Section 115F — Bonus shares received on account of original investments made in foreign currency are ‘foreign exchange asset’ covered by provisions of section 115F.

For the A.Y. 2006-07, the assessee, a non-resident Indian, filed his return of income declaring the income of Rs.60,000. The Assessing Officer (AO) while assessing the total income u/s.143(3) of the Act did not treat the bonus shares as foreign exchange assets and denied the benefits available u/s.115C of the Act. He assessed the total income to be Rs.11,23,265. There was no dispute that the original shares in respect of which bonus shares were received were acquired with convertible foreign exchange. Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) held that the provisions of section 115(C)(b) define the term ‘foreign exchange asset’ to mean an asset which the assessee has acquired or purchased or subscribed to in, convertible foreign exchange. He held that the bonus shares were neither acquired nor purchased nor subscribed by the assessee and consequently the same were held to be not ‘foreign exchange asset’. He upheld the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

(1) 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.

(2) The Tribunal observed that the 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 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.”

(3) In view of the above proposition, the bonus shares were held to be covered by section 115C(b) of the Act, and the same are eligible for benefit u/s.115F of the Act. The Tribunal allowed the appeal filed by the assessee.