| Question And Answer | |
|---|---|
| Subject: | Tax on renunciation of right issue |
| Category: | Income-Tax |
| Querist: | Chandan |
| Answered by: | Advocate Shashi Ashok Bekal |
| Tags: | income from other sources, renunciation of right issue, section 56(2)(x) |
| Date: | January 18, 2022 |
Let’s say one of the share holder, A (Non- resident), of ABC Pvt has renounced his right to subscribe to right issue to D (Non- resident). Would D attract provisions of sec 56(2)(x)? Also what would be the tax implication on A?
The Hon’ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC) held that, any diminution in the price of the existing shares, as a result of right issue cannot be set-off against the amount received on renouncing the right to receive shares, while computing Capital Gains.
Therefore, “Right to receive shares” is a Capital Asset. Therefore, the amount received by A would be taxable as Capital Gains, considering the cost of acquisition as Nil.
In the hands of D, there shouldn’t be any tax implications under section 56(2)(x) of the Income-tax Act, 1961 (Act). For the purpose of section 56(2)(x) of the Act, “property” has been defined under explanation (d) to section 56(2)(vii) of the Act, which does not include a “right to receive shares”.
However the actual consideration received by ‘A’ shall only be taxable and section 50CA shall not be applicable since ‘right to receive shares’ is not share of a company.