2024 (6) TMI 327 - AT - Income Tax

Addition u/s 2(22)(b) r.w.s. 56(2)(viia) - treatment of bonus shares received without consideration - AO formed an opinion that bonus shares as received by the assessee were nothing but dividend received by the assessee - assessee submitted that bonus is nothing but increase in number of shares without any corresponding increase in the value. The assessee did not receive any income or increase in the value of asset due to bonus shares - HELD THAT - Admittedly, the assessee acquired 41,31,989 number of shares of USPL in AY 2015-16 at Rs. 273.48 per share. During this year, USPL bought back 20,75,000 shares from the assessee @Rs.275/- per share. Later on 92,56,451 shares were received by the assessee as bonus shares in the ratio of 45 shares for every 10 shares held by it. The bonus thus received by the assessee was held to be dividend by Ld. AO u/s 2(22)(b). CIT(A), in our considered opinion, has correctly appreciated the provisions of Sec.2(22)(b). The issue of bonus shares to preference shares is covered as dividend but issue of bonus shares to equity shares in not covered as dividend u/s 2(22)(b). The revenue could not dispute the fact that the assessee was holding equity shares and not the preference shares. Since the bonus to equity shareholders is not covered within the ambit of Sec. 2(22)(b), the same has rightly been held by Ld. CIT(A) to be not applicable to the facts of the case. In such a situation, the same could not be brought to tax u/s 56(2). We are of the opinion that Ld. CIT(A) has correctly relied on the cited decisions of Dalmia Investment Co. Ltd. 1964 (3) TMI 17 - SUPREME COURT holding that issuance of bonus shares to equity shareholders do not amount to payment of dividend since the conversion of reserves into capital by issue of bonus shares do not involve release of profits to the shareholders and the said profits remain employed in the business. Similarly in Hansur Plywood Works Ltd. 1997 (11) TMI 1 - SUPREME COURT held that issuance of bonus shares does not amount to distribution of accumulated profits of a company. here 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. 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 u/s 56(2)(vii)(c) of the Act are not attracted in such a situation - Decided against revenue.

Summary

Issues:
1. Whether the addition made by the Assessing Officer under section 2(22)(b) read with section 56(2)(viia) of the Income Tax Act is justified.

Detailed Analysis:

Assessment Proceedings:
The case involved an appeal by the Revenue for the Assessment Year 2017-18 regarding the addition of Rs. 254,55,24,025 made towards shares received without consideration, treated as "Income from other sources" under section 56(2)(viia). The Assessing Officer (AO) adopted the fair market value of shares at Rs. 275 per share based on a transaction in the previous year. The AO held that the bonus shares received were to be considered as dividend in the hands of the company, subject to tax under section 56(2). The AO also invoked section 56(2)(viia) to tax the value of shares received without consideration.

Appellate Proceedings:
The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the distribution of bonus shares to equity shareholders did not fall under the scope of dividend as defined in section 2(22)(b). The CIT(A) referred to various legal precedents, including decisions by the Supreme Court and High Courts, to support the view that bonus shares do not amount to distribution of accumulated profits and should not be taxed as dividend income. The CIT(A) directed the AO to delete the addition made.

Findings and Adjudication:
The Appellate Tribunal upheld the CIT(A)'s decision, stating that the issue of bonus shares to equity shareholders does not constitute dividend under section 2(22)(b). The Tribunal relied on legal precedents to support the view that bonus shares do not involve the release of profits to shareholders and do not alter the capital structure of the company. The Tribunal concluded that the provisions of section 56(2)(viia) were not applicable in this case, as the issue of bonus shares did not result in any change in the profit-making apparatus or capital structure. The appeal was dismissed, affirming the deletion of the addition made by the AO.

In conclusion, the Tribunal's decision emphasized that the issue of bonus shares to equity shareholders does not amount to dividend income under the relevant provisions of the Income Tax Act. The legal analysis provided a comprehensive understanding of the treatment of bonus shares and the applicability of tax provisions in such cases.