We all know that cost of Bonus shares is “NIL” as per Sec. 55(2)(aa)(iii) of the Act and in normal circumstances, the gain on transfer of Bonus shares shall be fully taxable in the hands of seller.
However, Income Tax Act  has a special provision under sec. 115F for NRI’s/PIO’s under which  any long-term capital gains arising from the transfer of a foreign exchange asset, which have been invested in a specified asset within a period of six months after the date of such transfer, then NO tax is payable by NRI’s/PIO’s on such transfer.
Mumbai ITAT in a recent ruling of Sanjay Gala [ITA No. 2989/Mum/2008] on 15/07/2011 deciphered the issue “whether the Bonus Shares shall constitute Foreign Exchange Asset if original shares were purchased in foreign exchange”? It held that even bonus shares allotted to NRI’s for original shares purchased in foreign exchange shall be entitled to exemption provided under Income Tax Act, 1961.
Let us refer to the provisions of section 115C(b) of the Act, which read as under:-
“foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;”.
Mumbai ITAT concluded :
10. On perusal of the above provision, 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. In so far as this aspect is concerned, there is no dispute from the revenue authorities. The only dispute is with regard to the bonus shares received by the asesssee. The objection of the revenue authorities is that the assessee has received the bonus shares without investing any convertible foreign exchange. We are of the view that the 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. The Hon’ble Supreme Court and various High courts have considered the issue with regard to value of the bonus shares and held that “the method of spreading over on both the bonus and the original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, 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”. In view of the above proposition, the bonus shares acquired by the assessee are covered by section 115C(b) of the Act, and the same are eligible for benefit u/s 115F of the Act. Accordingly, the ground raised by the assessee is allowed.
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Published by

CA. Anuj Gupta
(Practices in NRI, Int.Tax, FEMA, TP , FDI/FIPB & FCRA)
Category Income Tax   Report

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