TMI Blog2017 (11) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... seas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CASS and a notice u/s 143(2) was served on the assessee on 9.8.2013. In response to the said notice, the assessee was represented by his C.A who filed necessary details. 3. On perusal of the return of income and the computation statement of the assessee for the A.Y 2012-13, the AO observed that the assessee has offered the LTCG of ₹ 55,59,33,503 to tax @ 10% instead of normal rate (20%). The assessee was therefore, asked to explain as to why the assessee has paid tax@10% only. The assessee submitted that the shares of M/s. Applabs Technologies Private Ltd were bought with the convertible foreign exchange and hence they were foreign exchange assets and therefore, the assessee is eligible for the concessional rate of 10% as per section 115E of the I.T. Act. In order to verify the eligibility of the concessional rate u/s 115E of the Act, the AO asked the assessee to furnish the details of acquisition and the movement of shares from the inception till the date of sale of the shares. In response to the same, the assessee filed the table showing the movement of shares from the date of incorporation of M/s. Applabs Technologies Private Ltd. The AO observed that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares to his grandson and daughter-in-law, who thereafter sold their shares to CSE India and have claimed benefit u/s 115E of the Act thereby defeating the purpose of giving concession to NRI s, which is, to encourage investments in convertible foreign exchange. Thus, he was of the opinion that the assessee is not eligible for the concessional rate of tax and brought the LTCG to tax @ 20%. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us. 5. The ld Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, submitted that the assessee had originally acquired 13,02,583 shares of M/s. AppLabs Technologies Private Ltd in the financial year 2001-02 through foreign inward remittances, while 2,32,773 shares of M/s. AppLabs India were subscribed by overseas investors subject to certain performance criteria through foreign inward remittances. It is submitted that since the overseas investors were unable to meet the performance criteria, the shares subscribed and owned by them were all transferred to the assessee without any consideration. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Gala (Supra) wherein it was held that where the assessee has acquired the original shares by investing in convertible foreign exchange, it cannot be said that the bonus shares are acquired in isolation without taking into consideration the original shares acquired by the assessee and that on issuance of bonus shares, the value of the original share has proportionately diminished and therefore, the cost of acquisition is to be split up between the original shares and the bonus shares and averaging out formula has to be followed with regard to all the shares and in view of this proposition bonus shares are also eligible for benefit u/s 115E of the Act. 7. As regards the original shares which were acquired by the overseas investors through foreign inward remittances and the bonus shares thereon transferred to the assessee without any consideration due to the non-fulfilment of certain conditions, the learned Counsel for the assessee submitted that the assessee has stepped into the shoes of the earlier owners of the shares i.e. the overseas investors on transfer of shares and therefore, the nature of the shares in their hands and also the cost of acquisition of original shares of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gains arising therefrom. The dispute is only with regard to the rate of tax on such capital gains. To decide this issue, we have to first adjudicate whether the bonus shares can also be considered as foreign exchange asset. In order to get the benefit of rate concession u/s 115E of the Act, the asset will have to fall under the definition of foreign exchange asset which means that the asset should have been purchased or acquired by way of inward remittance of foreign exchange. The assessee could not have acquired the bonus shares unless and until he owns the original shares and fulfills the conditions for allotment of bonus shares. The original shares definitely have a cost of acquisition in foreign exchange. The Hon'ble Supreme Court in the case of CIT vs. Dalmiya Investment Co,Ltd (Supra) has considered the issue as to whether the bonus shares can be said to have been acquired without any consideration. After considering the judicial precedents and various aspects of the bonus shares, the Hon'ble Supreme Court has held as under: Where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is a dealer in shares, their real cost to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. 10. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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