2023 (9) TMI 330 - AT - Income Tax

Addition u/s 56(2)(vii)(c) - bonus shares received - Assessee submitted that provisions of section 56(2)(vii)(c ) of the Act would not apply to bonus shares at all as it is merely done by capitalization of profits - HELD THAT - We hold that the bonus shares are issued only out of capitalization of existing reserves in the company. In the instant case, the ld. AO had not disputed the fact that the overall wealth of a shareholder post bonus or pre bonus remains the same. Having held so, it is wrong on his part to invoke the provisions of section 56(2)(vii)(c ) of the Act on the ground that there is an double benefit derived by the assessee due to bonus shares. We find that the issue in question is also covered by the decision of Dr Ranjan Pai 2016 (5) TMI 216 - ITAT BANGALORE as held 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. Therefore, the 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 u/s 56(2)(vii)(c) of the Act are not attracted to the fact situation of the case. Appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Whether the addition of bonus shares under section 56(2)(vii)(c) of the Income Tax Act, 1961 is justified.
2. Whether the provisions of section 56(2)(vii) of the Act apply to bonus shares.

Summary of Judgment:
Issue 1:
The appeal arose from the order of the Commissioner of Income Tax (Appeals) against the assessment order passed by the Assessing Officer. The assessee, an individual, had declared income from various sources including bonus shares and bonus units received from two entities. The Assessing Officer added a substantial amount under section 56(2)(vii)(c) of the Act, which the assessee contested. The assessee argued that bonus shares do not result in any fresh funds inflow and do not increase the wealth of shareholders. The ld. CIT(A) agreed with the assessee, citing relevant case laws and holding that the market price of shares after a bonus issue decreases proportionally, maintaining the overall wealth of shareholders. The addition made by the Assessing Officer was deemed unsustainable, and the appeal was allowed.

Issue 2:
The assessee contended that the bonus shares were issued out of capitalization of existing reserves, and the overall wealth of shareholders remained the same pre and post bonus issue. The decision of the Hon'ble Karnataka High Court in a similar case supported the assessee's argument. The Court held that bonus shares do not alter the profit-making apparatus and do not result in an increase in capital employed. The value of original shares decreases with the issuance of bonus shares, balancing any profit derived by the shareholder. The provisions of section 56(2)(vii)(c) were deemed inapplicable to the case of bonus shares. The ld. CIT(A) correctly interpreted the legal position and granted relief to the assessee, leading to the dismissal of the revenue's appeal.

In conclusion, the Tribunal upheld the decision of the ld. CIT(A) and dismissed the appeal of the revenue, emphasizing that bonus shares do not attract taxation under section 56(2)(vii)(c) of the Act.