| 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”.