2020 (12) TMI 1078 - HC - Income Tax

Income from other sources as per Section 56(2)(vii) - whether the fair market value of bonus shares computed as per Rule 11U and Rule 11UA of the Income Tax Rules can be considered as income from other sources as per Section 56(2)(vii) ? - HELD 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. Thus, 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. In the instant case, there is no material on record to infer that bonus shares have been transferred with an intention to evade tax, which is the object of the provision in question. Commissioner of Income Tax (Appeals) as well as the tribunal have rightly held that when there is an issue of bonus shares, the money remains with the company and nothing comes to the shareholders as there is no transfer of the property and the provisions of Section under Section 56(2)(vii)(c) of the Act are not attracted to the fact situation of the case. - Decided in against revenue.

Summary

Issues:
Interpretation of Section 56(2)(vii) of the Income Tax Act, 1961 regarding the taxation of bonus shares under the head 'income from other sources'.

Detailed Analysis:

Issue 1:
The primary issue in this case revolves around the interpretation of Section 56(2)(vii) of the Income Tax Act, specifically in relation to the taxation of bonus shares received by the assessee. The Assessing Officer treated the receipt of bonus shares as income from other sources and assessed the fair market value of the bonus shares at a specific amount. The Commissioner of Income Tax (Appeals) allowed the appeal by the assessee, stating that the provisions of Section 56(2)(vii) were not applicable to the case. The tribunal also dismissed the revenue's appeal, relying on a Supreme Court decision and concluding that the provisions of Section 56(2)(vii) were not attracted to the fact situation of the case.

Issue 2:
The crux of the argument presented by the revenue was that the assessee should have offered the market value of the bonus shares as income from other sources under Section 56(2)(vii)(c) of the Act since no consideration was paid for the shares. The revenue contended that the tribunal erred in its reliance on a Supreme Court decision and in determining the market value of the bonus shares. On the other hand, the assessee argued that there is no actual receipt when bonus shares are allotted, as they are created in the hands of the shareholders. The company does not transfer existing property to the allottees when issuing bonus shares, and no benefit accrues to the shareholders from such allotments.

Issue 3:
The court's analysis focused on the interpretation of Section 56(2)(vii) in the context of bonus shares and the fair market value computation under the Income Tax Rules. It was observed that the issue of bonus shares does not result in any fresh funds inflow or change in the capital employed by the company. The total funds available with the company remain the same, and the issue of bonus shares does not alter the company's profit-making apparatus. The court emphasized that any profit derived from bonus shares is offset by the depreciation in the value of existing equity shares held by the shareholder. Ultimately, the court concluded that the provisions of Section 56(2)(vii) were not applicable to the case as there was no transfer of property and no intention to evade tax through the issuance of bonus shares.

Conclusion:
In conclusion, the court dismissed the appeal by the revenue, upholding the decisions of the Commissioner of Income Tax (Appeals) and the tribunal. The court ruled that the fair market value of bonus shares computed under the Income Tax Rules cannot be considered as income from other sources under Section 56(2)(vii) of the Act in the specific context of this case. The judgment provides clarity on the taxation treatment of bonus shares and highlights the distinction between the issuance of bonus shares and the transfer of property for tax purposes.