2022 (4) TMI 849 - AT - Income Tax

Revision u/s 263 - issue of bonus shares would amount to distribution of dividend or not - as per CIT assessee had accumulated profits and the assessee issued bonus shares during the year, therefore, the assessee was liable to pay dividend distribution tax (DDT) on such issuance u/s 115-O as profits were distributed indirectly by issue of bonus shares as covered by the provisions of Sec. 2(22)(b) - HELD THAT - As per the provisions of Sec.2(22) dividend includes- (a)any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release of assets by the company to its shareholders of all or any part of the assets of the company, or (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not. The remaining clauses (c) to (e) are not relevant in the present case. It could be gathered that the assessee s case do not fall u/s 2(22)(a) since the bonus shares are nothing but mere conversion of accumulated profits into equity share capital. There is no actual outflow or release of assets of the assessee. The clause (b) of Sec. 2(22) applies in two situation i.e., (i) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest; (ii) any distribution to its preference shareholders of shares by way of bonus. The amounts paid under situation (i) and (ii) shall amount to dividend to the extent to which the company possesses accumulated profits, whether capitalized or not. In preceding para (5), we have already noted that the assessee has issued only equity shares and there are no preference shares. The bonus has been issued to equity shareholders only. Thus, the assessee s case do not fall either in Clause (a) or Clause (b) of Sec.2(22). This being so, the amount of bonus could not be held to be dividend and accordingly, Sec.115-O would have no application in such a case. Therefore, we direct Ld. AO to delete the impugned demand as raised against the assessee. The assessee succeeds on merits which render the issue of validity of revisional jurisdiction merely academic in nature. - Assessee appeal allowed.

Summary

Issues: Validity of revisional jurisdiction u/s 263 and applicability of Sec. 2(22)(b) r.w.s. 115-O on issuance of bonus shares.

Validity of revisional jurisdiction u/s 263:
The judgment pertains to appeals by the assessee challenging the revisional jurisdiction exercised by the Principal Commissioner of Income Tax under section 263 for the Assessment Year 2013-14. The dispute arose regarding the issuance of bonus shares to equity shareholders and the applicability of Sec. 2(22)(b) r.w.s. 115-O. The assessee contended that bonus shares did not attract the provisions of Sec. 2(22)(b) as wrongly held by the Principal CIT. The CIT-DR argued that the AO did not inquire into this matter during regular assessment, justifying the invocation of revisional jurisdiction. The tribunal analyzed the submissions and relevant documents to make its adjudication.

Applicability of Sec. 2(22)(b) r.w.s. 115-O on issuance of bonus shares:
The assessee, a resident corporate entity, acted as a franchisee of a securities firm. The dispute centered around the conversion of accumulated profits into share capital through the issuance of bonus shares. The Principal CIT deemed the original assessment erroneous, citing the issuance of bonus shares amounting to indirect profit distribution attracting dividend distribution tax under Sec. 115-O. The assessee argued that bonus shares did not involve asset release, relying on case law. Despite this, the AO computed dividend distribution tax on the bonus shares, leading to a demand against the assessee. The tribunal thoroughly examined the financial statements, capital structure, and legal provisions to arrive at its findings.

Findings and Adjudication:
Upon meticulous review, the tribunal noted that the issuance of bonus shares did not result in an actual outflow of funds from the assessee. The bonus shares merely capitalized accumulated profits without altering the capital structure. The tribunal emphasized that bonus shares to equity shareholders did not constitute a distribution of assets, as per Sec. 2(22)(a) or (b). Since the assessee issued only equity shares and not preference shares, the provisions of Sec. 115-O did not apply. Consequently, the tribunal directed the AO to delete the demand raised against the assessee. The judgment allowed one appeal and dismissed another as infructuous, emphasizing the success of the assessee on the merits, rendering the revisional jurisdiction issue academic.