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IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 5.7.2007 THE HON'BLE MR.JUSTICE P.D.DINAKARANAND THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A).No.947 of 2007 Commissioner of Income TaxChennai...Appellant/AppellantVs. M/s.New Ambadi InvestmentsPvt. Ltd., No.2, JehangirStreet, Chennai...Respondent/Respondent Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras 'B' Benchdated 22.12.2006 in ITA No.1403/Mds/2001 for the assessment year1994-95. against the order of the Commissioner of Income Tax(Appeals) V Chennai 34 for the Assessment year of 1994-95 in ITANo. 357/1996-97 dated 18.9.2001 against the Assessment order ofDeputy Commissioner of Income Tax Special Range I Chennai inPAN/GIR.No.47-056/Cu/7170 dated 8.11.96. For Appellant : Mrs.Pushya Sitaraman, Sr.S.C.(IT) -----J U D G M E N T (Delivered by P.D. DINAKARAN, J.) Whether the capital loss can be claimed in respect of transferof rights issue in a case where the assessee sold its right tosubscribe to partially convertible debentures - is the substantialquestion of law raised by the Revenue for our consideration in thisappeal preferred against the order of the Income-tax AppellateTribunal in ITA No.1403/Mds/2001 dated 22.12.2006, under thefollowing facts and circumstances of the case. 2.1. The relevant assessment year is 1994-95. The assesseefiled its return of income on 30.11.94 showing 'Nil' income. Thecase was processed on 26.10.95 accepting the same. In response to https://hcservices.ecourts.gov.in/hcservices/ the notice under Section 143(2) of the Income-tax Act, 1961, theassessee filed the details as called for. The assessee, under theCapital Gains, claimed short term capital loss to the tune ofRs.22,42,053/- in respect of sale of 43,535 rights to ParticallyConvertible Debentures of EID Parry (I) Ltd. at the value of Rs.5/-to Tichai Investments. Pvt. Ltd. The details of the working arestated as hereunder:- 2.2. According to EID Parry (I) Ltd.'s Rights offer, for every10 shares held, 5 PCD of Rs.150/- is issued and this would beconverted into one equiry share of Rs.10/- each, plus Rs.60/-premium and balance would be the non-convertible debentures. Inview of 1:2 ratio as above, for every right the corresponding dropin market value of the existing share would be Rs.28.25 x 2 =56.50. 2.3. The assessee claimed the short term capital loss ofRs.22,42,053/- for the transaction on the ground that the resultantfall in the market value of the existing shares should be deductedfrom the amounts received, relying on the decision of the ApexCourt in the case of Commissioner of Income-tax v. Miss.DhunDadabhoy Kapadia [(1967) 1963 I.T.R. 651]. But, the AssessingOfficer held that the decision of the Apex Court in the case ofMiss.Dhun Dadabhoy Kapadia [(1967) 1963 I.T.R. 651], referredsupra, would not apply to the facts of the present case, as it isbeyond any imagination that any asset in the form of right can havea negative value. However, he applied the judgment of the ApexCourt to the extent of not computing any capital gain at all. 2.4. Aggrieved by the said order of the assessing officerdated 8.11.1996, the assessee preferred an appeal before theCommissioner of Income-tax (Appeals), who, by order dated18.9.2001, held that the market value of the rights issue has to bereckoned with regardless of whether the sale contribution of therights is less than the notional loss or not. On appeal at theinstance of the Revenue, the order of the Commissioner wasconfirmed by the Appellate Tribunal by order dated 22.12.2006holding that the decision of the Apex Court is squarely applicable.Hence, the present appeal. 2.4. Aggrieved by the said order of the assessing officerdated 8.11.1996, the assessee preferred an appeal before theCommissioner of Income-tax (Appeals), who, by order dated18.9.2001, held that the market value of the rights issue has to bereckoned with regardless of whether the sale contribution of therights is less than the notional loss or not. On appeal at theinstance of the Revenue, the order of the Commissioner wasconfirmed by the Appellate Tribunal by order dated 22.12.2006holding that the decision of the Apex Court is squarely applicable.Hence, the present appeal. 3.1. In the case before the Apex Court in Miss.Dhun DadabhoyKapadia v. Commissioner of Income-tax [(1967) 1963 I.T.R. 651(SC)], referred supra, the assessee, who was holding by way ofinvestment 710 ordinary shares, renounced her right to all the 710shares and realised certain amount and when that amount was soughtto be wholly taxed as a capital gain, the assessee claimed thatsince the market value of the old shares fell down, resulting in acapital loss, she was entitled to set off against the capital gainrealised by her and thus, the capital gain should be computed afterdeducting from that amount the value of the embedded right whichbecame liquidated. The Apex Court, under the said facts andcircumstances of the case, held that the assessee was entitled todeduct from the capital gain realised, the loss suffered by way ofdepreciation in the old shares, because to work out the capitalgain or loss, the principles that have to be applied are thosewhich are a part of the commercial practice or which an ordinaryman of business would resort to when making computation for hisbusiness purposes. 3.2. Applying the ratio laid down by the Apex Court in thecase of Miss.Dhun Dadabhoy Kapadia [(1967) 1963 I.T.R. 651 (SC)],referred supra, a Division Bench of the Bombay High Court inCommissioner of Income-tax v. Motichand Construction Co. Pvt. Ltd.[(2003) 261 I.T.R. 70], where the assessing officer held that sincethe assessee was holding the old shares as stock-in-trade, he isnot entitled to claim loss under the head "Capital Gains", which,on appeal, was reversed by the Tribunal, held that the balance-sheet, profit and loss account and the computation tendered by theassessee before the Assessing Officer indicated that the old sharesheld as stock-in-trade were valued at cost and not at market priceand thus, the Tribunal was right in allowing the loss. 4. In view of the decision of the Apex Court in Miss.DhunDadabhoy Kapadia v. Commissioner of Income-tax [(1967) 1963I.T.R. 651 (SC)] and the decision of the Bombay High Court inCommissioner of Income-tax v. Motichand Construction Co. Pvt. Ltd.[(2003) 261 I.T.R. 70], referred supra, we find that the law iswell settled on the point and therefore, we hold that the assesseeis entitled to claim the capital loss that had arisen due totransfer of rights issue to partially convertible debentures. Finding no substantial question of law arises forconsideration in this tax case appeal, the same stands dismissed. sraSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1.The Assistant Registrar,Income Tax Appellate Tribunal"B" Bench, Madras.2.The Secretary, Central Board of Direct Taxes, New Delhi.3.The Commissioner of Income-Tax (Appeals) V, Chennai.4.The Deputy Commr. Of Income-tax,Central Circle-I(1), Chennai.+ 1 cc to Mrs. Pushya Sitaraman, Advocate SR No. 41067NSM(CO)SR/24.7.2007 T.C.(A).No.947 of 2007