2017 (1) TMI 1677 - AT - Income Tax

Revision u/s 263 - addition u/s 56(2)(vii)(c) - bonus shares were issued by way of capitalization of share premium account and reserve account thus benefit given to assessee was clearly chargeable as income from other sources as per CIT - HELD THAT - Legislator intended to tax the transfer of shares at a value lesser than its fair market value under Provisions of Section 56(2)(vii), and 56(2)(viia). On a careful reading of the provisions and the legislative intent, we agree with the submissions of Ld.AR that the provision would not be applicable to bonus/right shares as there is no increase or decrease in the wealth of shareholder assessee on account of bonus/right shares. Further, there is no element of gift in issuing of bonus/right shares to the assessee by the company. We agree with submission advanced by Ld. AR that in case section 56(2)(vii)/56 (2) (viia) is made applicable on issue of bonus/right shares, various other sections of the Act would become contradictory. This is because if for the sake of discussion it is presumed that the provisions of section 56 (2) (vii) are made applicable to the allotment of bonus/Right shares, then for the purpose of calculating capital gains under section 48 and 49 on the sale of such shares, the cost of acquisition shall be taken as per section 49 (4) which means the value of bonus/right shares considered while applying the provisions of section 52 (2) (vii), which is clearly contradicting the provisions of section 55 (2) (aa) (iiiia). If the legislature really intended to bring allotment of bonus/right shares within the ambit of section 56 (2) (vii), it would have amended section 55 (2) (aa) (iiia) simultaneously. As no property however is being passed on to the assessee in the instant case before us on allotment of bonus/right shares and the no addition could be made by applying provisions of section 56 (2) (vii) as the case may be. - Decided in favour of assessee Initiation of proceedings u/s 263 - AR has raised and argument regarding the proceedings under section 263 being initiated wrongly as there was no material before Ld. CIT that was unearthed during the search - HELD THAT - We reject this argument as the assessing officer has not dealt with share standing in the name of assessee at the time of assessment proceedings and that Assessing Officer has not investigated/inquired about the same by raising any query. It is a settled law that there need not be any incriminating material for making addition in assessment made u/s 153A when assessment has not abated. The Assessing Officer being an Investigating Officer should have conducted enquiry assessment proceedings. We, therefore, dismiss this ground of the assessee.

Summary

Issues Involved:
1. Validity of order under section 263 directing the AO to make an addition under section 56(2)(vii)(c) of ?1,61,05,704.
2. Whether the receipt of bonus and right shares falls within the ambit of section 56(2)(vii).

Issue-wise Detailed Analysis:

Issue 1: Validity of Order under Section 263
The assessee challenged the order dated 28.03.2016 passed by the CIT (Central) Gurgaon under section 263 of the Act for the assessment year 2010-11. The CIT directed the AO to add ?1,61,05,704 under section 56(2)(vii)(c) of the Act. The assessee argued that the order was bad in law as there was no error in the AO's order that needed correction under section 263. The CIT observed that the assessee received 10,000 equity shares at ?400 each and 6,29,428 bonus shares without consideration from M/s Bestech India Pvt. Ltd., which should be chargeable as income from other sources under section 56(2)(vii)(c). The CIT issued a show cause notice and concluded that the AO's failure to draw adverse inference rendered the assessment order erroneous and prejudicial to the revenue's interest. The AO was directed to recompute the income by adding ?1,61,05,704 under section 56(2)(vii)(c).

Issue 2: Applicability of Section 56(2)(vii) to Bonus and Right Shares
The assessee argued that section 56(2)(vii) does not apply to the receipt of bonus and right shares. It was contended that the legislative intent behind section 56(2)(vii) was not to include bonus/right shares and that these transactions were bona fide without any adverse remarks from revenue authorities. The assessee cited decisions from the Mumbai Tribunal in Sudhir Menon (HUF) vs. ACIT and the Bangalore Tribunal in DCIT vs. Dr. Rajan Pie, asserting that the property under section 56(2)(vii) must exist before it can be received, which is not the case with newly allotted shares. The DR argued that the shares were allotted without adequate consideration and there was an attempt to evade tax, justifying the addition under section 56(2)(vii)(c).

The Tribunal examined the legislative history and intent of section 56(2)(vii) and concluded that it does not apply to bonus/right shares as there is no increase or decrease in the shareholder's wealth. The Supreme Court in Khoday Distilleries Ltd. vs. CIT clarified that bonus shares do not amount to a distribution of accumulated profits and do not convey property to the shareholder. The Tribunal agreed with the assessee's argument that applying section 56(2)(vii) to bonus/right shares would lead to contradictions with other sections, such as section 55(2)(aa)(iiia). The Tribunal referenced the Mumbai Tribunal's decision in Sudhir Menon (HUF), which stated that issuing bonus shares does not result in the receipt of any property by the shareholder.

Conclusion:
The Tribunal allowed the assessee's appeal on Ground No. 1, holding that section 56(2)(vii) does not apply to the receipt of bonus and right shares. However, Ground No. 2, challenging the initiation of proceedings under section 263, was dismissed. The Tribunal found that the AO had not conducted any enquiry regarding the shares allotted to the assessee, justifying the CIT's action under section 263. The appeal was allowed in part, with the order pronounced in the open court on 27th January 2017.