The cost of acquisition of bonus shares is NIL under the Income Tax Act of India. This means that no capital gains tax is payable on the allotment of bonus shares. However, capital gains tax will be payable on the sale of bonus shares, at the same rate as it is on regular shares.

The cost of acquisition of bonus shares is treated as NIL because they are essentially a free gift from the company to its shareholders. Bonus shares are issued out of the company’s reserves and profits, and do not require any investment from the shareholders.

Example:

Mr. X holds 100 shares of Company A, with a cost of acquisition of Rs.100 per share. Company A issues a bonus of 1:1, which means that Mr. X receives an additional 100 bonus shares.

The cost of acquisition of the bonus shares will be NIL. This means that Mr. X will not have to pay any capital gains tax on the allotment of the bonus shares.

However, if Mr. X sells the bonus shares for Rs.150 per share, he will have to pay capital gains tax on the profit of Rs.50 per share.

COST OF ACQUISITION IN THE CASE OF RIGHT SHARES AND RIGHT RENOUNCEMENTS

Right shares: The cost of acquisition of right shares is the sum of the following:

• The subscription price paid to the company for the right shares.
• The proportionate part of the market value of the original shares as on the record date, attributable to the right shares.

• Right renunciations: The cost of acquisition of right renunciations is nil.

Example:

Mr. X holds 100 shares of Company A, which are trading at Rs.10 per share on the record date. The company offers a right issue to its shareholders at Rs.8 per share, in the ratio of 1:1.

Mr. X subscribes to all of the right shares. Therefore, the cost of acquisition of the right shares for Mr. X will be calculated as follows:

Cost of acquisition of right shares = Subscription price + Proportionate part of market value of original shares

Cost of acquisition of right shares = Rs.8 per share + Rs.1 per share

Cost of acquisition of right shares = Rs.9 per share

Mr. X can choose to exercise his right to subscribe to the right shares or renounce his rights. If he chooses to renounce his rights, the cost of acquisition of the right renunciations for Mr. X will be nil.

Please note:

• The cost of acquisition of right shares is used to calculate the capital gains tax payable by the assessed in case of a subsequent sale of the right shares.
• The cost of acquisition of right renunciations is not relevant for the purpose of calculating capital gains tax.

EXAMPLES

Example of Cost of Acquisition of Right Shares

Suppose an investor holds 100 shares of a company, and the company announces a rights issue at a ratio of 1:1. This means that the investor is entitled to purchase 1 new share for every 1 share that they already hold. The rights issue price is Rs.10 per share.

The investor decides to exercise their rights and purchase 100 new shares. The cost of acquisition of the new shares is Rs.1000 (100 shares * Rs.10 per share).

Example of Cost of Acquisition of Right Renunciations

Suppose an investor holds 100 shares of a company, and the company announces a rights issue at a ratio of 1:1. The investor decides to renounce their rights and sell them to another investor. The renunciation price is Rs.5 per right.

The investor’s cost of acquisition of the right renunciations is Rs.500 (100 rights * Rs.5 per right).

Important Notes

• The cost of acquisition of right shares is the amount that the investor pays to purchase the new shares.
• The cost of acquisition of right renunciations is the amount that the investor receives for selling their rights.
• The cost of acquisition of right shares and right renunciations is used to calculate the capital gains or losses on the disposal of the shares or rights.

Disclaimer: This information is for educational purposes only and should not be construed as tax advice. Please consult a tax advisor for specific advice on your individual circumstances.

CASE LAWS

• Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the amount paid by the shareholder to subscribe to the right shares. The Court also held that the diminution in the value of the original shares as a result of the right issue cannot be set off against the amount received on renouncing the right to receive shares, while computing capital gains.

• Navin Jindal v. ACIT [2010] 325 ITR 68 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the same as the cost of acquisition of the original shares, if the right shares are subscribed to by the shareholder. The Court also held that the capital gains on the sale of right shares would be computed in the same manner as capital gains on the sale of bonus shares.

• Southern Technologies Ltd. v. JCIT [2010] 325 ITR 68 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the same as the cost of acquisition of the original shares, if the right shares are renounced by the shareholder. The Court also held that the amount received on renouncing the right to receive shares is not taxable as income.

• C. Srinivasa Shetty v. CIT [1986] 159 ITR 294 (SC)

In this case, the Supreme Court held that if the cost of acquisition of a capital asset cannot be determined, then it is not possible to compute capital gains. Therefore, the receipt on renunciation of right shares would not be taxable as income, if the cost of acquisition of the right shares cannot be determined.

These are some of the important case laws on the cost of acquisition of right shares and right renunciations. It is important to note that the law in this area is complex and there are many other factors that may need to be considered when determining the cost of acquisition of right shares and right renunciations. It is always advisable to consult a tax advisor to determine the cost of acquisition of right shares and right renunciations in a specific case

FAQ QUESTION

The cost of acquisition of right shares and right renunciations is determined as follows of the Income Tax Act:

Right shares

The cost of acquisition of right shares is the amount paid by the subscriber to get them. If a subscriber purchases the right shares on renunciation by an existing shareholder, the cost of acquisition would include the amount paid by him to the person who has renounced the rights in his Favor and also the amount which he pays to the company for subscribing to the shares.

Right renunciations

The cost of acquisition of right renunciations is nil. This means that the person who renounces the rights does not have to pay any tax on the capital gains arising from the renunciation.

Example:

Mr. X holds 100 shares of Company A. Company A issues a rights issue of 1 new share for every 2 existing shares held. Mr. X exercises his rights to subscribe to 50 new shares. He also renounces the remaining 50 rights in favor of his friend, Mr. Y.

The cost of acquisition of the 50 new shares for Mr. X will be the amount he pays to Company A to subscribe to the shares. The cost of acquisition of the 50 rights renunciations for Mr. Y will be nil.

Please note:

• The cost of acquisition of right shares is used to calculate the capital gains or losses on the transfer of those shares.
• The cost of acquisition of right renunciations is not used to calculate any capital gains or losses