2011 (7) TMI 153 - AT - Income Tax

Disallowed - Assessment u/s 143(3) - Bonus shares treated as foreign exchange assets - Benifit u/s 115F - Hence, 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 - 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 - Hence, the bonus shares acquired by the assessee are covered by section 115C(b) of the Act, and the same are eligible for benefit under section 115F of the Act - Decided in favour of assessee.

Summary

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.