Navin Jindal vs. ACIT (Supreme Court)

Right to subscribe for shares arises only when offer is made by the company

The assessee held shares in Jindal Iron and Steel Co. Pursuant to a rights issue of partly convertible debentures announced by Jindal, the assessee received an offer to subscribe to 1875 PCDs on Rights Basis. The assessee renounced his right to subscribe to PCDs and received a consideration of Rs. 56,250/- for the renunciation. Against the said sale consideration, the assessee claimed on the basis of Dhun Dadabhoy Kapadia 63 ITR 651 that he had suffered a diminution in the value of the original 1500 equity shares being the difference between the cum-right price per share and the ex- rights price per share aggregating Rs. 3,00,000. The difference of Rs. 2,43,750 was claimed as a short-term capital loss. The lower authorities held that as the shares were held long-term, the said loss was also long-term. On appeal by the assessee, HELD allowing the appeal:

(i) 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.

(ii) For the purposes of s. 48 an important principle that must be borne in mind is that chargeability and computation go hand in hand. Computation is an integral part of chargeability under the Act. Accordingly, 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 and 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 as held in Dhun Dadabhoy Kapadia 63 ITR 651 (SC).