Bonus shares for non-resident Indians qualify as foreign exchange assets

The tribunal allowed the appeal of the non-resident Indian assessee, holding that bonus shares received on account of the original investment in foreign currency qualified as foreign exchange assets under section 115F. The tribunal emphasized the interdependence of original and bonus shares in determining the value of the asset and aligned its decision with legal precedents, allowing the assessee to avail benefits under the relevant provisions of the Act.

---

---

Issues:
1. Consideration of long term capital gains on sale of bonus shares under section 115F.

Analysis:
The appeal was filed against the order of CIT(A)-XXXIII, Mumbai, for the assessment year 2005-06. The assessee, a non-resident Indian, declared income of Rs. 60,000, which was processed under section 143(3) determining total income at Rs. 11,23,265. The Assessing Officer did not treat bonus shares as foreign exchange assets and disallowed benefits under section 115C of the Act. The CIT(A) upheld this decision, stating that bonus shares are distinct from original shares and not acquired, purchased, or subscribed to in convertible foreign exchange. The CIT(A) dismissed the appeal. The assessee contended that bonus shares received on account of original investment in foreign currency qualify as foreign exchange assets under section 115F. The assessee cited the judgment of the Hon'ble Supreme Court in CIT v. Dalmia Investment Co. Ltd. and other High Court judgments to support their argument.

The key contention revolved around whether bonus shares received by the assessee, a non-resident Indian, were eligible for benefits under section 115F of the Act. The revenue authorities argued that the assessee was only eligible for benefits with respect to the original shares acquired with convertible foreign exchange, not the subsequent bonus shares. However, the tribunal noted that the assessee acquired the original shares with convertible foreign exchange, and the bonus shares were interlinked with the original shares. Citing legal precedents, the tribunal held that the method of spreading the cost of acquisition over both original and bonus shares is appropriate, as the value of original shares is proportionately affected by the issuance of bonus shares. Therefore, the bonus shares received by the assessee were considered foreign exchange assets and eligible for benefits under section 115F.

In conclusion, the tribunal allowed the appeal of the assessee, emphasizing that the bonus shares acquired by investing in convertible foreign exchange were covered under section 115C(b) of the Act and eligible for benefits under section 115F. The tribunal's decision aligned with legal precedents and the interdependence of original and bonus shares in determining the value of the asset.

---