Bonus shares retain foreign exchange asset character, enabling concessional long-term capital gains tax under Chapter XII-A.

Bonus shares issued on shares originally acquired with convertible foreign exchange were treated as retaining the character of a foreign exchange asset under Chapter XII-A. The Tribunal read sections 115C, 115E and 115F together and held that there was no material distinction in applying the definition of foreign exchange asset across those provisions. Because the original shares were purchased with convertible foreign exchange, the bonus shares could not be viewed in isolation; the cost of acquisition was spread over the original and bonus shares. The long-term capital gains on transfer of the bonus shares therefore qualified for the concessional tax rate under section 115E.

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Issues: Whether bonus shares received on shares originally acquired with convertible foreign exchange constitute a foreign exchange asset for the purpose of concessional taxation under section 115E, and whether the long-term capital gains arising from their transfer are eligible for the lower rate of tax.

Analysis: Section 115E applies to long-term capital gains arising from transfer of a specified asset, and its scheme must be read with section 115C defining a foreign exchange asset as a specified asset acquired with convertible foreign exchange. The Tribunal held that there was no legal distinction between the application of this definition under sections 115E and 115F, since both provisions form part of Chapter XII-A. The original shares had been acquired with convertible foreign exchange, and the bonus shares issued in relation to those shares could not be treated in isolation. The cost of the original shares stands spread over both the original and bonus shares, and the bonus shares retain the character of the underlying foreign exchange asset for purposes of the special regime.

Conclusion: The bonus shares were treated as foreign exchange assets, and the assessees were entitled to the concessional rate of tax under section 115E on the long-term capital gains from their sale.

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