# MISS DHUN DADABHOY KAPADIA v. COMMISSIONER OF INCOME-TAX, BOMBAY

- **Citation:** [1967] 2 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1966-10-31
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/miss-dhun-dadabhoy-kapadia-v-commissioner-of-income-tax-bombay-3992
- **Pages:** 6

## Headnote

Income-tax Act (11 of 1922), s. 128(2)-Renouncerient of right
. shares for money value-Depreciation in value of origrnal shares--
Capital gain how calculated.
The asaessee was holdin~ as an investment 710 sharos Lo a company.
She became entitled to receive 710 new shares issued by the company,
with an option to renounce them.
She renounced her right
to receive
the new shares by sale in the open
market and
realised a sum of
Rs. 45,262.50.
The Income-tax Officer sought to tax the entire amount
at a capital gain• Immediately before the renouncement, the old shares
were valued at Rs. 253.00 per share. After renouncement the price of
the old shares fell to Rs. 198.75 as a result of which, the assessee suffered
a capital loss of about Rs. 38,000. The assessee claimed a set off of this
loss against the capital gain of Rs. 45,262.50. The plea was rejected by
the Income-tax Authorities, the Appellate Tribunal and the High Court.
In appeal to this Court,
HELD : The claim of the assessee that her net capital gain was not
·represented by Rs. 45,262.50 was correct. The
net capital
gain could
only be properly computed after deducting the sum which approximately
represented the loss incurred simultaneously, by the assessee, in. her original asset of 710 old shares as a result of the depreciation in their valui:.
[4 E, HJ
In working out capital gain or loss, the principles that have to be
applied are those which an ordinary man of business will resort to when
making computation for his business purposes, or which are a part of the
commercial practice. (5 GJ
Immediately before the assessee renounced her right to take rhe n.;,v
shares, the capital asset she possessed consisted of her old 710 shares
valued at Rs. 253.00 per share plus the right to take the new 710 shares.
After renouncement her capital assets were 710 old shares valued at
Rs. 198,75 per share together with the sum of Rs. 45,262.50. Therefore.,
the value of the capital asset after renouncement would be Rs. 710 x
198.75 plus Rs. 45,262.50 while the. value of the asset, immediately before renouncement, would be Rs. 710 x 253.00, there being no cash
value, at the iime Of the right to receive, the. new shares, to be taken. into
'ai.Xouot; and, the net capital gain of the assessee· would be the difference
between the two. [4 C-GJ
Alternatively, at the time of the issue of new shares the assessee possessed 710 shares and the right to obtain the new shares allotted. When
she sold that right and realised Rs. 45,262:50, she capitalized that right
and
converted it into money.
A concomitant of the acquisition of the
right was the depreciation in the value of the old shares, and the depreciation, is, in a commercial sense, the value of the right \vhich she subsc·
quently transferred. The net capital gain by her would, therefore, be
represented, only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of <leprecia·
lion of her original shares in order to acquire that right. [5 A-El
2
SUPRBMB COURT RBPOllTS
(1967] 2 S.C.R.
CJ.T., Bihar v. Dalmia lm·estm•nt Co. Ltd. [1964) 7 S.C.R. 210
followed.
C!vIL APPELLATE JURISDICTION : Civil Appeal No. 757 of
1965.
Appeal from the judgment and order dated August 24/25, 1962
of the Bombay High Court in Income-tax Reference No.
12 of
1961.
R. J. Ko/ah and 0. C. Mathur, for the appellant.
S. K. Aiyar and R. N. Saclttltey, for the respondent.
S. T. Desai, 0. C. Mathur, for interveners.

## Text

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MISS DHUN DADABHOY KAPADIA
v.
COMMISSIONER OF INCOME-TAX, BOMBAY
October 31, 1966
[J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.]
Income-tax Act (11 of 1922), s. 128(2)-Renouncerient of right
. shares for money value-Depreciation in value of origrnal shares--
Capital gain how calculated.
The asaessee was holdin~ as an investment 710 sharos Lo a company.
She became entitled to receive 710 new shares issued by the company,
with an option to renounce them.
She renounced her right
to receive
the new shares by sale in the open
market and
realised a sum of
Rs. 45,262.50.
The Income-tax Officer sought to tax the entire amount
at a capital gain• Immediately before the renouncement, the old shares
were valued at Rs. 253.00 per share. After renouncement the price of
the old shares fell to Rs. 198.75 as a result of which, the assessee suffered
a capital loss of about Rs. 38,000. The assessee claimed a set off of this
loss against the capital gain of Rs. 45,262.50. The plea was rejected by
the Income-tax Authorities, the Appellate Tribunal and the High Court.
In appeal to this Court,
HELD : The claim of the assessee that her net capital gain was not
·represented by Rs. 45,262.50 was correct. The
net capital
gain could
only be properly computed after deducting the sum which approximately
represented the loss incurred simultaneously, by the assessee, in. her original asset of 710 old shares as a result of the depreciation in their valui:.
[4 E, HJ
In working out capital gain or loss, the principles that have to be
applied are those which an ordinary man of business will resort to when
making computation for his business purposes, or which are a part of the
commercial practice. (5 GJ
Immediately before the assessee renounced her right to take rhe n.;,v
shares, the capital asset she possessed consisted of her old 710 shares
valued at Rs. 253.00 per share plus the right to take the new 710 shares.
After renouncement her capital assets were 710 old shares valued at
Rs. 198,75 per share together with the sum of Rs. 45,262.50. Therefore.,
the value of the capital asset after renouncement would be Rs. 710 x
198.75 plus Rs. 45,262.50 while the. value of the asset, immediately before renouncement, would be Rs. 710 x 253.00, there being no cash
value, at the iime Of the right to receive, the. new shares, to be taken. into
'ai.Xouot; and, the net capital gain of the assessee· would be the difference
between the two. [4 C-GJ
Alternatively, at the time of the issue of new shares the assessee possessed 710 shares and the right to obtain the new shares allotted. When
she sold that right and realised Rs. 45,262:50, she capitalized that right
and
converted it into money.
A concomitant of the acquisition of the
right was the depreciation in the value of the old shares, and the depreciation, is, in a commercial sense, the value of the right \vhich she subsc·
quently transferred. The net capital gain by her would, therefore, be
represented, only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of <leprecia·
lion of her original shares in order to acquire that right. [5 A-El
2
SUPRBMB COURT RBPOllTS
(1967] 2 S.C.R.
CJ.T., Bihar v. Dalmia lm·estm•nt Co. Ltd. [1964) 7 S.C.R. 210
followed.
C!vIL APPELLATE JURISDICTION : Civil Appeal No. 757 of
1965.
Appeal from the judgment and order dated August 24/25, 1962
of the Bombay High Court in Income-tax Reference No.
12 of
1961.
R. J. Ko/ah and 0. C. Mathur, for the appellant.
S. K. Aiyar and R. N. Saclttltey, for the respondent.
S. T. Desai, 0. C. Mathur, for interveners.
The Judgment of the Court was delivered by
Bbargava, J. This appeal by certificate granted by the High
Court of Bombay under section 66A(2) of the Indian Income-tax
Act, 1922 (hereinafter referred to as "the Act") is directed against
the answer returned by the High Court to the following question
referred to it by the Income-tax Appellate Tribunal under s. 66(1)
of the Act:-·-
"Whether having regard lo the provisions of section
I 2B(ii). the assessee is entitled to claim a deduction from
the full value of the consideration of Rs. 45.262.50 nP. received for the capital asset, the sum of Rs. 37,630 or any
similar sum?"
The case arose out of proceedings for assessment of the appellant for the assessment year 1957-58, the corresponding previoas
year being the financial year 1956-57. The appellant was holding
710 ordinary shares of the Tata Iron and Steel Company Ud.
(hereinafter referred to as "the Company"), which she had inherited
some time prior to 1st January, 1954. as an investment. It was
admitted that she was not a dealer in shares.
Under a special
resolution passed at an Extraordinary General Meeting of the
Company on 12th March, 1956, the appellant, as holder of 7!0
ordinary shares, became entitled to purchase new ordinary shares
issued in the ratio of one new ordinary share for one existing ordinary
share as held on 26th April, 1956.
In pursuance of this resolution,
an offer was made to the appellant by the Company by its circular
letter dated 15th May, 1956, that she was, in terms of the resolution, entitled to apply for 710 new ordinary shares to be paid for
at the rate of Rs. 105 per new ordinary share. This payment
was to represent Rs. 75 as the face value of the share and Rs. 30
as premium. She was also given the option of either taking the
shares wholly or partly, or renouncing them either wholly or
partly, in favour of any other person or persons. The appellant
chose to renounce her right to all the 710 ordinary shares instead
of taking the shares herself, and when renouncing the shares,
she sold them in the open market on 12th June, 1956, as a result
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DHUN KAPADIA v. C.I.T. (Bhargava, J.)
3
of which she actually realised a sum of Rs. 45,262/50 nP. It
was common ground before the Income-tax authorities as well as
the Tribunal that this amount received by her was a capital gain
and the whole of this amount was sought to be taxed as capital
gain received by the appellant. On behalf of the appellant, the
plea was that, on the
issue of the new ordinary shares, the
value of her old ordinary shares depreciated, because the assets
of the Company remained stationary, while the number of shares
increased. It was in consideration of this depreciation in her
original holdings that she was given the right to purchase these new
ordinary shares, or to renounce .them in favour of some other
person and make up the loss which she would suffer on her original
shares. The Board of Directors of the Native Stock and Share
Association Ltd. had passed a resolution that the transactions in
these shares were to be cum-right up to and including !st June,
1956, and were to be ex-rights from 4th June, 1956, onwards. The
intervening days, 2nd and 3rd June, being official holidays, there
were to be no transactions on those days. The market quotation
of the old Tata ordinary shares was Rs. 253 per share on !st June,
1956, and fell to Rs. 198/75 nP on 4th June, 1956. There was,
thus, a fall in the market quotation of old shares of Rs. 54/25P
per share. It was claimed by the appellant that, as a result of this
depreciation in the price of her old ordinary shares, she suffered
a capital loss in those shares to the extent of Rs. 37,630, and she
was entitled to set off this loss against the capital gain of Rs. 45,262/
SOP which she realised on selling her right to take the new ordinary
shares. In the alternative, the case was put forward on the basis
that the right to receive these new ordinary shares was a right
which was embedded in her old ordinary shares, and consequently,
when she realised the sum of Rs. 45,262/50P by selling her right,
the capital gain should be computed after deducting from this
amount realised the value of the embedded right which became liquidated. The value of that right, according to the appellant, should
be calculated in accordance with the principles of Accountancy
as laid down by various authors on the subject to be applied in
such situations. Even if this principle be accepted, the amount
taxable as capital gain in her hands would have to be reduced by
at least a sum of Rs. 37,630, if not more. This plea put forward
on behalf of the appellant was rejected by the Income-tax Authorities as well as by the Income-tax Appellate Tribunal. Thereupon,
the question, reproduced by us above, was referred to the High
Court by the Tribunal, and the High Court also answered it
against the appellant. The appellant has, therefore, come up to
this Court in this appeal.
In order tb answer the question referred to the High Court,
it appears to us that the nature of the transaction, which resulted
SUPREME COURT REPORTS
(1967] 2S.CR.
in this reccirt of Rs. 45.262/SOP by the appellant, must be analysed
and properly understood. The amount, it is the agreed case of
the parties, was a capital gain. 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 7 IO 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 7!0 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 7!0 shares plus this right to take 7!0 new shares. At
the time of her transaction, her old shares were valued at Rs. 253
per share, so that the capital asset in her possession can be treated
to be the cash value of 710 multiplied by Rs. 253 of the old shares
plus this right to obtain new shares. After she had transferred
this right to obtain new shares, the capital assets that came into
her hands were the 7!0 old shares, which became valued at Rs.
198/75P per share, together with the sum of Rs. 45,262/SOP.
The
net capital gain or loss to the appellant obviously would be the
difference between the value of the capital asset and the cash in
her hands after she had renounced her right and realised the cash
value in respect of it, and the value of the capital asset including
the right which she possessed before those new shares were
issued and before she realised any cash in respect of the right by
renouncing it in favour of some other person. As we have indicated above, the value of the capital asset, after renouncement,
would be 7!0 multiplied by Rs. !98/75P plus the sum of Rs. 45,262/
50P, while the value of the asset, immediately before the renouncement, would be 7!0 multiplied by Rs. 253, there being no cash
value at that time of the right to be taken into account. Thus,
the capital gain or loss would be worked out at Rs. 45,262/50P
after deducting from it the sum worked out at 710 multiplied by
the difference between Rs. 253 and Rs. 198/75P. This last amount
comes to a little more than the sum of Rs. 37,630 which the appellant
claimed should be deducted from Rs. 45,262/SOP in computing
her capital gain. The claim made by the appellant was thus clearly
justified, because the net capital gain by her in the transaction,
which consisted of issue of new shares together with her renouncement of the right to receive new shares and make some money
·thereby, could only be properly computed in the manner indicated
by us above.
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DHUN KAPADIA v. C.I.T. (Bhari!Na, J.)
5
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/SOP, 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 in 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 acquii;ition 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 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.
The view that we have taken finds support from the principle
laid down by this Court for valuation of bonus shares issued by a
company to holders of original shares in the case of Commissioner
of Income-tax, Bihar v. Dalmia Investment Co. Ltd.(')
The High Court, in dealing with this question, had expressed
the view that principles of Accountancy applicable to valuation of
such right to receive new shares issued by a company are not applicable when computation has to be made for purposes of taxation;
but we are unable to accept this proposition. In working out
capital gain or loss, the principles that have to be applied are those
which are a part of the commercial practice or which an ordinary
man of business will resort to when making computation for his
business purposes. The principles of accounting indicated by us
above are clearly the principles that must be applied in order to
find out .the net capital gain or loss arising out of a transaction
of the nature with which we are concerned. The application of
those principles indicates that the claim of the appellant that the
net capital gain by her is not represented by the whole amount of
Rs. 45,262/SOP realised by her on renouncement of her right to
(I) 19641 7 S.C.R. 210: 521.T.R. 567.
6
SUPIU!ME COVllT :UPORTS
[196 7J 2 S.C.R.
receive the new shares was comet and that the net capital gain
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can only be properly computed after deducting the sum of Rs.
37,630 which approximately represents the loss incurred simultanoously by the appellant in her original asset of 710 old shares as a
result of the depreciation in their value. The question referred to
the High Court must, therefore, be answered in favour of the appellant The appeal is, consequently, allowed, the answer returned
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by the High Court is set aside, and the question is answered in the
affirmative. The appellant will be entitled to her costs in this
Court as well as in the High Court.
V.P.S.
Appeal allowed.