2022 (5) TMI 194 - AT - Income Tax

Addition u/s 56(2)(vii)(c) read with section 2(24)(xv) - Applicability of provisions of section 56(2)(vii)(c) applicable to the bonus shares - Whether allotment of bonus shares cannot be considered as received for an inadequate consideration and therefore, it is not taxable as income from other sources u/s 56(2)(vii)(c)? - HELD THAT - We find that even the CBDT Vide Circular No. 06/2014 issued on dated 11.02.2014 clarified that bonus units at the time of issue would not be subjected to additional income tax u/s 115R of the Act, since issue of bonus units is not akin to distribution of income by way of dividend. This may be inferred from provisions of section 55 of the Act which prescribed that cost of acquisition of bonus units shall be treated as Nil for purposes of computation of capital gains tax. CBDT vide circular 717 dated 14.08.1995 clarified that in order to overcome the problem of complexity, a simple method has been laid down for computing of cost of acquisition of bonus shares. For the sake of clarity and simplicity, the cost of bonus shares is to be taken as Nil while the cost of original shares is to be taken as the amount paid to acquire them. This procedure will also applicable to any other security where a bonus issue has been made. The issue under consideration has been elaborately considered by the Hon ble Tribunal in various cases such as Rajan Pai Bangalore Vs. Department of Income Tax 2016 (5) TMI 216 - ITAT BANGALORE and Sudhir Menon HUF 2014 (3) TMI 534 - ITAT MUMBAI and even by the Hon ble Apex Court in the case of CIT v. Dalmia Investment Co. Ltd. 1964 (3) TMI 17 - SUPREME COURT as relied upon by the Ld. Commissioner while holding that the provisions of section 56(2)(vii)(c) of the Act are not applicable to the bonus shares. Even otherwise we do not find any material and reason to controvert the findings of the ld. Commissioner on the issue under consideration, therefore in view of aforesaid analysis and respectfully following the Judgments referred above of the Hon ble Apex Court and the Hon ble tribunal and the Circulars issued by the CBDT, the appeal of the revenue is liable to be dismissed.

Summary

Issues Involved:
1. Applicability of provisions of section 56(2)(vii)(c) of the Income-tax Act, 1961 to bonus shares.
2. Determination of the fair market value (FMV) of bonus shares and its tax implications.
3. Interpretation of section 55(2)(aa)(iiia) concerning the cost of acquisition of bonus shares.
4. Examination of double taxation concerns under section 56(2) and section 55(2)(aa)(iiia).

Detailed Analysis:

1. Applicability of Provisions of Section 56(2)(vii)(c) to Bonus Shares:
The primary issue in this case revolves around whether the provisions of section 56(2)(vii)(c) of the Income-tax Act, 1961, apply to the acquisition of bonus shares. The Assessing Officer (AO) added Rs. 47,21,93,975 to the total income of the Assessee, arguing that the Assessee received property (bonus shares) without consideration, invoking section 56(2)(vii)(c). However, the Commissioner of Income-tax (Appeals) deleted this addition, stating that the issuance of bonus shares is merely a capitalization of profits by the issuing company, not a receipt of property without consideration. The Commissioner emphasized that the value of existing shares is split between the original and new bonus shares, and there is no actual gain or accretion to the property of the shareholder.

2. Determination of FMV and Tax Implications:
The AO computed the FMV of the bonus shares issued by HCL Technologies Ltd. as per Rule 11UA, adding the amount to the Assessee's income under section 56(2)(vii)(c). The AO contended that the taxable event is the receipt of property without consideration or for less than FMV. However, the Commissioner, supported by various judicial precedents, held that the issuance of bonus shares does not result in a real gain or betterment in the wealth of the shareholder, as the intrinsic value of the original shares is proportionately reduced.

3. Interpretation of Section 55(2)(aa)(iiia):
Section 55(2)(aa)(iiia) specifies that the cost of acquisition for bonus shares is Nil for the purposes of sections 48 and 49. The Commissioner argued that this specific provision should prevail over the general provisions of section 56(2). The Commissioner cited judicial precedents, including the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd., to support the view that the issuance of bonus shares is a mere capitalization of profits and does not constitute income under section 56(2)(vii)(c).

4. Double Taxation Concerns:
The Commissioner noted that if the FMV of bonus shares were taxed under section 56(2), it would lead to double taxation. The FMV would be taxed once at the time of receipt under section 56(2) and again at the time of sale, as the cost of acquisition is Nil under section 55(2)(aa)(iiia). This interpretation aligns with the CBDT Circulars, which clarify that the cost of acquisition of bonus shares is Nil for capital gains computation, and bonus units are not subject to additional income tax at the time of issue.

Conclusion:
The Tribunal upheld the Commissioner's decision, concluding that the provisions of section 56(2)(vii)(c) do not apply to bonus shares. The Tribunal relied on the Supreme Court's judgment in CIT v. Dalmia Investment Co. Ltd. and other judicial precedents, affirming that the issuance of bonus shares is a capitalization of profits and does not result in income. The appeal by the Revenue Department was dismissed, confirming that the addition of Rs. 47,21,93,975 to the Assessee's income was unwarranted. The Tribunal emphasized the importance of interpreting specific provisions over general ones and avoiding double taxation. The order was pronounced in the open court on 29/04/2022.