Landmark Judgment: S. 115F , sale of bonus shares

Sanjay Gala vs ITO (ITAT)

Dated: 15^th July 2011

 

S. 115F - Whether CIT(A) grossly erred in not considering of long term capital gains on sale of bonus shares as covered by S. 115F, bonus shares received  on account of original investments made in foreign currency as a foreign exchange asset covered by the provisions of s. 115F, held that bonus shares on eligible asset can also be regarded as foreign exchange asset since its cost is embedded in the cost of the original shares which constituted foreign exchange asset and, hence, the assessee is eligible for exemption in the same manner in which exemption can be claimed on sale of the original shares.

 

Editorial View:   The has relevance for exemption under special provisions for NRIs wherein long-term capital gains is earned by NRIs on transfer of foreign exchange asset if the sale consideration from such asset is reinvested in other specified assets. (as shares, debentures or deposits of Indian companies, Central Government securities, etc.)

 

This ruling provides useful guidance that, where the original shares constitute foreign exchange asset by virtue of being acquired, purchased or subscribed to in foreign exchange, bonus shares which are allotted on the basis of such original shares also meet the test and, hence, constitute foreign exchange asset. Consequently, the LTCG arising on such bonus shares are eligible for exemption under the special provisions of the ITL.

 

The general exemption of LTCG arising on transfer of listed equity shares where the sale is entered into through recognized stock exchanges and is subjected to Securities Transaction Tax. This ruling would be helpful to NRIs who can explore availing exemption under the special provisions if they are not eligible for exemption on the LTCG under the general provisions. Also, one may need to evaluate the impact that this decision can have on interpretation of capital gains computation under provisions which requires capital gains to be computed by adoption of parameters of sales etc., into foreign currency.