M/S. SANJAY GALA, MUMBAI v. THE ITO (IT)-3(1), MUMBAI

ITA 2989/MUM/2008 | 2005-2006
Pronouncement Date: 15-07-2011 | Result: Allowed

Appeal Details

RSA Number 298919914 RSA 2008
Assessee PAN AABPG5043N
Bench Mumbai
Appeal Number ITA 2989/MUM/2008
Duration Of Justice 3 year(s) 2 month(s) 13 day(s)
Appellant M/S. SANJAY GALA, MUMBAI
Respondent THE ITO (IT)-3(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-07-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted L
Tribunal Order Date 15-07-2011
Date Of Final Hearing 17-03-2011
Next Hearing Date 17-03-2011
Assessment Year 2005-2006
Appeal Filed On 02-05-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI P.M. JAGTAP A.M. AND SHRI V. DURGA RAO J.M. ITA NO. 2989/MUM/2008 ASSESSMENT YEAR: 2005-06 SANJAY GALA . APPELLANT 304 PRAGATI PARADISE PLOT NO. 601/C NEAR AGARWAL NAGAR MATUNGA MUMBAI 19. (PAN AABPG5043N) VS. INCOME-TAX OFFICER RESPONDENT (INTERNATIONAL TAXATION) 3(1) MUMBAI APPELLANT BY : MR. VIJAY MEHTA & MR. UMESH K. GALA RESPONDENT BY : MR. R.S. SRIVASTAVA ORDER PER V. DURGA RAO J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-XXXIII MUMBAI PASSED ON 14/02/2008 FOR THE ASSESSMENT YEAR 2005-06 WHEREIN THE ASESSSEE HAS RAISED THE FO LLOWING GROUND OF APPEAL:- 1. RE: NON CONSIDERATION OF LONG TERM CAPITAL GAINS ON SALE OF BONUS SHARES AS COVERED BY S. 115F RS. 10 63 265/-. 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE CIT(A) GROSSLY ERRED IN NOT CONSIDERING BONUS S HARES RECEIVED ON ACCOUNT OF ORIGINAL INVESTMENTS MADE IN FOREIGN CURRENCY AS A FOREIGN EXCHANGE ASSET COVERED BY THE PROVISIONS OF S. 115F. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A NON-RESIDENT INDIAN AND FILED HIS RETURN OF INCOME DECLARING INC OME OF RS.60 000/- ITA NO. 2989/M/2008 SANJYA GALA 2 WHICH WAS PROCESSED U/S 143(3) ON 24/10/07 DETERMIN ING THE TOTAL INCOME AT RS. 11 23 265/-. IN THE ASSESSMENT ORDER THE AO HAD NOT TREATED THE BONUS SHARES AS FOREIGN EXCHANGE ASSETS AND HAD NOT ALLOWED THE BENEFITS AVAILABLE U/S 115C OF THE ACT. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CI T(A). BEFORE THE CIT(A) ASSESSEE FILED A WRITTEN SUBMISSION WHICH W AS EXTRACTED BY THE CIT(A) IN HIS ORDER AT PAGES 1TO 7 WHEREIN IT WAS S TATED THAT BONUS SHARES SHOULD BE CONSIDERED AS FOREIGN EXCHANGE AS SET AND LONG TERM CAPITAL GAIN ON SAME SHOULD BE ELIGIBLE FOR EXEMPTI ON U/S 115F. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CI T(A) HELD AS UNDER:- 4. I HAVE GONE THROUGH THE FACTS OF THE CASE. SEC. 115C(B) DEFINES FOREIGN EXCHANGE ASSET AND IT IS EXTRACTED BELOW:- SEC. 115C(B) FOREIGN EXCHANGE ASSET MEANS ANY SP ECIAL ASSET WHICH THE ASSESSEE HAS ACQUIRED OR PURCHASED WITH OR SUBSCRIBED TO IN CONVERTIBLE FOREIGN EXCHANGE. 4.1 THE ASSET INVOLVED IS BONUS SHARES. AS POINTED OUT BY THE AO IT CANNOT BE SAID THAT THE APPELLANT HAS ACQUI RED THE BONUS SHARES. IT CANNOT BE ALSO SAID THAT THE APPELLANT H AS PURCHASED THE BONUS SHARES. SIMILARLY THE APPELLANT HAS ALSO NOT SUBSCRIBED TO IN CONVERTIBLE FOREIGN EXCHANGE ONLY WITH REGARD TO THE ORIGINAL SHARES. THE ORIGINAL SHARES ARE ENTIRE LY DIFFERENT ASSETS THAN THE BONUS SHARES. EACH SHARE HAS A DIST INCT NUMBER. SO THE APPELLANTS CONTENTION THAT THE BONUS SHARES SHOULD BE CONSIDERED AS PART OF ORIGINAL SHARES AND HENCE THE APPELLANT HAS SUBSCRIBED TO IN CONVERTIBLE FOREIGN EXCHANGE WITH REGARD TO THE BONUS SHARES CANNOT BE ACCEPTED. FOR E.G. A PERSON MIGHT HAVE PURCHASED A COW WITH CONVERTIBLE FOREIGN EXCHANGE. AFTER SOME TIME WHEN THE COW YIELDS A CALF IT CANNOT BE SAID THAT THE CALF WAS ACQUIRED THROUGH CONVERTIBLE FOREIGN EXCHANGE. THE CALF MIGHT HAVE BEEN DERIVED FROM THE COW WHICH WAS PURC HASED WITH FOREIGN CONVERTIBLE FOREIGN EXCHANGE BUT DEFINITELY THE CALF IS NOT PURCHASED IN CONVERTIBLE FOREIGN EXCHANGE. SIMILAR IS THE CASE WITH REGARD TO THE BONUS SHARES. IN THIS REGARD IT IS WORTHWHILE TO MENTION THAT THE COST OF BONUS SHARES IS ALWAYS TAK EN AS NIL FOR THE PURPOSE OF CAPITAL GAIN. IT WAS NOT AT ALL LINK ED WITH THE COST PRICE OF THE ORIGINAL SHARES PURCHASED. IN VIEW OF ALL THE ABOVE I UPHOLD THE ACTION OF THE AO HENCE GROUND NO. 2 IS DISMISSED. 3. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE I S IN APPEAL BEFORE US. ITA NO. 2989/M/2008 SANJYA GALA 3 4. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE BONUS SHARES RECEIVED ON ACCOUNT OF ORIGINAL IN VESTMENT MADE IN FOREIGN CURRENCY AS FOREIGN EXCHANGE ASSET COVERED BY THE PROVISIONS OF SECTION 115F OF THE ACT. THE BONUS SHARES ARE AL LOTTED IN RESPECT OF SHARES ALREADY HELD AND THE COST OF BONUS SHARES IS ALREADY EMBEDDED IN THE ORIGINAL SHARES. IT WAS SUBMITTED THAT AS PE R SECTION 55(2)(AA)(III) OF THE ACT THE COST OF ACQUISITION OF BONUS SHARES IS CONSIDERED TO BE NIL THEREFORE IT CANNOT BE SAI D THAT THE BONUS SHARES SHOULD HAVE BEEN ACQUIRED IN CONVERTIBLE FOR EIGN EXCHANGE. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON JU DGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. DALMIA INVESTMENT CO. LTD. 52 ITR 567 WHEREIN THE HONBLE COURT HELD AS UNDER:- WHERE BONUS SHARES ARE ISSUED IN RESPECT OF ORDINAR Y 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. THE 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 PROPORT ION OF THE FACE VALUE THEY BEAR (IF THERE IS NO OTHER CIRCUMSTANCE TO DIFFERENTIATE THEM) OR ON EQUITABLE CONSIDERATIONS BASED ON THE M ARKET PRICE BEFORE AND AFTER ISSUE. THEY HAVE TO BE VALUED AT THE MARKET VALUE ON THE DATE WHEN THEY WERE ACQUIRED. THE HONBLE SUPREME COURT FURTHER OBSERVED THAT CAN WE THEN SAY THAT THE BONUS SHARES ARE A GIFT AND ARE ACQUIR ED 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 REALIZ E THAT THERE IS AN IMMEDIATE DETRIMENT TO THE SHAREHOLDER IN RESPEC T OF HIS ORIGINAL HOLDING. THE INCOME-TAX OFFICER IN THIS C ASE 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 PASSUE WITH THE EXISTING SHARES THE MARKET PRICE WAS EXACTLY HALVE D AND DIVIDED BETWEEN THE OLD AND THE BONUS SHARES. THIS WILL ORD INARILY BE THE CASE BUT NOT WHEN THE SHARES DO NOT RANK PARI PASSU AND WE SHALL DEAL WITH THAT CASE SEPARATELY. WHEN THE SHAR ES RANK PARI PASSU THE RESULT MAY BE STATED BY SAYING THAT WHAT THE SHAREHOLDER HELD AS A WHOLE RUPEE COIN IS HELD BY H IM AFTER THE ISSUE OF BONUS SHARES IN TWO 50 NP. COINS. THE TOT AL VALUE REMAINS THE SAME BUT THE EVIDENCE OF THAT VALUE IS NOT IN ONE CERTIFICATE BUT IN TWO. ITA NO. 2989/M/2008 SANJYA GALA 4 5. THE LEARNED COUNSEL ALSO RELIED UPON THE JUDGMEN T OF JURISDICTIONAL HIGH COURT IN THE CASE OF D.M. DAHAN UKAR VS. CIT 88 ITR 454 WHEREIN IT WAS HELD AS UNDER:- IN GOLD MOHORE INVESTMENT CO. LTD.S CASE THE SUPR EME COURT TOOK THE VIEW THAT IN THE CASE OF A DEALER IN SHARE S WHO VALUES HIS STOCK AT COST WHERE BONUS SHARES ISSUED IN RES PECT OF ORDINARY SHARES HELD BY HIM RANK PARI PASSU WITH TH E ORIGINAL SHARES THE CORRECT METHOD OF VALUING THE COST TO T HE DEALER OF THE BONUS SHARES IS TO TAKE THE COST OF THE ORIGINAL SH ARES SPREAD IT OVER THE ORIGINAL SHARES AND THE BONUS SHARES COLLE CTIVELY AND FIND OUT THE AVERAGE PRICE OF ALL THE SHARES. 6. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO PLACED RELIANCE ON THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF ESC ORTS FARMS (RAMGARH) LTD. VS. CIT 143 ITR 749 WHEREIN IT WAS HELD AS UNDER:- FROM A LAYMANS POINT OF VIEW THE COST OF THE ORIG INAL SHARES IS THE PRICE PAID FOR THEM; AND THE COST OF THE BONUS SHARES IS NIL. BUT ONCE THE PRINCIPLE OF AVERAGING IS ACCEPTED AS IT CERTAINLY HAS TO BE IN RESPECT OF BONUS SHARES AT LEAST IT NECESSARILY IMPLIES THAT FOR THE ORIGINAL COST THE ASSESSEE MUS T BE TAKEN TO HAVE ACQUIRED BOTH THE BONUS AND THE ORIGINAL SHARE S. IN OTHER WORDS THE ISSUE OF THE BONUS SHARES THOUGH SUBSE QUENT HAS THE EFFECT OF ALTERING THE ORIGINAL COST OF ACQUISI TION OF THE SHARES. THERE IS NOTHING ILLEGAL IN THIS AS THE PRICE PAID BY THE ASSESSEE ORIGINALLY WAS NOT ONLY FOR THE SHARES THEMSELVES B UT ALSO FOR SUCH SHARES THAT IT MAY YIELD SUBSEQUENTLY IF ANY. THE RIGHT TO ACQUIRE BONUS SHARES IS A RIGHT EMBEDD ED IN THE ORIGINAL SHARES AND THEY ARE A LEGAL ACCRETION THE RETO. THE METHOD OF SPREADING OVER ON BOTH THE BONUS AND THE ORIGINAL SHARES THE COST OF ACQUISITION OF THE ORIGINAL SHAR ES 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 INTE RLINKED AND INTERDEPENDENT ON THE ISSUE OF BONUS SHARES. THEREF ORE ONCE THE BONUS SHARES ARE ISSUED THE AVERAGING OUT FORMULA HAS TO BE FOLLOWED WITH REGARD TO ALL THE SHARES. BUT IN VIEW OF THE SPECIFIC LANGUAGE OF S. 55(2)(I) REGARDING THE SUBSTITUTED M ARKET VALUE OF 1 ST JANUARY 1954 THIS CANNOT BE DONE WHERE THE ASSES SEE HAS ELECTED TO EXERCISE AN OPTION AS DECIDED IN SHEKHAW ATI GENERAL TRADERS LTD.S CASE [1971] 82 ITR 788 (SC). ITA NO. 2989/M/2008 SANJYA GALA 5 7. THE LEARNED COUNSEL FOR THE ASESSSEE FURTHER REL IED ON THE MEMORANDUM EXPLAINING FINANCE BILL 1995 [212 ITR ( ST.) 357] WHEREIN IT WAS HELD THAT FOR THE SAKE OF CLARITY AND SIMPLICITY SECTION 55 IS BEING AMENDED TO PROVIDE THAT THE COS T OF BONUS SHARES WILL BE TAKEN AS NIL FOR COMPUTATION OF CAPITAL GAI N ON SALE OF BONUS SHARES. THIS WOULD NOT AFFECT THE COST OF ORIGINAL SHARES. THIS PROCEDURE WILL ALSO BE APPLICABLE TO ANY OTHER SECURITY WHERE A BONUS ISSUE HAS BEEN MADE. IT WAS FURTHER HELD THAT WITH A VIEW TO ENCOURAGING THE FLOW OF FOREIGN EXCHANGE REMITTANCES INTO INDIA AND INVE STMENT IN INDIA BY NON-RESIDENT INDIAN CITIZEN AND FOREIGN NATIONALS O F INDIAN ORIGIN THE BILL SEEKS TO MAKE SPECIAL PROVISIONS RELATING TO C ERTAIN INCOMES OF SUCH NON-RESIDENTS. 8. THE LEARNED DR ON THE OTHER HAND BESIDES STRON GLY RELYING UPON THE ORDERS OF THE AUTHORITIES BELOW SUBMITTED THAT CHAPTER XII IS THE SPECIAL PROVISIONS AND THE CASES RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE HAVE NO APPLICATION TO THE FACTS OF THE CASE OF THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASESSSE E HAS NOT INVESTED ANYTHING ON FOREIGN EXCHANGE ASSET AND ONLY BY VIRT UE OF ORIGINAL INVESTMENT BONUS SHARES WERE ALLOTTED TO THE ASSESS EE. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS PERUSE D THE RELEVANT MATERIAL ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS DECISIONS CITED. THE ISSUE INVOLVE D IN THIS APPEAL FOR OUR CONSIDERATION IS WHETHER THE ASSESSEE IS ELIGIB LE FOR BENEFIT U/S 115F OF THE ACT ON THE BONUS SHARES RECEIVED BY HI M. THE ASSESSEE IS NRI ACQUIRED SHARES WITH CONVERTIBLE FOREIGN EXCHAN GE. SUBSEQUENTLY BONUS SHARES WERE ALLOTTED TO HIM. ACCORDING TO THE AO AND CIT(A) THE ASESSSEE IS ONLY ELIGIBLE FOR BENEFIT U/S 115F OF THE ACT WITH REGARD TO SUBSCRIPTION MADE TO ORIGINAL SHARES AND HE IS NOT ELIGIBLE FOR THE BONUS SHARES SUBSEQUENTLY RECEIVED BY HIM A S NO SUBSCRIPTION MADE IN FOREIGN EXCHANGE TO RECEIVE THE BONUS SHARE S. IN THIS ITA NO. 2989/M/2008 SANJYA GALA 6 CONNECTION WE REFER TO THE PROVISIONS OF SECTION 1 15C(B) OF THE ACT WHICH READ AS UNDER:- ( B ) FOREIGN EXCHANGE ASSET MEANS ANY SPECIFIED ASSE T WHICH THE ASSESSEE HAS ACQUIRED OR PURCHASED WITH OR SUBSCRIBED TO IN CONVERTIBLE FOREIGN EXCHANGE; 10. ON PERUSAL OF THE ABOVE PROVISION IT IS CLEAR THAT FOREIGN EXCHANGE ASSET FOR THE PURPOSE OF SECTION 115F IS T HE ONE WHICH ASSESSEE HAS ACQUIRED IN CONVERTIBLE FOREIGN EXCHAN GE. IN THE PRESENT CASE THE ASSESSEE SUBSCRIBED TO SHARES IN CONVERTI BLE FOREIGN EXCHANGE AND ACQUIRED THE FOREIGN EXCHANGE ASSET. I N SO FAR AS THIS ASPECT IS CONCERNED THERE IS NO DISPUTE FROM THE R EVENUE AUTHORITIES. THE ONLY DISPUTE IS WITH REGARD TO THE BONUS SHARES RECEIVED BY THE ASESSSEE. THE OBJECTION OF THE REVENUE AUTHORITIES IS THAT THE ASSESSEE HAS RECEIVED THE BONUS SHARES WITHOUT INVESTING AN Y CONVERTIBLE FOREIGN EXCHANGE. WE ARE OF THE VIEW THAT THE ASSES SEE 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 ORI GINAL SHARES ACQUIRED BY THE ASSESSEE. THE HONBLE SUPREME COURT AND VARIOUS HIGH COURTS HAVE CONSIDERED THE ISSUE WITH REGARD T O VALUE OF THE BONUS SHARES AND HELD THAT THE METHOD OF SPREADING OVER ON BOTH THE BONUS AND THE ORIGINAL SHARES THE COST OF ACQUISITI ON OF THE ORIGINAL SHARES WOULD APPEAR TO BE THE PROPER METHOD OF DETE RMINING THE VALUE OF THE ASSET. FOR THERE IS NO DOUBT THAT ON THE IS SUANCE OF THE BONUS SHARES THE VALUE OF THE ORIGINAL SHARES IS PROPORT IONATELY DIMINISHED. IN SIMPLE LANGUAGE IT IS SPLIT UP. AS SUCH THE C OST OF ACQUISITION OF THE ORIGINAL SHARES AND THEIR VALUE IS CLOSELY INTERLIN KED AND INTERDEPENDENT ON THE ISSUE OF BONUS SHARES. THEREF ORE ONCE THE BONUS SHARES ARE ISSUED THE AVERAGING OUT FORMULA HAS TO BE FOLLOWED WITH REGARD TO ALL THE SHARES. IN VIEW OF THE ABOVE PROPOSITION THE BONUS SHARES ACQUIRED BY THE ASSESSEE ARE COVERED BY SECT ION 115C(B) OF THE ACT AND THE SAME ARE ELIGIBLE FOR BENEFIT U/S 115F OF THE ACT. ACCORDINGLY THE GROUND RAISED BY THE ASSESSEE IS A LLOWED. ITA NO. 2989/M/2008 SANJYA GALA 7 11. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON THIS 15 TH DAY OF JULY 2011. SD/- SD/- (P.M. JAGTAP) (V. DURG A RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI DATED:15 TH JULY 2011 KV COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE L BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI.