2017 (11) TMI 190 - AT - Income Tax

Eligibility to benefit of rate concession u/s 115E - Tax on investment income and long-term capital gains - bonus shares treatment as foreign exchange assets - Held that - The bonus shares acquire the nature of the original shares, though the cost of acquisition shall be nil u/s 55(2)(aa) of the I.T. Act. The clause (iii)(a) thereunder which has been inserted by the Finance Act of 1995 to clarify that where the bonus shares have been allotted, the cost of acquisition can be taken at Rs. Nil. From the computation of income of the assessee, it is seen that the assessee has not claimed any cost of acquisition while computing the long term capital gain from sale of bonus shares. Therefore, in our opinion, the bonus shares are also foreign exchange assets u/s 115E of the I.T. Act. Coming to the second category of shares i.e. the original and the bonus shares transferred to the assessee by the overseas investors without any cost attached to them, we find that the original shares were initially purchased or acquired by the overseas investors by way of inward remittances of foreign exchange and they were also allotted the bonus shares on the original shares. As held by us in the above paragraphs, the bonus shares acquire the character of the original shares acquired by the overseas investors. Coming to their transfer to the assessee, the AO has accepted the assets as long term capital assets by taking into consideration the period of holding of the overseas investors also. Having done so, it is not open to the AO to treat the said asset as acquired without any cost by the assessee. Since the assessee has received the asset without any cost, it has to be treated as a gift and the cost of acquisition of the previous owner has to be treated as a cost of acquisition to the assessee. In view of the same, the original shares acquired by the assessee from the overseas investors are also foreign exchange assets u/s 115E of the Act and the cost of acquisition of the earlier owners has to be allowed as cost of acquisition of the assessee while computing the long term capital gain. Thus the shares sold by the assessee have been treated as long term capital assets and being the assets acquired by way of foreign exchange fall within the definition of foreign exchange asset u/s 115 E(b) of the Act and the assessee is eligible for a concessional rate of 10% u/s 115E of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Qualification of bonus shares and shares received from overseas investors as "foreign exchange assets" under Section 115C of the Act.
2. Computation of Long Term Capital Gains (LTCG) under Section 112 at 20% for such shares.
3. Deduction for the cost of acquisition of shares originally bought by the overseas investors.
4. Allegation of tax evasion through the issuance of bonus shares.
5. Imputation of interest under Section 234B.
6. Initiation of penalty proceedings under Section 274 read with Section 271.

Detailed Analysis:

1. Qualification of Bonus Shares and Shares Received from Overseas Investors as "Foreign Exchange Assets":
The primary issue was whether the bonus shares and shares received from overseas investors qualify as "foreign exchange assets" under Section 115C of the Act. The AO contended that the shares sold by the assessee were not purchased in foreign currency, thus disqualifying them from concessional tax rates under Section 115E. However, the assessee argued that the original shares were purchased using convertible foreign exchange and that bonus shares should inherit the nature of the original shares. The Tribunal upheld the assessee's view, citing the Supreme Court's decision in CIT vs. Dalmiya Investment Co. Ltd, which states that the cost of acquisition of bonus shares should be apportioned with the original shares. Consequently, the bonus shares were considered foreign exchange assets.

2. Computation of LTCG under Section 112 at 20%:
The AO computed LTCG at 20%, arguing that the shares sold were not acquired using foreign exchange. The Tribunal, however, determined that since the original shares were acquired using foreign exchange, and the bonus shares derived their nature from these original shares, the concessional rate of 10% under Section 115E was applicable. The Tribunal also noted that the assessee did not claim any cost of acquisition for the bonus shares, aligning with Section 55(2)(aa) of the Act, which states that the cost of bonus shares should be considered nil.

3. Deduction for the Cost of Acquisition of Shares Originally Bought by Overseas Investors:
The assessee contended that the shares transferred by overseas investors should carry the cost of acquisition of the original investors. The Tribunal agreed, citing the Bombay High Court's decision in CIT vs. Manjula J. Shah, which allows for the cost of acquisition of the previous owner to be considered in the hands of the current owner. Thus, the Tribunal held that the original shares acquired by overseas investors and transferred to the assessee without cost should be treated as foreign exchange assets, and the cost of acquisition of the previous owner should be allowed.

4. Allegation of Tax Evasion through the Issuance of Bonus Shares:
The AO alleged that the issuance of bonus shares was a manipulation to evade tax, given that the management of the company was in the hands of the assessee and his family. The Tribunal found no evidence supporting this claim and noted that the CIT (A) did not address the assessee's arguments regarding the transfer of shares by overseas investors due to non-fulfillment of certain conditions. The Tribunal concluded that the shares sold were long-term capital assets acquired through foreign exchange, qualifying for the concessional tax rate under Section 115E.

5. Imputation of Interest under Section 234B:
The Tribunal's decision did not specifically address the imputation of interest under Section 234B. However, given the favorable ruling on the primary issues, it can be inferred that the imputation of interest would be reconsidered in light of the revised tax computation.

6. Initiation of Penalty Proceedings under Section 274 read with Section 271:
Similarly, the Tribunal did not explicitly discuss the initiation of penalty proceedings under Section 274 read with Section 271. The favorable outcome on the main issues likely impacts the basis for any penalty proceedings, potentially negating the grounds for such actions.

Conclusion:
The Tribunal ruled in favor of the assessee, allowing the appeal and confirming that the bonus shares and shares received from overseas investors qualify as foreign exchange assets under Section 115C, thereby eligible for the concessional tax rate of 10% under Section 115E. The Tribunal also supported the assessee's stance on the cost of acquisition for shares transferred by overseas investors, aligning with judicial precedents. The order was pronounced in the Open Court on 31st October 2017.