REPORTABLE

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

J U D G M E N T

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  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  share  on  6.1.92         425

                     Difference  200

1500 shares @ Rs.200/- per share i.e.  1500 x 200

(A)

b] Long Term:

I. On 8460 equity shares of JSL:

sold  on  7.8.91  @  Rs.240/-  20,30,400

Less:   Aggregate  cost  of  acquisition  3,63,200

II. On 7000 Equity shares of SAW PIPES  LTD.

Sold  on  20.6.91  @  Rs.103/-  each  7,21,000

Less : Cost during 86-87 @ Rs.10/- each  70,000

Less: Long  term  capital  loss  due  to  depreciation  in  the  value  of  1500  original share of JISCO as a result of  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)

56,250

(-) 3,00,00 0

16,67,2 00

6,51,00 0

15000

1381920

23,18,2 00

NIL

13,96,9 20

(-) 2,43,75 0

NIL

9,21,28 0

6,77,53 0

======= ==

NIL

16,80,2 00

6,51,00 0

15,000

12,43,4 70

23,31,2 00

2,43,68 0

20,87,4 50

12,58,4 70

NIL

8,28,9 80

8,28,9 80

====== ==

...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.