2012 (4) TMI 461 - AT - Income Tax

Bonus shares from convertible foreign exchange qualify for concessional tax rate

The Tribunal allowed the appeals of the assessees, directing the Assessing Officer to grant them the benefit of the concessional rate under Section 115E ... Application of concessional rate under Chapter XII-A - foreign exchange asset - treatment of bonus shares as part of original shares for cost allocation - application of Section 115E to long-term capital gains on bonus shares - concordance between Sections 115E and 115FApplication of Section 115E to long-term capital gains on bonus shares - foreign exchange asset - treatment of bonus shares as part of original shares for cost allocation - Whether the concessional rate prescribed in Section 115E of the Income-tax Act applies to long-term capital gains arising from transfer of bonus shares when the original shares were acquired using convertible foreign exchange. - HELD THAT: - Section 115E(b) prescribes a concessional rate for income by way of long-term capital gains arising out of transfer of specified assets which, read with the definition of 'foreign exchange asset' in Section 115C(b), refers to specified assets acquired with convertible foreign exchange. A conjoint reading of Sections 115E and 115F shows both provisions relate to income arising from transfer of foreign exchange assets under Chapter XII-A. Judicial precedent establishes that on issuance of bonus shares the cost of acquisition of the original shares is to be apportioned between original and bonus shares (averaging/spreading method), so bonus shares cannot be treated in isolation from the original shares for purposes of determining whether they are foreign exchange assets. The Tribunal relied on the Mumbai-Bench decision in Sanjay Gala v. ITO which applied this principle under Section 115F, and on higher authority in CIT v. Dalmia Investment Co. Ltd. for the proposition that bonus shares are covered by the definition of foreign exchange asset where the original shares were acquired in convertible foreign exchange. Applying these principles, bonus shares issued on original shares purchased with convertible foreign exchange qualify as 'foreign exchange asset' and hence long-term capital gains on their transfer fall within clause (b) of Section 115E and are taxable at the concessional rate specified therein. The authorities below erred in applying the higher rate under Section 112 on the ground that the shares sold were bonus shares. [Paras 7, 8]Concessional rate under clause (b) of Section 115E applies to long-term capital gains on transfer of bonus shares which arose from original shares acquired with convertible foreign exchange; orders of the lower authorities set aside and A.O. directed to give benefit of the concessional rate.Final Conclusion: Appeals allowed; long-term capital gains on sale of bonus shares, where original shares were acquired in convertible foreign exchange, qualify as arising from a 'foreign exchange asset' and are taxable at the concessional rate under Section 115E; lower authorities' orders set aside and A.O. directed to apply the concessional rate. Issues:Application of concessional rate under Section 115E to long term capital gains on sale of bonus shares acquired using convertible foreign exchange.Analysis:The appeals involved the question of whether the concessional rate specified in Section 115E of the Income-tax Act could be applied to long term capital gains arising from the sale of bonus shares acquired using convertible foreign exchange. The assessees, non-residents, had declared income from capital gains on the sale of shares of a company and had computed tax based on the concessional rate under Section 115E. However, the Assessing Officer (A.O.) applied a higher tax rate on the capital gains, contending that the concessional rate did not apply to bonus shares. The assessees argued that bonus shares should be treated similarly to original shares acquired with convertible foreign exchange, making them eligible for the concessional rate.Upon appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], the argument was rejected, emphasizing that the legislative intent behind the concessional rate was to encourage investments in convertible foreign exchange, which would not be fulfilled if bonus shares were included. The assessees then approached the Appellate Tribunal, asserting that both original and bonus shares should be considered foreign exchange assets under Section 115E. They relied on a decision by the Mumbai Bench of the Tribunal, which held that bonus shares acquired with convertible foreign exchange were eligible for benefits under Section 115F.The Tribunal analyzed Sections 115E and 115F of the Act, noting that both dealt with income arising from the transfer of foreign exchange assets. Referring to the Mumbai Bench decision, the Tribunal concluded that bonus shares acquired with convertible foreign exchange were covered under the definition of 'foreign exchange asset.' The Tribunal emphasized that there should be no differentiation in applying the definition of foreign exchange asset between Sections 115E and 115F, both falling under Chapter XII-A of the Act. Therefore, the assessees were entitled to the concessional rate under Section 115E for the long term capital gains on the sale of bonus shares.In light of the above analysis, the Tribunal allowed the appeals of the assessees, setting aside the orders of the lower authorities and directing the Assessing Officer to grant the assessees the benefit of the concessional rate under Section 115E for the computation of capital gains tax on the sale of bonus shares acquired using convertible foreign exchange.