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 ... Whether lower rate of tax u/s 115E will be applicable to long term capital gains on sale of bonus shares where such bonus shares resulted out of original investments of shares made out of convertible foreign exchange - Held that: A conjoint reading of Section 115E and 115F clearly show that long term capital gains mentioned in clause (b) of Section 115E and investment made out of sale consideration received on transfer of foreign exchange asset mentioned in Section 115F, both relate to income arising out of transfer of foreign exchange asset - In the case of Sanjay Gala v. ITO [2011 - TMI - 205129 - ITAT, MUMBAI - Income Tax] - 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 - assessees cannot be deprived of the concessional rate available under Section 115E of the Act just because the sale of shares were bonus shares - Appeals are allowed 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.