1. This appeal by the assessee is directed against the order of CIT(A) on a ground that the CIT(A) has erred in upholding the addition of Rs. 5,08,500 on account of short-term capital gains.
2. We have heard the rival submissions and carefully perused the orders of authorities below and documents placed on record.
3. Brrefly stated, during the year under account, the assessee sold warrants of Reliance Petroleum Ltd., which he acquired by virtue of his holding of bonds. As per the scheme for the issue of bonds, each of the bond-holder was entitled to two warrants. These warrants entail the assessee to subscribe for the shares of Reliance Petroleum Ltd. Accordingly, the assessee was entitled for 1,82,200 such warrants. Out of these, the assessee acquired 50,000 warrants by purchasing 25,000 bonds-cum-rights from market @ Rs. 31.50 each. The assessee sold all the warrants during the year for Rs. 2,64,504. For the purpose of working capital gain from the lot of 50,000, he adopted cost of acquisition on notional basis at Rs. 10.17 each, spreading over the purchase of the bonds @ Rs. 31 each and considering the yield from those from the date of acquisition, i.e., 2nd Nov., 1994. By this way, the assessee arrived at the cost of 50,000 warrants at Rs. 5,08,500. By reducing this amount from the sale price of Rs. 2,64,504, he arrived at loss of Rs. 2,43,996. The assessee has also claimed that at the time of purchase of bonds, the interest and principal value was fixed and determinate value of bonds were enhanced only due to the fact that the holder was to receive two warrants each. He further contended that this offer was given to make the scheme more lucrative. The claim of the assessee was examined by the AO and he opined that where the assessee becomes entitled to any additional financial asset without payment and if he renounces such entitlements, the cost has to be taken at nil as per Sub-section (2)(aa) of Section 55 of the IT Act (hereinafter called as an Act). This is in consonance with Sub-section (2)(aa) because the person who acquires such renounced rights from the assessee by payment of a price, it would be a part of cost of acquisition in his hands, when he sells the financial assets (shares) subscribed to by -him.
Hence statutorily w.e.f. 1st April, 1996, the cost of acquisition of such warrants in the hands of the assessee would be nil. The method followed by the assessee pursuant to this judgment in the case of CIT v. Dalmia Investment Ltd. and Miss Dhun Dadabhoy Kapadia v. CIT was not proper and cost of acquisition should be worked out as per amendments by Finance Act, 1995, according to which the cost of additional benefits would be at nil. The AO accordingly recomputed the short-term capital gain at Rs. 2,64,504.
4. The assessee preferred an appeal before the CIT(A) with the submissions that the value of the detachable warrants should be worked out in the light of judgment of the apex Court in the case of Dalmia Investment Ltd. (supra) and Miss Dhun Dadabhoy Kapadia (supra), but the AO did not follow the same. The CIT(A) re-examined the issue in the light of amended provisions and confirmed the order of the AO.5. Now the assessee has preferred an appeal before the Tribunal and reiterated its contentions, whereas on the other hand, the learned Departmental Representative has placed heavy reliance on the order of CIT(A).
6. Having carefully examined the rival submissions in the light of amended provisions, we find that under Section 55, the amendment was brought by Finance Act, 1995 w.e.f. 1st April, 1996. Prior to the amendment, the additional financial assets were to be valued as per the average method in view of the judgment of the apex Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT (supra) in which it has been held that as a result of issue of rights shares, value of original shares get depressed and the extent of depression would represent cost of acquisition of right to subscribe to shares and such cost would be liable to be deducted in computing capital gains arising on renouncing the right to subscribe to shares. This decision was repeatedly followed by several High Courts in various cases.
7. To nullify the effect of the judgment of the apex Court, Clause (aa) was inserted in Section 55(2) by Finance Act, 1995 w.e.f. 1st April, 1996 in which shares or the securities within the meaning of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 have been referred to as "financial asset" and it has been laid down that in a case where by virtue of holding a capital asset, being a financial asset, the assessee becomes entitled to subscribe to any additional financial asset, the cost of acquisition in relation to original receipt, additional receipt, right to renounce, etc. would be as follows : (i) in relation to original financial asset, cost of acquisition would be the amount actually paid for acquiring the said asset; (ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person the cost of acquisition shall be taken at nil; (iii) in relation to the additional financial asset acquired on the basis of said entitlement, the cost of acquisition would be the actual amount paid by him for acquiring such asset; (iv) in relation to any financial asset purchased by any person in whose favour right to subscribe to such asset has been renounced, the cost of acquisition would mean the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset.
8. A simple illustration would explain the provisions in sub-clauses (i) to (iv) of Clause (aa) of Section 55(2). Suppose "A" purchases 10 shares of a company for Rs. 150 at the rate of Rs. 15 per share and subsequently the company offers, what is known as "rights shares" to him and on account of this, "A" becomes entitled to subscribe to these shares of the company at the rate of Rs. 12 per share when the market rate is Rs. 20 per share. There would be no change in the cost of acquisition of original financial asset, viz. original 10 shares; the cost of acquisition would continue to be Rs. 150 [vide sub-clause (i)]. If "A" accepts the offer and subscribes to 10 shares by paying Rs. 12 per share cost of acquisition in relation to this additional financial asset, viz.
addition to shares, would be Rs. 120 [vide sub-clause (iii)]. If "A" renounces the entitlement to subscribe to the shares in favour of "B" for consideration of Rs. 7 per share, cost of acquisition to "A" in relation to entitlement to subscribe to the shares (which by itself is a capital asset) would be nil with the result that entire consideration of Rs. 70 received by him for transfer of said capital asset would represent capital gains [vide sub-clause (iii)] and as far as "B" is concerned, cost of acquisition in relation to 10 shares acquired by him in the above process would be Rs. 19 per share, i.e., aggregate of Rs. 7 and Rs. 12 [vide sub-clause (iv)].
9. Keeping in view the aforesaid legal position after the amendment, we have examined the facts of the instant case and we find that the assessee has acquired the TOCD of Reliance Petroleum Ltd. by virtue of original holding of shares. As such, in view of the amended provisions, the original cost of shares cannot be spread over for working the capital gain of sales. We, therefore, find no infirmity in the computation of short-term capital gain done by the AO. Accordingly, the order of the CIT(A) is confirmed.