Case Law Details
Sri Shashi Parvatha Reddy Vs DCIT (ITAT Hyderbad)
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. Further, with regards to the capital gain on the sale of bonus shares, our findings in the above paragraphs with regard to the bonus and shares acquired by the assessee hold good even for these shares.
Full Text of the ITAT Order is as follows:-
This is assessee’s appeal for the A.Y 2012-13 against the order of the CIT (A)-10 Hyderabad, dated 28.09.2016. The assessee has raised the following grounds of appeal:
“ Based on the facts and circumstances of the case and in law, the learned Assessing Officer (” AO”)/ Learned Commissioner of Income-Tax (Appeals) erred in:
1. Alleging that the capital gains pertaining on bonus shares and shares received from overseas investors do not qualify as “foreign exchange asset” under 115C of the Act.
2. Not appreciating the fact that the bonus shares are allotted only on account of the shares subscribed/ acquired by the Appellant and ignoring the judicial precedents in this regard.
3. Computing LTCG u/s 112 @ 20% in respect of bonus shares and shares received from overseas investors, which were acquired by them through foreign remittances.
4. Without prejudice, assuming without admitting that the shares received from overseas investors without making any payments, do not qualify as foreign exchange asset, the AO/CIT(A) ought to have allowed deduction for the cost of acquisition in the hands of the original buyer.
5. Alleging that the issue of bonus shares is a manipulation to evade tax.
6. Imputing interest u/s 234B of INR 2,10,27,420.
7. Initiating penalty proceedings u/s 274 r.w.s 271 of the Act.
The Appellant also submits that each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant”.
2. Brief facts of the case are that the assessee, an individual and an NRI, filed his return of income for the A.Y 201213 on 28.07.2012, admitting a total income of Rs.61,49,07,607 comprising of Long Term Capital Gain (LTCG) of Rs.55,59,33,503, income from other sources of Rs.5,81,76,495 and income from house property of Rs.7,97,609. The case was selected for scrutiny under 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 Rs.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 been allotted bonus shares against the original shares bought by him and that some other shares were given to him by overseas investors without any payment from him. He observed that by August 2007 which included both the original and bonus shares) the assessee had already sold all the original shares, which were bought by him in convertible foreign exchange and the shares which have been sold in September, 2011 are the bonus shares and the shares acquired by him free of cost from overseas investors. According to the AO, as per section 115E of the Act, to get the benefit of concessional rate u/s 115E of the Act, all the shares sold should have been bought by convertible foreign exchange only. Since none of the shares sold to CSE on 14.09.2011 have been purchased in foreign currency, he was of the opinion that the assessee is not eligible for concessional rate u/s 115E of the Act.
4. A show-cause notice was issued to the assessee, to which the assessee vide reply dated 23.03.2015, submitted his explanation and also relied upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Dalmiya Investment Co. Ltd, reported in 52 ITR 567, (S.C) and the decisions of the Tribunal in the cases of Sanjay Gala vs. ITO (I.T) reported in (2011) 12 Taxmann.com 311 (Mum), and Smt. Deivanayagam Maruthi vs. DCIT (I.T) (2012) 20 Taxmann.com 660 (Chennai). The AO however, was not convinced with the reply of the assessee and observed that in the case of Sanjaya Gala, the Tribunal at Mumbai relied upon the decision of the Hon’ble Supreme Court in the case of Dalmiya Investment Co. Ltd (Supra) but the facts of the case in the case of Sanjay Gala are distinguishable from the facts in the case of Dalmiya Investment Co. Ltd. He observed that the assessee has acquired the shares to the tune of 37,58,133 shares without investing any convertible foreign exchange and therefore, he is not entitled to the concessional rate u/s 115E of the Act. He also considered that M/s. AppLabs Technologies Private Ltd is an Indian company and the promoters of the company are only two persons i.e. the assessee and his father. He observed that the assessee was allotted bonus shares in order to avoid tax as the management of the company is in the hands of the assessee and his family only. He also observed that the assessee’s father, who is a resident of India, had transferred some of the 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. He submitted that AppLabs had issued bonus shares in the ratio of 1:9 to all of its shareholders and the shares transferred to the assessee by the overseas investors included both the original shares and the bonus shares allotted to them. It is submitted that in between the financial year 2001-02 and 2010-11, the assessee had gifted/transferred some of his holdings and as on 1.4.2011, he was holding 36,60,404 shares of AppLabs India comprising of the following:
a) 14,30,406 being bonus shares issued to him on the original shares bought by him.
b) 1,35,044 being original shares acquired by the overseas investors in convertible foreign exchange.
c) 20,94,954 being bonus shares issued on the original shares of overseas investors.
6. It is submitted that during the previous year 2011-12, the assessee had sold all the above 36,60,404 shares for a consideration of Rs.55.59 crores and offered LTCG @ 10% u/s 115E of the I.T. Act. Therefore, according to him, the findings of the AO that the assessee has acquired the shares without any consideration is incorrect. As regards the bonus shares of 14,30,406 shares, he submitted that as per the judgment of the Hon’ble Supreme Court in the case of CIT vs. Dalmiya Investment Co Ltd (Supra), the cost of acquisition of bonus shares, if they rank pari passu, with the existing shares, has to be apportioned amongst the original shares and the bonus shares equally. He submitted that this issue has also been clarified by the Finance Bill of 1995 reported in 212 ITR page 88 wherein clause iii(a) has been introduced to section 55(2)(aa) of the Act to provide that the cost of bonus shares will be taken as “Nil” for computation of capital gain on sale of bonus shares. The assessee also relied upon the budget speech of the Finance Minister explaining the reason for introduction of cl.(iii)(a) to section 55 of the Act wherein the Hon’ble Finance Minister stated that the calculation of capital gains on sale of bonus shares has led to several disputes, and in order to simplify the position and avoid disputes, he proposed that the cost of bonus shares for calculation shall be taken at “Nil”. He submitted that this amendment being clarificatory in nature, is applicable with retrospective effect. The learned Counsel for the assessee has also drawn our attention to the findings of the Tribunal in the case of Sanjay 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 those investors should be considered as cost of acquisition of the assessee in respect of such shares and therefore, it cannot be stated that these shares have been acquired without any cost to them. For this proposition, the learned Counsel for the assessee relied upon the decision of the Hon’ble Bombay High Court in the case of CIT vs. Manjula J. Shah (355 ITR 474) (Bom.) wherein it was held that, when for the purpose of section 48 r.w.s. 49(1), the holding of the previous owner was taken into consideration to determine whether the asset was a long-term capital asset or not, bearing in mind the scheme of the Act, it would be improper and absurd to give a literal interpretation to the words “held by the assessee” as suggested by the Revenue therein. The learned Counsel for the assessee further placed reliance upon the following decisions in support of the above contentions:
i) CIT vs. B.C.Srinivasa Setty 128 ITR 294 (S.C) para 814
ii) ACIT vs. K.S.Sheikh Mohideen 115 ITR 243 (Mad.) Para 10.
iii) CIT vs. Pushpraj Singh 232 ITR 754 (MP) Para-4
iv) CIT vs. Dhanraj Dugar 137 ITR 350 (Cal) Para 6
v) CIT vs. Manoharsinhji P Jadeja 281 ITR 19 (Guj.) Page 11 & 12.
vi) Bomi S Billimoria vs. ACIT 27 DTR 324 (Mum) Para 16
vii) Ajay C. Mehta vs. DCIT 114 ITD 628 (Ahd.)Para 8.
8. The learned DR, on the other hand, supported the orders of the authorities below.
9. Having regard to the rival contentions and the material on record, the undisputed facts are that the assessee has acquired the original shares from M/s. AppLabs Technologies Private Ltd by inward remittance of foreign exchange, while some other shares were acquired by overseas investors also by inward remittance of foreign exchange. It is also not in dispute that the Company, AppLabs Technologies Pvt Ltd had allotted bonus shares in the ratio of 1:9 to all the shareholders including the assessee and the overseas investors and that due to non fulfilment of certain conditions, the overseas investors had to transfer their shares along with the bonus shares to the assessee without any cost. It is also undisputed that the assessee has transferred maximum number of original shares to various parties over a period of six years and the assessee has sold the bonus shares and shares transferred by overseas investors during the relevant financial year and offered to tax the capital 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 the assessee cannot be taken to be Nil or their face value. They have to be valued by spreading the cost of the old shares over the old shares and the new issue (viz., the bonus shares) taken together if they rank pari passu, and if they do not, the price may have to be adjusted either is proportion of the face value they bear (if there is no other circumstance to differentiate them) or on equitable considerations based on the market price before and after issue. They have to be valued at the market value on the date when they were acquired
Can we then say that the bonus shares are a gift and are acquired for nothing? At first sight, it looks as if they are so, but the impact of the issue of bonus shares has to be seen to realise that there is an immediate detriment to the shareholder in respect of his original holding. The Income tax Officer, in this case, has shown that in 1945 when the price of shares became stable it was Rs. 9 per share, while the value of the shares before the issue of bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata, which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. coins. The total value remains the same, but the evidence of that value is not in one certificate but in two”
Thus, it is clear that where the original shares are purchased/acquired in foreign exchange, then the same shall also be attributed to the bonus shares which have been allotted subsequently. 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. Therefore, in our opinion, 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.
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 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. Further, with regards to the capital gain on the sale of bonus shares, our findings in the above paragraphs with regard to the bonus and shares acquired by the assessee hold good even for these shares. The findings of the AO that the assessee has got the bonus shares allotted to him and his father only to avoid tax is not based on any evidence. Though the assessee had submitted before the CIT (A) that the overseas investors had transferred the assets to the assessee due to non fulfilment of certain conditions, the CIT (A) has not considered any of these arguments and has not found them to be untrue. Therefore, we are of the opinion that 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.
11. In the result, assessee’s appeal is allowed.
Order pronounced in the Open Court on 31st October, 2017.
