Issue of bonus shares not taxable. ITAT deleted addition made u/s 56(2)(vii)(c) 

Issue of bonus shares not taxable. ITAT deleted addition made u/s 56(2)(vii)(c) of the Income Tax Act 1961

In a recent judgment, ITAT has held that issue of bonus shares is not taxable u/s 56(2)(vii)(c) as income from other sources 

ABCAUS Case Law Citation:
ABCAUS 3799 (2023) (09) ITAT

Important Case Laws relied upon by parties:
CIT vs General Insurance Corporation Ltd reported in 286 ITR 232 (SC)
Mamta Bhandari
Principal Commissioner of Income Tax vs Dr Ranjan Pai
Meenu Satija vs. Pr.CIT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in in deleting the addition made u/s 56(2)(vii)(c) of the Income Tax Act, 1961 (the Act) for bonus shares received.

The respondent assessee was an individual and had filed her return of income declaring income from salary, income from house property, income from capital gains and from other sources. The Assessing Officer (AO) noticed that the assessee had received bonus shares and bonus units. The assessee was show caused as to why the addition u/s 56(2)(vii)(c ) of the Act should not be made in respect of these bonus shares and bonus units.

The assessee submitted that provisions of section 56(2)(vii)(c) of the Act would not apply to bonus shares at all as it is merely done by capitalization of profits. The value of the shares would remain the same and there would be no increase in the wealth of the shareholders on account of bonus issue and his percentage of holding the shares in the company remains constant. It was explained that pursuant to bonus shares and bonus units, the share / unit gets divided in the same proportion for all the shareholders.

The assessee submitted that there would be no receipt of any property by the shareholder and what received is only split shares out of her own holding. The assessee also placed reliance on the decision of Hon‟ble Supreme Court which held

that issuance of bonus shares by a company does not result in any inflow of fresh funds and nothing came to the shareholders.

It was also submitted that the market price of any share after the bonus issue gets reduced almost in proportion to the bonus issue and hence there would be no increase in the market value of shares held by the assessee pursuant to bonus issue. The overall wealth of a shareholder post bonus or pre bonus remains the same.

It was further submitted that the assessee received no additional benefit or income on allotment of bonus shares because it is only a split of his total rights in the wealth of a company which remains the same even after bonus issue.

However the AO did not heed to the contentions of the assessee and proceeded to treat the bonus shares/bonus units issued to be taxed u/s 56(2)(vii)(c) of the Act and made the said addition.

The CIT(A) after distinguishing various case laws relied upon by the AO and after relying on various case laws in favour of the assessee granted relief to the assessee by deleting the addition.

The Tribunal observed that the bonus shares are issued only out of capitalization of existing reserves in the company. It was noted In the instant case, the AO had not disputed the fact that the overall wealth of a shareholder post bonus or pre bonus remains the same. Having held so, it is wrong on his part to invoke the provisions of section 56(2)(vii)(c) of the Act on the ground that there was an double benefit derived by the assessee due to bonus shares.

The Tribunal found that the issue in question was also covered by the decision of Hon’ble High Court. This issue was decided by the Hon’ble Court in favour of the assessee by observing that the issue of bonus shares by capitalization of reserves is merely a reallocation of the companies funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. The total funds available with the company remains the same and issue of bonus shares does not result in any change in respect of capital structure of the company. hus, there is no addition or alteration to the profit making apparatus and the total funds available with the company remain the same. In substance, when a shareholder gets a bonus shares, the value of the original share held by him goes down and the market value as well as intrinsic value of two shares put together will be the same or nearly the same as per the value of original share before the issue of bonus shares. Thus, any profit derived by the assessee on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him.

The Tribunal opined that the CIT(A) had rightly appreciated the contentions of the assessee and its related legal position.

Accordingly, the ITAT dismissed the appeal of the revenue.

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