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Capital gains on sale of rights — how reckoned

Capital gains are required to be computed with reference to the respective cost of each.

I am a senior citizen having taxable income. I received an offer of 500 rights shares (face value Rs. 10) at a premium of Rs. 70 per share from a company. I renounced these rights in favour of a sharebroker for a consideration of Rs. 150 per share for the right to subscribe to the right shares and received Rs. 75,000 (500 X 150). Please clarify my liability to tax on this amount. If it constitutes short-term capital gains, which I consider it to be, what is the net amount that is chargeable to tax?

The reader is right in his inference that it will be a case of short term capital gains considering the fact, that a mere right to subscribe to right shares has been transferred within a period of three years prescribed for assets other than shares. A possible view is that when rights shares are issued to the original shareholders, the period of holding should be reckoned in relation to the date of acquisition of original shares. Such a view was taken in Navin Jindal v ACIT (2006) 280 ITR 608 (P&H), but it is controversial and not safe, since such a view was taken prior to insertion of clause (aa) in Sec. 55(2) treating any additional financial asset received as a separate asset. Sec. 55 would treat each class of shares and other rights as distinct. Capital gains are required to be computed with reference to the respective cost of each.

The earlier view of the Courts, that in such cases, the loss by way of fall in value of original shares consequent on issue of rights shares can be set off against capital gains on sale of rights cannot prevail after the aforesaid amendment. It is in the light of the same that the entire amount of Rs. 75,000 received by the reader would be assessable as short term capital gains.

S. RAJARATNAM

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