2019 (12) TMI 35 - AT - Income Tax

Addition u/s 56(2)(vii)(c) - difference between the fair market value of the shares and consideration received by the company from the assessee to whom bonus shares issued - HELD THAT - In the case, the assessee has received bonus shares without paying any consideration, and fair market of which, has been held by the AO as income in the hands of the assessee. We find that the CIT(A) has deleted the addition following the precedent in the case of Sudhir Menon (HUF) 2014 (3) TMI 534 - ITAT MUMBAI . In the case of the assessee, bonus shares were also received in financial year corresponding to assessment year 2010-11 from the same company and the AO made addition u/s 56(2)(vii). Receipt of bonus share without consideration is involved in the year under consideration, respectfully, following the finding of the Tribunal in the case of Sudhir Menon (HUF) 2014 (3) TMI 534 - ITAT MUMBAI in the case of the assessee itself, we uphold the finding of the CIT(A) on the issue in dispute. The ground of appeal of the Revenue is accordingly dismissed.

Summary

Issues:
1. Addition of fair market value of bonus shares under section 56(2)(vii)(c) of the Income Tax Act, 1961.
2. Interpretation of provisions regarding taxation of bonus shares received without consideration.

Analysis:
1. The appeal concerned the addition of ?4,31,34,701 as the fair market value of bonus shares received by the assessee under section 56(2)(vii)(c) of the Income Tax Act, 1961. The Assessing Officer computed the fair market value of the bonus shares and made the addition based on the provisions of the Act. However, the Ld. CIT(A) deleted the addition following the decision of the Tribunal in a similar case, emphasizing that the provisions of section 56(2)(vii) do not apply to bonus shares. The Tribunal upheld the Ld. CIT(A)'s decision, citing precedents and holding that the addition made by the AO was not in accordance with the law.

2. The interpretation of the provisions regarding taxation of bonus shares received without consideration was a key aspect of the judgment. The Tribunal referred to the explanatory memorandum of the Financial Bill 2010, highlighting that the provisions of section 56(2)(vii) were introduced as anti-abuse measures to prevent laundering of unaccounted income under the guise of gifts. The Tribunal further discussed the case law and explained that bonus shares do not fall under the purview of section 56(2)(vii) as they do not involve the receipt of any property by the shareholder. The judgment clarified that bonus shares represent a capitalization of profit by the issuing company and do not result in an increase in the shareholder's wealth. The Tribunal emphasized that bonus shares do not constitute a gift or accretion to property, as the shareholder receives split shares out of their existing holding.

3. The Tribunal's decision was based on the principle that bonus shares do not attract the provisions of section 56(2)(vii) of the Act. The Tribunal relied on previous judgments and held that the issue of bonus shares was not intended to be taxed under the said provisions. The Tribunal emphasized that bonus shares do not involve the receipt of any property by the shareholder and are essentially a reallocation of existing shares. Therefore, the Tribunal concluded that the addition made by the Assessing Officer was not valid and upheld the decision to delete the addition by the Ld. CIT(A).

In conclusion, the judgment clarified the treatment of bonus shares under section 56(2)(vii) of the Income Tax Act, highlighting that bonus shares do not constitute taxable income under the specified provisions. The decision was based on legal interpretations, precedents, and the specific nature of bonus share transactions, emphasizing that bonus shares do not involve the receipt of additional property by the shareholder.