Exemption under s 115F

Bonus shares received by the assessee are eligible for an exemption under s 115F even if the original shares were acquired in foreign currency, as held by MumTrib in Sanjay Gala v ITO — In favour of: The assessee; ITA No 2989/Mum/2008: (AY 2005–2006).

Sanjay Gala v ITO

ITAT BENCH “L”, MUMBAI

ITA No. 2989/Mum/2008

Assessment Year: 2005-06

P.M. Jagtap, A.M. and V. Durga Rao, J.M.

Decided on: 15 July 2011

Counsel appeared:

Mr. Vijay Mehta & Mr. Umesh K. Gala for the appellant

Mr. R.S. Srivastava for the respondent

Order

Per: V. Durga Rao, J.M.:

This appeal filed by the assessee is directed against the order of CIT(A)-XXXIII, Mumbai, passed on 14/02/2008 for the assessment year 2005-06 wherein the asesssee has raised the following ground of appeal:-

“1. Re: Non consideration of long term capital gains on sale of bonus shares as covered by S. 115F Rs. 10,63,265/-.

1.1 On the facts and in the circumstances of the case and in law, the CIT(A) grossly erred in not

considering bonus shares received on account of original investments made in foreign currency as a foreign exchange asset covered by the provisions of s. 115F.”

2. Briefly stated the facts are that the assessee is a non-resident Indian and filed his return of income declaring income of Rs.60,000/-, Which was processed u/s 143(3) on 24/10/07 determining the total income at Rs. 11,23,265/-. In the assessment order, the AO had not treated the bonus shares as foreign exchange assets and had not allowed the benefits available u/s 1 15C of the Act. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) assessee filed a written submission, which was extracted by the CIT(A) in his order at pages 1to 7 wherein it was stated that bonus shares should be considered as foreign exchange asset and long term capital gain on same should be eligible for exemption u/s 115F. After considering the submissions of the assessee, the CIT(A) held as under: -

“4. I have gone through the facts of the case. Sec. 115C(b) defines Foreign Exchange Asset and it is extracted below:-

Sec. 115C(b) –Foreign exchange asset means any special asset which the assessee has acquired  or purchased with, or subscribed to in, convertible foreign exchange.”

4.1 The asset involved is bonus shares. As pointed out by the AO, it cannot be said that the appellant has acquired the bonus shares. It cannot be also said that the appellant has purchased the bonus shares.

Similarly, the appellant has also not subscribed to in convertible foreign exchange only with regard to the original shares. The original shares are entirely different assets than the bonus shares. Each share has a distinct number. So the appellant’s contention that the bonus shares should be considered as part of original shares and hence the appellant has subscribed to in convertible foreign exchange with regard to the bonus shares cannot be accepted. For e.g. a person might have purchased a cow with convertible foreign exchange. After some time, when the cow yields a calf it cannot be said that the calf was acquired through convertible foreign exchange. The calf might have been derived from the cow which was purchased with foreign convertible foreign exchange but definitely the calf is not purchased in convertible foreign exchange. Similar is the case with regard to the bonus shares. In this regard it is worthwhile to mention that the cost of bonus shares is always taken as Nil for the purpose

of capital gain. It was not at all linked with the cost price of the original shares purchased. In view of all the above, I uphold the action of the AO, hence, ground no. 2 is dismissed.”

3. Aggrieved by the order of CIT(A), the assessee is in appeal before us.

4. Before us, the learned counsel for the assessee submitted that the bonus shares received on account of original investment made in foreign currency as foreign exchange asset covered by the provisions of section 115F of the Act. The bonus shares are allotted in respect of shares already held and the cost of bonus shares is already embedded in the original shares. It was submitted that as per section 55(2)(aa)(iii) of the Act, the cost of acquisition of bonus shares is considered to be ‘Nil’, therefore, it cannot be said that the bonus shares should have been acquired in convertible foreign exchange. The learned counsel for the assessee relied upon judgment of the Hon’ble Supreme Court in the case of CIT v Dalmia Investment Co. Ltd., 52 ITR 567 wherein the Hon’ble Court held as under:-

“Where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is a dealer in shares, their real cost to the assessee cannot be taken to be Nil or their face value. The have to be valued by spreading the cost of the old shares over the old shares and the new issue (viz. the bonus shares) taken together if they rank pari passu, and if they do not, the price may have to be adjusted either is proportion of the face value they bear (if there is no other circumstance to differentiate them) or on equitable considerations based on the market price before and after issue.

They have to be valued at the market value on the date when they were acquired.”

The Hon’ble Supreme Court further observed that can we then say that the bonus shares are a gift and are acquired for nothing? At first sight, it looks as if they are so, but the impact of the issue of bonus shares has to be seen to realize that there is an immediate detriment to the shareholder in respect of his original holding. The Income-tax Officer, in this case, has shown that in 1945 when the price of shares became stable it was Rs. 9 per share, while the value of the shares before the issue of bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata, which ranked pari passue with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. Coins. The total value remains the same, but the evidence of that value is not in

one certificate but in two.”

5. The learned counsel also relied upon the judgment of jurisdictional High Court in the case of D.M. Dahanukar v CIT, 88 ITR 454 wherein it was held as under:–

“In Gold Mohore Investment Co. Ltd.’s case, the Supreme Court took the view that in the case of a dealer in shares who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the bonus shares is to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares.”

6. The learned counsel for the assessee also placed reliance on the judgment of the Delhi High Court in the case of Escorts Farms (Ramgarh) Ltd. v CIT, 143 ITR 749 wherein it was held as under:–

“From a layman’s point of view, the cost of the original shares is the price paid for them; and the cost of the bonus shares is nil. But once the principle of averaging is accepted, as it certainly has to be in respect of bonus shares at least, it necessarily implies that for the original cost the assessee must be taken to have acquired both the bonus and the original shares. In other words, the issue of the bonus shares, though subsequent, has the effect of altering the original cost of acquisition of the shares. There is nothing illegal in this, as the price paid by the assessee originally was not only for the shares themselves but also for such shares that it may yield subsequently, if any. The right to acquire bonus shares is a right embedded in the original shares, and they are a legal accretion thereto. The method of spreading over on both the bonus and the original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is ‘split up’. As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to be followed with regard to all the shares. But in view of the specific language of s. 55(2)(i) regarding the substituted market value of 1st January, 1954, this cannot be done where the assessee has elected to exercise an option as decided in Shekhawati General Traders Ltd.’s case [1971] 82 ITR 788 (SC).”

7. The learned counsel for the asesssee further relied on the Memorandum Explaining Finance Bill, 1995 [212 ITR (St.) 357] wherein it was held that ” For the sake of clarity and simplicity, section 55 is being amended to provide that the cost of bonus shares will be taken as Nil for computation of capital gain on sale of bonus shares. This would not affect the cost of original shares. This procedure will also be applicable to any other security where a bonus issue has been made. It was further held that  with a view to encouraging the flow of foreign exchange remittances into India and investment in India by non-resident Indian citizen and foreign nationals of Indian origin, the bill seeks to make special provisions relating to certain incomes of such non-residents.”

8. The learned DR, on the other hand, besides strongly relying upon the orders of the authorities below, submitted that Chapter XII is the special provisions and the cases relied upon by the learned counsel for the assessee have no application to the facts of the case of the assessee. He further submitted that the assessee has not invested anything on foreign exchange asset and only by virtue of original investment bonus shares were allotted to the assessee.

9. We have considered the rival submissions, perused the relevant material on record, and gone through the orders of the authorities below as well as decisions cited. The issue involved in this appeal for our consideration is whether the assessee is eligible for benefit u/s 115F of the Act, on the bonus shares received by him. The assessee is NRI acquired shares with convertible foreign exchange. Subsequently, bonus shares were allotted to him. According to the AO and CIT(A), the assessee is only eligible for benefit u/s 115F of the Act with regard to subscription made to original shares and he is not eligible for the bonus shares subsequently received by him as no subscription made in foreign exchange to receive the bonus shares. In this connection, we refer to the provisions of section 115C(b) of the Act, which read as under:-

(b) “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;”

10. On perusal of the above provision, it is clear that foreign exchange asset for the purpose of section 115F is the one which assessee has acquired in convertible foreign exchange. In the present case, the assessee subscribed to shares in convertible foreign exchange and acquired the foreign exchange asset. In so far as this aspect is concerned, there is no dispute from the revenue authorities. The only dispute is with regard to the bonus shares received by the asesssee. The objection of the revenue authorities is that the assessee has received the bonus shares without investing any convertible foreign exchange. We are of the view that the assessee acquired the original shares by investing in convertible foreign exchange and, therefore, it cannot be said that the bonus shares are acquired in isolation without taking into consideration the original shares acquired by the assessee. The Hon’ble Supreme Court and various High courts have considered the issue with regard to value of the bonus shares and

held that “the method of spreading over on both the bonus and the original shares the cost of

acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is ‘split up’. As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to be followed with regard to all the shares”. In view of the above proposition, the bonus shares acquired by the assessee are covered by section 115C(b) of the Act, and the same are eligible for benefit u/s 115F of the Act. Accordingly, the ground raised by the assessee is allowed.

11. In the result, appeal of the assessee is allowed.

Pronounced in the open court on this 15th day of July, 2011.