RAMAKRISHNAN J. - This is a reference made to us for decision under section 26 (1) of the Gift-tax Act, 1958, and it arises in the following circumstances :
The assessee S. R. Chockalingam Chettiar, is a shareholder in Sri Ramalingam Choodambikai Mills Limited, Tirupur, wherein the held 450 shares. The assessment year was 1958-59. In the previous year, that is, the year ended April, 12, 1958, the company issued fresh capital, acting under the provisions of section 81 of the Indian Companies Act, 1956, the company issued a circular to the shareholders stating that they could renounce the shares offered to them in favour of any person or persons, that if they wished to exercise such a right, they must sign the from of renunciation and their nominees must also sign in the prescribed acceptance form. These forms were sent to the shareholders as enclosures to the said circular. The assessee, Chockalingam Chettiar, received that circular, and the company had offered to allot to him from out of the fresh of the fresh capital 800 equity shares. On June 15, 1957, the assessee signed the form of renunciation in favour of one S. K. Soundappa Chettiar, who signed the acceptance form and applied to the company for allotment of 800 equity shares.
The question that arose belong the taxing authority administering the Gift-tax Act, was whether Chockalingam Chettiar, the assessee, should be directed to pay gift-tax on the renunciation thus made by him in favour of Soundappa Chettiar. The Gift-tax Officer found that the renunciation involved the gift of a valuable right, that it was property on which the Gift-tax Act could operate, and that the value of the gift would be the difference between the market value of the companys shares on June 15, 1957, and the face value at which the shares were offered to the existing shareholders. On this basis the Gift-tax Officer added a sum of Rs. 56,800, to the amount for which the assessee was liable to pay gift-tax for the assessment year 1958-59. The view of the Gift-tax Officer was upheld by the Appellate Assistant Commissioner in appeal, but he reduced the value of the right by Rs. 12,800, by adopting the market value of the equity share in June, 1957, as its market value on June 15, 1957. There was a further appeal by the assessee to the Tribunal. The Tribunal also confirmed the view that the renunciation of the right to acquire such shares from the issue of fresh capital conferred upon the existing shareholders is a valuable right for which market quotations are available, and such rights are often sold in the market. Therefore, the Tribunal held that the gift in question was a taxable one under the Gift-tax Act. But so far as the valuation of the gift is concerned, the Tribunal directed the Gift-tax Officer to ascertain 'the market quotations for the rights' as on the relevant date of purchase and subject such market value to gift-tax. It is the decision of the Tribunal that is challenged on this reference.
Learned counsel appearing for the assessee strenuously contended with reference to the definition of 'gift' in section 2(xii) of the Gift-tax Act that the gift must affect some existing movable or immovable property and not future property. The definition in section 2(xii) reads thus :
'Gift means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or moneys worth, and includes the transfer of any property deemed to be a gift under section 4.'
'Property' is defined in section 2(xxii) as including any interest in property, movable or immovable, section 2(7) of the Sale of Goods Act in the definition of 'goods' includes stock and shares will be existing movable property which can from the subject-matter of a gift, in the present case, the subject-matter of the renunciation by the assessee to Soundappa Chettiar was not existing shares but shares which were yet to be allotted, on other words, future property which cannot form the subject-matter of a gift. We are unable to accept this view of the case. The company in the instant case had decided upon the further issue of capital by an appropriate resolution of the board of directors. It had also taken the necessary statutory steps under section 81 of the Companies Act giving the existing shareholders their right to the allotment of specified number of shares in the further issue together with the power to renounce in favour of any other person. Section 81(1) of the Companies Act reads thus :
'81. (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after the formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, -
(a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date;
(b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined;
(c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right;
(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner as they think most beneficial to the company.
Explanation. - In this sub-section, equity share capital and equity shares have the same meaning as in section 85.'
This section shows that the moment the officer is made, a right in prescient is conferred on the existing shareholders to acquire those shares. Section 81(1) (c) shows that this right can be renounced in favour of another person. Section 81(1) (d) shows that if the shareholder fails to exercise the right thus conferred on him, the company has got the power to dispose of the shares in such manner as they think most beneficial to the company. These provisions would show that what is contemplated therein is a right in prescient and not a future right. In this connection, we may observe that so far as the legal concept of a share in a company is concerned, there is a fictional element. The shareholder gets only a piece of paper defining his rights, which will confer on him a specified interest in the company, measurable in terms of money. To quote Modern Company Law by Gower (page 320 - second edition) :
'A share is not a sum of money, but is an interest measured by a sum of money, and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.'
It would, therefore, follow that the moment the appropriate circular under section 81 of the Indian Companies Act, was issued to Chockalingam Chettiar and either shareholders, a right to obtain a specified number of shares in the fresh issue of capital was also conferred on them. This right was a tangible right which could be conveyed by renunciation and which could also be sold and, therefore, it cannot be construed as an interest in future property. It was existing property as defined in the Gift-tax Act.
Our attention has been drawn by the learned counsel for the department to a decision of the Bombay High Court in Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax, which throws an interesting light on the trade practice in regard to shares offered to existing shareholders in further issue of capital under section 81 of the Companies Act. In that case, the assessee held 710 shares in the Tata Iron and Steel Company Ltd. The company resolved to issue new shares and offered one new share to each existing shares. The assessee chose to renounce her right to apply for the 710 new shares by selling the right to a third party in open market at the rate of Rs. 63.75 per share right, and realised a sum of Rs. 45,262.50 by the sale. The court held that this amount was rightly treated as capital gains resulting to the assessee from the transaction in question. The nature of the trade practice in such cases has been fully brought out at page 889 of the report, where an extract from the 'Principles of Accounting Inter-mediate' by Finney and Miller is found in the following terms :
'When a corporation is about to issue additional share, each holder of stock of the class to be issued may receive warrants (here forms A and B) evidencing has right to subscribe for new shares in the ratio that his holdings beat to the total shares outstanding before the additional issuance. Such a stock right, subscription right, or purchase warrant frequently entitle the stockholders to purchase only a fraction of a share of new stock for each old share held (here one new share for one old share), and the number of rights is expressed in term of the number of shares owned rather than the number of shares which may be acquired.... The announcement of the granting to the rights (12-3-1956), states the date when the stock records will be closed to determine the stockholders on record (here 26-4-1956), to whom the warrants will be issued, and also the later date when subscription will be payable (here 2-7-2956). Between the date of the announcement and the date of the issuing of the warrants (here 15-5-1956), the stock and the rights are inseparable, and the stock is dealt in rights-on. After the warrants are issued, the stock is dealt in ex-rights, and the rights are dealt in separately.'
We may also refer to the observation in Palmers Company Law, 20th edition, where at page 149 it is stated that in such cases there is an element of bonus conferred on existing shareholders, reinforcing the view that such right is a valuable right and can be the subject-matter of a gift. The relevant observation is this :
'In the case of a rights issue, the existing shareholders are given the right to apply for the new shares or debentures in a fixed proportion, e.g., three new shares for every Pounds 10 of old shares; often the price at which the new shares are offered is below the market quotation of the old share, even taking into account the fall in market value which will result by reason of the enlarged issued capital-and thus contains an element of bonus.'
It is clear that in the present case when the Tribunal directed the assessing officer to recalculate the market value of the right to acquire new shares, and which will be the market value of the gift in question, it was having in mind the principles set out in the above paragraphs, which in turn are based upon the well-known business practice in respect of companies. We are, therefore, of the opinion that the decision of the Tribunal is right, and we answer both the question referred to us in the affirmative in favour of the department and against the assessee. The assessee will pay the cost of the department. Advocates fee Rs. 250.
Tax case No. 81 of 1963.
The question for decision in this case is identical with that in T. C. No. 80 of 1963 and, therefore, this case was also heard along with it. The assessee is one K. T. Kandaswami Chettiar, and he was a shareholder in Dhanalakshmi Mills Ltd., Tirupur. The assessee renounced the additional 300 shares offered to him in the fresh capital issued by the company under section 81 of the companies Act, in favour of his four sons. The question was whether the shares thus renounced would be a gift for the purpose of assessment to gift-tax, and the Tribunal after holding that the gift was taxable, issued a direction similar to the one in T. C. No. 80 of 1963 for ascertaining its value. The Two question referred to us here for decision in this case are whether there was any gift of the right to obtain 300 right shares by the assessee in favour if his four sons, liable to tax under the Gift-tax Act, and, if the answer is in the affirmative, whether the said right is capable of any valuation, for the same reasons as in T. C. No. 80 of 1963, we answer these questions in the affirmative in favour of the department and against the assessee. In view of the award of advocates fee in T. C. No. No. 80 of 1963 towards the costs, there will be no separate order for costs in this reference.