My NRI client subscribed to shares of an Indian company in convertible foreign exchange, later received bonus shares on them, and has now sold only the bonus shares. The assessing officer says bonus shares were not acquired with foreign exchange, so they are not a foreign exchange asset and the concessional rate under section 115E is not available. Is he right?
No, on this Tribunal's reasoning. It held that there can be no differentiation between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, and that bonus shares issued on original shares acquired in convertible foreign exchange are covered by section 115C(b) — so the long-term capital gain on selling the bonus shares takes the concessional rate under section 115E. The orders of the lower authorities were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate.
Decided by the ITAT (Shri Abraham P. George, Accountant Member and Shri Vikas Awasthy, Judicial Member (order per Abraham P. George, A.M.), Income Tax Appellate Tribunal, 'D' Bench, Chennai) on 2012-02-28, reported as I.T.A. Nos. 170/Mds/2012 and 171/Mds/2012; Assessment Year 2008-09; date of hearing and date of pronouncement both 28 February 2012; cited in a later Tribunal order as 20 taxmann.com 660 (Chennai). It bears on section 115C, section 115C(b), section 115C(f), section 115E, section 115F, section 112, section 45, section 55 of the Income Tax Act 1961, in Capital Gains, Residence & Treaty Benefit, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the point at which the convertible-foreign-exchange condition in section 115C(b) is most often argued to fail, because on the face of it no foreign exchange was ever paid for a bonus share. The route through the difficulty is the averaging-out principle: once bonus shares are issued the cost of the original shares is spread over the original and the bonus shares together and the value of the original shares is proportionately diminished, so the bonus shares cannot be treated as acquired in isolation from the original acquisition. That reasoning was worked out by the ITAT Mumbai in Sanjay Gala v. ITO in the context of section 115F, and the Chennai Bench here carried it across to section 115E on the ground that both sections sit in Chapter XII-A and use the same definition. Two cautions. The Revenue's counter-argument — that since clause (iii)(a) was inserted in section 55(2)(aa) bonus shares have no cost of acquisition at all — is not addressed anywhere in this order, but it has since been answered against the Revenue by a coordinate Bench: in Sri Shashi Parvatha Reddy v. DCIT-2 (International Taxation), Hyderabad, I.T.A. No. 392/Hyd/2017, assessment year 2012-13, the ITAT Hyderabad 'A' Bench held on 31 October 2017, following this order and Sanjay Gala, 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 nil cost goes to the computation of the gain, not to the character of the asset. That is a second Tribunal Bench and not a High Court, so the point remains untested on appeal. And the concessional long-term capital gains rate itself has moved: this order applies the ten per cent in section 115E(ii) as it then stood, and for a transfer on or after 23 July 2024 the rate is twelve and one-half per cent.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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Two non-resident assessees, Smt. Deivanayagam Maruthini and Shri Eassuwaran Deivanayagam, filed returns for AY 2008-09 declaring income of Rs 2,05,93,100 and Rs 1,05,00,000 respectively, the source being capital gains on the sale of shares of M/s Breeze Hotels Ltd. They computed tax on those gains at the concessional rate in section 115E. The Assessing Officer found that the gains arose on the sale of 14,06,090 shares in the first case and 7,00,000 shares in the second, that the investments originally made in the company were under the OCB Scheme of the Government of India on a non-repatriation basis, and that the shares actually sold were BONUS shares received from the company. He held that section 115E applies only to a foreign exchange asset as defined in section 115C and that bonus shares could not be so considered, rejected the contention that the definition applied equally to bonus shares because the original shares had been acquired in convertible foreign currency, and applied a 20 per cent rate on the capital gains under section 112. The Commissioner of Income Tax (Appeals)-IV, Chennai confirmed that by a consolidated order dated 1 December 2011, distinguishing the ITAT Mumbai decision in Sanjay Gala v. ITO as a section 115F case, holding that the assessees had sold only bonus shares, and reasoning that the legislative intention of a concessional rate was to encourage investment in convertible foreign exchange and would not be served if the shares sold were bonus shares.
The appeals of both assessees were allowed. There can be no differentiation whatsoever between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, since both sections fall under Chapter XII-A, so the assessees could not be deprived of the concessional rate under section 115E merely because the shares sold were bonus shares. Bonus shares issued on original shares acquired using convertible foreign exchange are covered by section 115C(b) and are a foreign exchange asset, and the long-term capital gain on their transfer was eligible for the concessional rate specified in section 115E. The orders of the authorities below were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate (paragraphs 7 and 8).
The Tribunal framed the question as whether the concessional rate in section 115E could be applied to long-term capital gains on the sale of bonus shares where the bonus shares resulted from original investments in shares made out of convertible foreign exchange, and reproduced section 115E in full at the end of paragraph 6 and section 115F in full within paragraph 7. Reading clause (b) of section 115E with clause (ii) of the charging part, it held that income by way of long-term capital gains is taxed at the lower rate, and that since clause (a) deals with income from investment of an asset other than a specified asset, the long-term capital gains in clause (b) relate by implication only to gains arising on the sale of a specified asset; a conjoint reading of sections 115E and 115F showed that both relate to income arising out of the transfer of a foreign exchange asset (paragraph 7). The same question, in the context of a section 115F claim, had been decided by the Mumbai Bench in Sanjay Gala v. ITO, whose reasoning the Chennai Bench reproduced and adopted: the assessee having subscribed to the original shares in convertible foreign exchange, the bonus shares could not be said to be acquired in isolation without taking the original shares into account, because on the issue of bonus shares the cost of acquisition of the original shares is spread over both and the value of the original shares is proportionately diminished, so that the averaging-out formula applies to all the shares. Since the definition of 'foreign exchange asset' is common to the two sections, the Chennai Bench held that the coordinate Bench had rightly relied on the Supreme Court decision in CIT v. Dalmia Investment Co. Ltd. in holding bonus shares covered by section 115C(b), and that the authorities below had erred in applying a higher rate of tax than the law warranted (paragraph 7).
In our opinion, there can be no differentiation whatsoever between definition of "foreign exchange asset" as applied to Section 115E and 115F since both the sections fall under Chapter XII-A of the Act.
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Handle my notice → Ask a CA on WhatsAppNo, on this Tribunal's reasoning. It held that there can be no differentiation between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, and that bonus shares issued on original shares acquired in convertible foreign exchange are covered by section 115C(b) — so the long-term capital gain on selling the bonus shares takes the concessional rate under section 115E. The orders of the lower authorities were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate. This was decided by the ITAT (Shri Abraham P. George, Accountant Member and Shri Vikas Awasthy, Judicial Member (order per Abraham P. George, A.M.), Income Tax Appellate Tribunal, 'D' Bench, Chennai) and bears on section 115C, section 115C(b), section 115C(f), section 115E, section 115F, section 112, section 45, section 55 of the Income Tax Act 1961. It is reported as I.T.A. Nos. 170/Mds/2012 and 171/Mds/2012; Assessment Year 2008-09; date of hearing and date of pronouncement both 28 February 2012; cited in a later Tribunal order as 20 taxmann.com 660 (Chennai). This is the point at which the convertible-foreign-exchange condition in section 115C(b) is most often argued to fail, because on the face of it no foreign exchange was ever paid for a bonus share. The route through the difficulty is the averaging-out principle: once bonus shares are issued the cost of the original shares is spread over the original and the bonus shares together and the value of the original shares is proportionately diminished, so the bonus shares cannot be treated as acquired in isolation from the original acquisition. That reasoning was worked out by the ITAT Mumbai in Sanjay Gala v. ITO in the context of section 115F, and the Chennai Bench here carried it across to section 115E on the ground that both sections sit in Chapter XII-A and use the same definition. Two cautions. The Revenue's counter-argument — that since clause (iii)(a) was inserted in section 55(2)(aa) bonus shares have no cost of acquisition at all — is not addressed anywhere in this order, but it has since been answered against the Revenue by a coordinate Bench: in Sri Shashi Parvatha Reddy v. DCIT-2 (International Taxation), Hyderabad, I.T.A. No. 392/Hyd/2017, assessment year 2012-13, the ITAT Hyderabad 'A' Bench held on 31 October 2017, following this order and Sanjay Gala, 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 nil cost goes to the computation of the gain, not to the character of the asset. That is a second Tribunal Bench and not a High Court, so the point remains untested on appeal. And the concessional long-term capital gains rate itself has moved: this order applies the ten per cent in section 115E(ii) as it then stood, and for a transfer on or after 23 July 2024 the rate is twelve and one-half per cent. If it applies to you, the first step is this: Prove the ORIGINAL acquisition in convertible foreign exchange first — remittance advice, FIRC, bank certificate. The bonus-share argument is parasitic on that proof and collapses without it.
Two non-resident assessees, Smt. Deivanayagam Maruthini and Shri Eassuwaran Deivanayagam, filed returns for AY 2008-09 declaring income of Rs 2,05,93,100 and Rs 1,05,00,000 respectively, the source being capital gains on the sale of shares of M/s Breeze Hotels Ltd. They computed tax on those gains at the concessional rate in section 115E. The Assessing Officer found that the gains arose on the sale of 14,06,090 shares in the first case and 7,00,000 shares in the second, that the investments originally made in the company were under the OCB Scheme of the Government of India on a non-repatriation basis, and that the shares actually sold were BONUS shares received from the company. He held that section 115E applies only to a foreign exchange asset as defined in section 115C and that bonus shares could not be so considered, rejected the contention that the definition applied equally to bonus shares because the original shares had been acquired in convertible foreign currency, and applied a 20 per cent rate on the capital gains under section 112. The Commissioner of Income Tax (Appeals)-IV, Chennai confirmed that by a consolidated order dated 1 December 2011, distinguishing the ITAT Mumbai decision in Sanjay Gala v. ITO as a section 115F case, holding that the assessees had sold only bonus shares, and reasoning that the legislative intention of a concessional rate was to encourage investment in convertible foreign exchange and would not be served if the shares sold were bonus shares. The matter was decided on 2012-02-28 by the ITAT (Shri Abraham P. George, Accountant Member and Shri Vikas Awasthy, Judicial Member (order per Abraham P. George, A.M.), Income Tax Appellate Tribunal, 'D' Bench, Chennai). On those facts the ITAT held as follows. The appeals of both assessees were allowed. There can be no differentiation whatsoever between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, since both sections fall under Chapter XII-A, so the assessees could not be deprived of the concessional rate under section 115E merely because the shares sold were bonus shares. Bonus shares issued on original shares acquired using convertible foreign exchange are covered by section 115C(b) and are a foreign exchange asset, and the long-term capital gain on their transfer was eligible for the concessional rate specified in section 115E. The orders of the authorities below were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate (paragraphs 7 and 8).
The Tribunal framed the question as whether the concessional rate in section 115E could be applied to long-term capital gains on the sale of bonus shares where the bonus shares resulted from original investments in shares made out of convertible foreign exchange, and reproduced section 115E in full at the end of paragraph 6 and section 115F in full within paragraph 7. Reading clause (b) of section 115E with clause (ii) of the charging part, it held that income by way of long-term capital gains is taxed at the lower rate, and that since clause (a) deals with income from investment of an asset other than a specified asset, the long-term capital gains in clause (b) relate by implication only to gains arising on the sale of a specified asset; a conjoint reading of sections 115E and 115F showed that both relate to income arising out of the transfer of a foreign exchange asset (paragraph 7). The same question, in the context of a section 115F claim, had been decided by the Mumbai Bench in Sanjay Gala v. ITO, whose reasoning the Chennai Bench reproduced and adopted: the assessee having subscribed to the original shares in convertible foreign exchange, the bonus shares could not be said to be acquired in isolation without taking the original shares into account, because on the issue of bonus shares the cost of acquisition of the original shares is spread over both and the value of the original shares is proportionately diminished, so that the averaging-out formula applies to all the shares. Since the definition of 'foreign exchange asset' is common to the two sections, the Chennai Bench held that the coordinate Bench had rightly relied on the Supreme Court decision in CIT v. Dalmia Investment Co. Ltd. in holding bonus shares covered by section 115C(b), and that the authorities below had erred in applying a higher rate of tax than the law warranted (paragraph 7). In the words reproduced by the source cited on this page: "In our opinion, there can be no differentiation whatsoever between definition of "foreign exchange asset" as applied to Section 115E and 115F since both the sections fall under Chapter XII-A of the Act." The decision followed or applied Sanjay Gala v. ITO (2011) 46 SOT 482 (ITAT Mumbai) — reasoning reproduced and adopted; CIT v. Dalmia Investment Co. Ltd. (52 ITR 567) (SC) — relied on as applied by the coordinate Bench, for the averaging-out of the cost of bonus and original shares; Sri Shashi Parvatha Reddy v. DCIT-2 (International Taxation), I.T.A. No. 392/Hyd/2017 (ITAT Hyderabad, 31 October 2017) — later coordinate Bench following this order.
It was decided by the ITAT on 2012-02-28 and is reported as I.T.A. Nos. 170/Mds/2012 and 171/Mds/2012; Assessment Year 2008-09; date of hearing and date of pronouncement both 28 February 2012; cited in a later Tribunal order as 20 taxmann.com 660 (Chennai). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 115C, section 115C(b), section 115C(f), section 115E, section 115F, section 112, section 45, section 55, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals of both assessees were allowed. There can be no differentiation whatsoever between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, since both sections fall under Chapter XII-A, so the assessees could not be deprived of the concessional rate under section 115E merely because the shares sold were bonus shares. Bonus shares issued on original shares acquired using convertible foreign exchange are covered by section 115C(b) and are a foreign exchange asset, and the long-term capital gain on their transfer was eligible for the concessional rate specified in section 115E. The orders of the authorities below were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate (paragraphs 7 and 8). It arises in Capital Gains, Residence & Treaty Benefit, Capital Gains Exemptions and How Tax Law Is Read matters, on section 115C, section 115C(b), section 115C(f), section 115E, section 115F, section 112, section 45, section 55 of the Income Tax Act 1961, and was decided by Shri Abraham P. George, Accountant Member and Shri Vikas Awasthy, Judicial Member (order per Abraham P. George, A.M.), Income Tax Appellate Tribunal, 'D' Bench, Chennai. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Run the argument in the order the Tribunal ran it: section 115C(b) defines the foreign exchange asset; section 115C(f)(i) makes shares in an Indian company a specified asset; the definition is common to sections 115E and 115F; therefore the bonus shares carry the character of the original shares. Cite Sanjay Gala v. ITO for the averaging-out reasoning, but cite it as a coordinate-bench decision reproduced in this order rather than as something you have read separately, unless you have retrieved the order itself. Be ready for the section 55 'no cost of acquisition for bonus shares' point. It is not answered anywhere in this order, but it is answered in Sri Shashi Parvatha Reddy v. DCIT-2 (International Taxation), I.T.A. No. 392/Hyd/2017 (ITAT Hyderabad 'A' Bench, 31 October 2017): the nil cost under section 55(2)(aa) affects the computation of the gain, not whether the bonus share is a foreign exchange asset. Cite that order alongside this one. Fix the rate by the date of transfer, not by this order: section 115E(ii) charges ten per cent only for a transfer before 23 July 2024 and twelve and one-half per cent on or after it. Note that the investments here were made under the OCB Scheme on a non-repatriation basis and that nobody argued that non-repatriability defeats section 115C(b). If your officer takes that point, this order is no answer to it.
Validity check could not be completed. The Revenue appealed this order to the Madras High Court in Tax Case Appeal Nos. 348 and 349 of 2014, and by order dated 9 October 2018 (T.S. Sivagnanam and V. Bhavani Subbaroyan JJ), read in full this pass at indiankanoon.org/doc/55452982/, the appeals were 'dismissed as withdrawn and the substantial question of law framed is left open', the Revenue having sought to withdraw them on account of low tax effect in terms of CBDT Circular No. 3 of 2018 dated 11 July 2018, with liberty to the Revenue to apply for restoration if the tax effect in either case is above the threshold. The Tribunal's construction has therefore never been tested on the merits by a High Court and the question of law is expressly open — which is why this is labelled unverified rather than good law. The reasoning has since been FOLLOWED on the merits. In Sri Shashi Parvatha Reddy v. DCIT-2 (International Taxation), Hyderabad, I.T.A. No. 392/Hyd/2017, assessment year 2012-13, the ITAT Hyderabad 'A' Bench (P. Madhavi Devi, Judicial Member and S. Rifaur Rahman, Accountant Member) held on 31 October 2017, at its paragraphs 9 and 10, that 'The Coordinate Bench of this Tribunal in the case of Sajnay Gala and Smt. Deivanayagam Maruthi (cited Supra) also followed the above decision to hold that the bonus shares issued on original shares by investing convertible foreign exchange are also foreign exchange asset u/s 115E of the Act', 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', and that the shares 'fall within the definition of foreign exchange asset u/s 115E(b) of the Act and the assessee is eligible for a concessional rate of 10% u/s 115E of the Act'; the appeal was allowed. That order was read in full at indiankanoon.org/doc/147021232/ and disposes of the section 55 argument, which had earlier been recorded but not decided at the stay stage in the same assessee's Stay Application No. 38/Hyd/2017, order dated 10 March 2017 (indiankanoon.org/doc/121701202/). Separately, the rate this order applies is superseded prospectively: section 115E(ii) now charges twelve and one-half per cent on a long-term capital gain where the transfer takes place on or after 23 July 2024. No decision doubting or dissenting from the construction was located, but no systematic later-treatment search was run beyond the indiankanoon queries recorded in NOTES-B84.md. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order was read in full from the plain document URL https://indiankanoon.org/doc/196208496/ and the operative sentence was then re-fetched independently through https://indiankanoon.org/docfragment/196208496/?formInput=%22there%20can%20be%20no%20differentiation%20whatsoever%20between%20definition%20of%22, which returned the same sentence in the same words. PARAGRAPH STRUCTURE, established by transcribing the whole document and not by asking about it: the order opens with 'O R D E R / PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :' and then runs as numbered paragraphs 1, 2, 3, 4, 5, 6, 7 and 8, paragraph 1 beginning 'These are appeals filed by different assessees which are directed against a consolidated order dated 1.12.2011 of Commissioner of Income Tax (Appeals)-IV, Chennai', and paragraph 8 reading 'In the result, appeals of both the assessees are allowed.' before the signature block. There is nothing after paragraph 8. (A verification pass re-transcribed the entire order from the same plain document URL and found paragraph 1 printed; an earlier reading had recorded the opening paragraph as unnumbered. Nothing in this entry cites paragraph 1, so the discrepancy is recorded rather than relied on.) THIS MATTERS: within its own paragraph 7 the order reproduces paragraphs 9 and 10 of the ITAT Mumbai order in Sanjay Gala v. ITO. Those two paragraph numbers belong to Sanjay Gala and not to this order, and citing 'paragraph 9' or 'paragraph 10' of this order would be a fabricated locator. Everything attributed to the Tribunal in this entry is taken from the Chennai Bench's own words in paragraphs 6, 7 and 8. Sanjay Gala v. ITO is cited in the order as '(2011) 46 SOT 482' and in Sashi Parvatha Reddi as '12 taxmann.com 311 (Mum)'; those are neutral citation strings printed inside judgments and no headnote or commentary was used. The order itself was NOT retrievable on indiankanoon under any of the title or phrase searches run this pass, so its reasoning is known to me only as reproduced here. Two transcription oddities in the source: paragraph 2 calls the statute 'Income-tax Act, 1962' (a typographical error for 1961), and the reproduced Sanjay Gala paragraph 9 prints 'the nous shares' for 'the bonus shares'. The order also records at paragraph 2 that the original investments were made under the OCB Scheme of the Government of India on a non-repatriation basis; no party argued and the Tribunal did not decide whether non-repatriability affects section 115C(b). The Supreme Court decision on bonus-share cost referred to at paragraph 7 is given as 'CIT v. Dalmia Investment Co. Ltd. (52 ITR 567)'; I did not retrieve that judgment this pass. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals of both assessees were allowed. There can be no differentiation whatsoever between the definition of 'foreign exchange asset' as applied to section 115E and as applied to section 115F, since both sections fall under Chapter XII-A, so the assessees could not be deprived of the concessional rate under section 115E merely because the shares sold were bonus shares. Bonus shares issued on original shares acquired using convertible foreign exchange are covered by section 115C(b) and are a foreign exchange asset, and the long-term capital gain on their transfer was eligible for the concessional rate specified in section 115E. The orders of the authorities below were set aside and the Assessing Officer was directed to give the assessees the benefit of the concessional rate (paragraphs 7 and 8).
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