term capital asset' means a capital asset held by an
assessee for not more than thirty-six months immediately preceding the date of
its transfer.
45(1).
Any profits or gains arising from the transfer of a capital asset effected in
the previous year shall, save as otherwise provided in sections 53, 54, 54B,
54D, 54E, 54F, 54G and 54H, be chargeable to income-tax under the head `Capital
gains', and shall be deemed to be the income of the previous year in which the
transfer took place.
48(1).
The income chargeable under the head `Capital gains' shall be computed,-- [a]
by deducting from the full value of the consideration received or accruing as a
result of the transfer of the capital asset the following amounts, namely:--
[i] expenditure incurred wholly and exclusively in connection with such
transfer;
[ii] the
cost of acquisition of the asset and the cost of any improvement thereto;
Provided
that in the case of an assessee, who is a non-resident Indian, capital gains
arising from the transfer of a capital asset being shares in, or debentures of,
an Indian company shall be computed by converting the cost of acquisition,
expenditure incurred wholly and exclusively in connection with such transfer
and the full value of the consideration received or accruing as a result of the
transfer of the capital asset into the same foreign currency as was initially
utilised in the purchase of the ...5/- - 5 - shares or debentures, and the
capital gains so computed in such foreign currency shall be reconverted into
Indian currency, so however, that the aforesaid manner of computation of
capital gains shall be applicable in respect of capital gains accruing or
arising from every re- investment thereafter in, and sale of, shares in, or
debentures of, an Indian company.
Explanation:
For the purposes of this clause,-- (i) `non-resident Indian' shall have the
same meaning as in clause (e) of section 115C;
(ii)
`foreign currency' and `Indian currency' shall have the meanings respectively
assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46
of 1973);
(iii) the
conversion of Indian currency into foreign currency and the reconversion of
foreign currency into Indian currency shall be at the rate of exchange
prescribed in this behalf;
[b] where
the capital gain arises from the transfer of a long-term capital asset
(hereafter in this section referred to, respectively, as long-term capital gain
and long-term capital asset) by making the further deductions specified in
sub-section (2).
(2) The
deductions referred to in clause (b) of sub-section (1) are the following,
namely:-- [a] where the amount of long-term capital gain arrived at after
making the deductions under clause (a) of sub-section (1) does not exceed
fifteen thousand rupees, the whole of such amount;
[b] in
any other case, fifteen thousand rupees as increased by a sum equal to,-- (i)
in respect of long-term capital gain so arrived at relating to capital assets,
being buildings or lands or any rights in buildings or lands or gold, bullion
or jewellery,-- ...6/- - 6 - (A) in the case of a company, ten per cent of the
amount of such gain in excess of fifteen thousand rupees;
(B) in
the case of any other assessee, fifty per cent of the amount of such gain in
excess of fifteen thousand rupees;
(ia) in
respect of long-term capital gain so arrived at relating to equity shares of
venture capital undertakings,-- (A) in the case of a company, other than
venture capital company, thirty per cent of the amount of such gain in excess
of fifteen thousand rupees;
(B) in
the case of venture capital company, sixty per cent of the amount of such gain
in excess of fifteen thousand rupees;
(C) in
any other case, sixty per cent of the amount of such gain in excess of fifteen
thousand rupees;
[ii] in
respect of long-term capital gain so arrived at relating to capital assets
other than capital assets referred to in sub-clauses (i) and (ia),-- (A) in the
case of a company, thirty per cent of the amount of such gain in excess of
fifteen thousand rupees;
(B) in
any other case, sixty per cent of the amount of such gain in excess of fifteen
thousand rupees:
Provided
that where the long-term capital gain relates to both categories of capital
assets referred to in sub-clauses (i) and (ii), the deduction of fifteen
thousand rupees shall be allowed in the following order, namely:-- [1] the
deduction shall first be allowed against long-term capital gain relating to the
assets mentioned in sub-clause (i);
...7/- -
7 - [2] thereafter, the balance, if any, of the said fifteen thousand rupees
shall be allowed as deduction against long-term capital gain relating to the
assets mentioned in sub-clause (ii), and the provisions of sub-clause (ii)
shall apply as if references to fifteen thousand rupees therein were references
to the amount of deduction allowed in accordance with clauses (1) and (2) of
this proviso:
Provided
further that, in relation to the amount referred to in clause (b) of
sub-section (5) of section 45, the initial deduction of fifteen thousand rupees
under clause (a) of this sub- section shall be reduced by the deduction already
allowed under clause (a) of section 80T in the assessment for the assessment
year commencing on the 1st day of April, 1987, or any earlier assessment year
or, as the case may be, by the deduction allowed under clause (a) of this sub-
section in relation to the amount of compensation or consideration referred to
in clause (a) of sub-section (5) of section 45 and references to fifteen
thousand rupees in clauses (a) and (b) of this sub-section shall be construed
as references to such reduced amount, if any.
Explanation:
For the purposes of this section,-- [a] `venture capital company' means such
company as is engaged in providing finance to venture capital undertakings
mainly by way of acquiring equity shares of such undertakings or, if the
circumstances so require, by way of advancing loans to such undertakings, and
is approved by the Central Government in this behalf;
[b]
`venture capital undertaking' means such company as the prescribed authority
may, having regard to the following factors, approve for the purposes of
sub-clause (ia) of clause (b) of sub- section (2), namely;-- [1] the total
investment in the company does not exceed ten crore rupees or such other higher
amount as may be prescribed;
...8/- -
8 - [2] the company does not have adequate financial resources to undertake
projects for which it is otherwise professionally or technically equipped;
and [3]
the company seeks to employ any technology which will result in significant
improvement over the existing technology in India in any field and the
investment in such technology involves high risk."
We find
merit in this batch of civil appeals filed by the assessee(s). The right to
subscribe for additional offer of shares/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
crystallizes only when the Rights Offer is announced by the Company. Therefore,
in order to determine the nature of the gains/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.
For the
purposes of Section 48 of the Act, one must keep in mind an important
principle, namely, that chargeability and computation has to go hand in hand.
In ...9/- - 9 - other words, computation is an integral part of chargeability
under the Act. It is for this reason that we have opined that 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 gains/loss of renunciation of right to subscribe is a
short-term or long-term gains/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.
Our view
is based on the judgement of this Court in the case of Miss Dhun Dadabhoy
Kapadia vs. Commissioner of Income-Tax, Bombay, reported in [1967] 63 I.T.R.
651], which has taken the view that, for computing capital gains on
renunciation of right to subscribe for additional shares, diminution in the
value of original shares would be regarded as the cost of acquisition for such
right [See pages 654-655 of the said judgement]. We quote hereinbelow the
relevant portion of the said judgement which further indicates that the right
to subscribe for new shares/debentures is a separate capital asset which comes
into existence only when the Company passes Resolution for the issue of new
shares:
...10/- -
10 - "The capital asset which the appellant originally possessed consisted
of 710 ordinary shares of the company. There was already a provision that, if
the company issued any new shares, every holder of old shares would be entitled
to such number of ordinary shares as the board may, by resolution, decide. This
right was possessed by the appellant because of her ownership of the old 710
ordinary shares, and when the board of directors of the company passed a
resolution for issue of new shares, this right of the appellant matured to the
extent that she became entitled to receive 710 new shares. This right could be
exercised by her by actually purchasing those shares at the prescribed rate, or
by renouncing those shares in favour of another person and obtaining monetary
gain in that transaction. At the time, therefore, when the appellant renounced
her right to take these new shares, the capital asset which she actually
possessed consisted of her old 710 shares plus this right to take 710 new
shares.
.....
..... ..... ....
In the
alternative, the case can be examined in another aspect. At the time of the
issue of new shares, the appellant possessed 710 old shares and she also got
the right to obtain 710 new shares. When she sold this right to obtain 710 new
shares and realised the sum of Rs.45,262.50P., she capitalised that right and
converted it into money. The value of the right may be measured by setting off
against the appreciation in the face value of the new shares the depreciation
of the old shares and, consequently, to the extent of the depreciation in the
value of her original shares, she must be deemed to have invested money in
acquisition of this new right. A concomitant of the acquisition of the new right
was the depreciation in the value of the old shares, and the depreciation may,
in a commercial sense, be deemed to be the value of the right which she
subsequently transferred. The capital gain made by her would, therefore, be
represented only by the difference ...11/- - 11 - between the money realised on
transfer of the right, and the amount which she lost in the form of
depreciation of her original shares in order to acquire that right. Looked at
in this manner also, it is clear that the net capital gain by her would be
represented by the amount realised by her on transferring the right to receive
new shares, after deducting therefrom the amount of depreciation in the value
of her original shares, being the loss incurred by her in her capital asset in
the transaction in which she acquired the right for which she realised the
cash. This method of looking at the transaction also leads to the same
conclusion which we have indicated in the preceding paragraph."
[Emphasis
supplied] Section 48 deals with 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. Under Section 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 Section 48(2) of the Act, which is similar to standard deduction,
becomes necessary.
The basic
controversy in this batch of civil appeals concerns the stage at which Section
48(2) of the Act becomes applicable. For that purpose, we annex hereinbelow a
chart indicating Computation of Income under the head "Capital
gains", as projected by the assessee on the one hand and as projected by
the Assessing Officer on the other hand.
...12/-
12 - COMPUTATION OF INCOME UNDER THE HEAD "CAPITAL GAINS As per assessee
As per assessing officer Capital gains/Loss:
a] Short
Term:
Amount of
sale proceeds (renouncement 56,250 of 1875 Right PCDs offer of JISCO from
Colorade Trading Co. Ltd. on 15.2.92 @ 30/-.
Less :
being cost of acquisition of 1875 right PCD offer of JISCO being depleted in
the value of existing share holdings of 1500 Equity shares as under:- Cum-right
price per share on 3.1.92 625 Less : Ex-right price per on (-) share (-) NIL
NIL 6.1.92 425 3,00,00 2,43,75 0 0 Difference 200 1500 shares @ Rs.200/- per
share i.e.
1500 x
200 (A) 16,67,2 b] Long Term: 00 16,80,2 00 I. On 8460 equity shares of JSL:
sold on
7.8.91 @ Rs.240/- 23,18,2 23,31,2 20,30,400 00 6,51,00 00 0 Less: Aggregate
cost of acquisition 6,51,00 3,63,200 0 NIL 2,43,68 II. On 7000 Equity shares of
SAW PIPES NIL 0 LTD.
20,87,4
Sold on 20.6.91 @ Rs.103/- each 50 7,21,000 15,000 8,28,9 Less : Cost during
86-87 @ Rs.10/- each 13,96,9 80 70,000 20 9,21,28 12,43,4 15000 Less: Long term
capital loss due to 0 70 12,58,4 8,28,9 80 depreciation in the value of 1500
1381920 6,77,53 70 original share of JISCO as a result of 0 ====== right issue
of PCDs after adjusting the == profit realized on a/c of discussed =======
above == Less : Deduction u/s 48(2):
On
Rs.15000/- @ 100% On Rs.2303200/- @ 60% (B) Net Income under the head
"capital gains" (A) + (B) ...13/- - 13 - On analysis of the said
chart, one finds that, according to the assessee, the net income chargeable to
tax under the head "Capital gains" is Rs.6,77,530/-, whereas,
according to the Assessing Officer, the net income is Rs.8,28,980/-. According
to the assessee, the loss suffered by him, as indicated in the chart, is a
short-term capital loss of Rs.2,43,750/-, which occurred to the assessee on
sale of right to subscribe to PCDs.
The
long-term gain, which accrued to the assessee on sale of shares of JSL and SPL,
came to Rs.23,18,200/- to which Section 48(2) is applied by the assessee. On
application of Section 48(2), the standard deduction comes to Rs.13,96,920/-
Accordingly, the long-term gain, as computed under Section 48, accruing to the
assessee on sale of shares of JSL and SPL came to Rs.9,21,280/- from which the
assessee deducts loss of Rs.2,43,750/- resulting in the net income of
Rs.6,77,530/-. On the other hand, according to the Assessing Officer, there is
no dispute regarding the long-term gains accruing to the assessee on sale of
shares of JSL and SPL amounting to Rs.23,31,200/- [difference in the figures is
insignificant]. From the said figure of Rs.23,31,200/-, the Assessing Officer
deducts the loss of Rs.2,43,680/- as a long-term loss and applies Section 48(2)
deduction to the figure of Rs.20,87,450/-. Consequently, the Assessing Officer
works 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 shows the
controversy between the parties.
Assessee
treats Rs.2,43,750/- as a short-term loss, and, therefore, he applies the
standard deduction under Section ...14/- - 14 - 48(2) to the long-term gain of
Rs.23,18,200/- from sale of shares of JSL and SPL, whereas the Assessing
Officer applies Section 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.
As stated
above, we have opined that the loss suffered by the assessee amounting to
Rs.2,43,750/- was a short-term loss. Therefore, in our view, the computation of
income under the head "Capital gains", as projected in the chart
submitted by the assessee and as computed by the assessee is correct. In other
words, the computation of income under the head "Capital gains"
submitted to this Court by the assessee is correct and the computation of
income made by the Department is erroneous.
Accordingly,
civil appeals filed by the assessees stand allowed with no order as to costs.
......................J. [S.H. KAPADIA]
......................J. [H.L. DATTU]
......................J. [DEEPAK VERMA]
New Delhi,
January 11, 2010.
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