2016 (5) TMI 216 - AT - Income Tax

Income from Other Sources - addition made by the AO, considering the fair market value of the bonus shares received by the assessee from one M/s. Manipal Education & Medical Group (India) P. Ltd - Held that - An assessee who received bonus shares could never be considered as receiving something without consideration or for a consideration less than the fair market value of the property. When bonus shares are received, it is not something which has been received free or for a lesser fair market value. A consideration has flown out from the holder of the shares, may be unknown to him, which is reflected in the depression in the intrinsic value of the original shares held by him. Thus in our view, Section 56(2)(v), (vi) and (vii) brought in to the Act for addressing the vacuum caused due to withdrawal of the Gift-tax Act cannot be used for the purpose of taxing the value of bonus shares received by an assessee. Valuation of unquoted shares set out in Rule 11 UA(B) will have applicability only on receipt of shares as gift or for inadequate consideration. Bonus shares can never be considered as received without consideration or for inadequate consideration calling for application of subclause (c) of clause (vii) of Section 56(2) of the Act. We have no hesitation to uphold the order of CIT (A) deleting the addition made by the AO. - Decided in favour of assessee

Issues Involved:

1. Taxability of bonus shares under Section 56(2)(vii)(c) of the Income-tax Act, 1961.
2. Applicability of Rule 11U and 11UA for valuation of bonus shares.
3. Interpretation of legislative history and intention behind Section 56(2)(vii).
4. Consideration of judicial precedents and circulars in determining tax liability for bonus shares.

Issue-wise Detailed Analysis:

1. Taxability of Bonus Shares under Section 56(2)(vii)(c) of the Income-tax Act, 1961:

The Revenue challenged the CIT(A)'s order deleting the addition made by the AO, which considered the fair market value of bonus shares received by the assessee as 'Income from Other Sources' under Section 56(2)(vii)(c). The AO argued that since the assessee did not pay any consideration for the bonus shares, their fair market value should be taxed. The assessee contended that bonus shares represent capitalisation of profits by the issuing company and do not result in any increase or decrease in the shareholder's wealth, thus Section 56(2)(vii)(c) should not apply. The CIT(A) agreed with the assessee, relying on the Mumbai Tribunal's decision in Sudhir Menon HUF v. ACIT and the Supreme Court's judgment in CIT v. General Insurance Corporation, concluding that bonus shares do not attract tax under Section 56(2)(vii)(c).

2. Applicability of Rule 11U and 11UA for Valuation of Bonus Shares:

The AO applied Rule 11UA to determine the fair market value of the bonus shares, calculating it at ?12,49,00,000/-. The CIT(A) rejected this approach, stating that Rule 11UA is meant for valuing shares received as gifts or for inadequate consideration, not for bonus shares. The CIT(A) emphasized that bonus shares result in a proportional reduction in the value of the original shares held by the shareholder, meaning there is no net gain or loss in wealth.

3. Interpretation of Legislative History and Intention behind Section 56(2)(vii):

The legislative history behind Section 56(2)(vii) was examined to determine if it could be applied to bonus shares. The clauses were introduced to address the vacuum created by the repeal of the Gift-tax Act, aiming to tax properties received without consideration or for inadequate consideration. The Tribunal concluded that the legislative intention was not to include bonus shares within the ambit of these clauses, as bonus shares were never considered gifts under the Gift-tax Act.

4. Consideration of Judicial Precedents and Circulars in Determining Tax Liability for Bonus Shares:

The Tribunal referred to the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd., which held that bonus shares should be valued by averaging the cost of the original and bonus shares. The Mumbai Tribunal's decision in Sudhir Menon HUF also supported the view that bonus shares do not result in any increase in the shareholder's wealth, as the value of the original shares is proportionally reduced. The Tribunal concluded that Section 56(2)(vii)(c) does not apply to bonus shares, as they are not received without consideration or for inadequate consideration.

Conclusion:

The Tribunal upheld the CIT(A)'s order, deleting the addition made by the AO. It concluded that bonus shares do not attract tax under Section 56(2)(vii)(c) as they do not result in any net gain in the shareholder's wealth. The appeal of the Revenue was dismissed.

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