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TMI Blog2016 (5) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... can never be considered as received without consideration or for inadequate consideration calling for application of subclause (c) of clause (vii) of Section 56(2) of the Act. We have no hesitation to uphold the order of CIT (A) deleting the addition made by the AO. - Decided in favour of assessee - I.T.A No. 1290/Bang/2015 - - - Dated:- 29-4-2016 - Shri. Abraham P. George, Accountant Member And Shri. George George K, Judicial Member For the Petitioner : Shri. Sajjan Kumar Tulsiyan, Advocate For the Respondent : Shri. Sanjay Kumar, CIT -III ORDER Per Abraham P. George, Accountant Member In this appeal filed by Revenue, it assails an order dt.04.08.2015, of CIT(A)-11, Bengaluru, by which he deleted an addition made by the AO, considering the fair market value of the bonus shares received by the assessee from one M/s. Manipal Education Medical Group (India) P. Ltd ( MEMG in short), as income under the head Income from Other Sources . 02. Apropos facts are that assessee, a medical professional, had filed his return declaring income of ₹ 3,22,43,332/-. During the course of assessment proceedings, it was noted by the AO that assessee had received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue whether any income should be attributed for bonus shares issued to a beneficiary was considered by the Mumbai Bench of the Tribunal in the case of Sudhir Menon HUF (Supra). As per the CIT (A), view taken by the Mumbai bench was supported by judgment of Hon ble Apex Court in the case of CIT v. General Insurance Corporation [286 ITR 232]. He held that when there was an issue of bonus shares, the money remained with company and nothing came to the shareholder. He held that sub-clause (c) of caluse (vii) of sub-section (2) of Section 56 of the Act could not be applied to bonus shares and deleted the addition made by the AO. 05. Now before us, Ld. DR strongly assailing the order of the CIT (A), submitted that the judgment of Hon ble Apex Court in the case of General Insurance Corporation (supra) was prior to introduction of clause (vii) to Section 56(2) of the Act. As per the Ld. DR, clause (vii) was inserted by Finance (No.2) Act, 2009, w.e.f. 01.10.2009. According to him, the question before Mumbai bench of the Tribunal in the case of Sudhir Menon HUF (supra) relied on by the assessee was on the cost of right shares and not of bonus shares. Its observation regarding bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bonus shares and make a valuation thereof taking the fair market value, then it would imply that a cost was necessarily incurred for the purpose of acquiring the bonus shares. It would result in a situation where capital gains arising out of sale of bonus shares would be charged to tax, taking the whole consideration, ignoring the cost attributed to it by operation of Section 56(2)(vii)(c) of the Act. In any case, as per the Ld. AR, decision of Mumbai bench in the case of Sudhir Menon HUF (supra) was directly on the value to be attached to bonus shares. Ld. AR further submitted that bonus shares did not add up to the value of share holder in any manner and thus no benefit whatsoever was received. Thus according to him, CIT (A) was justified in deleting the addition. 06. We have perused the orders and heard the rival contentions. Section 56(1) and (2), in so far as it is relevant on the issue on hand, is reproduced below : (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources if it is not chargeable to income-tax under any of the heads specified in section 14, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 ; or(g) from any trust or institution registered under section 12AA. Explanation For the purposes of this clause, relative means- (i) spouse of the individual ; (ii) brother or sister of the individual ; (iii) brother or sister of the spouse of the individual ; (iv) brother or sister of either of the parents of the individual ; (v) any lineal ascendant or descendant of the individual ; (vi) any lineal ascendant or descendant of the spouse of the individual ; (vii) spouse of the person referred to in clauses (ii) to (vi). (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,- (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum ; (b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of art ; #or (ix) bullion ; (e) relative shall have the meaning assigned to it in the Explanation to clause (vi) of sub-section (2) of this section ; (f) stamp duty value means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property ; 07. To answer the question raised before us, it is necessary to have a walk through the legislative history behind clause (v) to (vii) of section 56(2) reproduced above. The genesis for the introduction of the above clauses was apparently the abuse arising out of abolishment of tax on gift. By virtue of clause (3) to Section 3 of Gift-tax Act, 1958 inserted through Finance (No.2) Act, 1998, provisions of the Gift-tax Act ceased to apply on any gifts made after first October, 1998. Before this, taxable gifts made by a person was charged at the rate of 30% in the hands of the donor. Then, there was a period of free for all, when neither the donor nor the donee had to pay tax on the gifts and the said period ran from October 1998 to August, 2004. To redress the situation, Finance Act (No.2), 2004, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.10,000 Rs.11,000 Rs.11,000 BALANCE SHEET WOULD AFTER ISSUE OF BONUS SHARES Equity ₹ 200 x10 ₹ 2,000 Fixed Current assets Rs.11,000 Reserves Surplus ₹ 9,000 Rs.11,000 Rs.11,000 Value of one equity share before the issue of bonus shares will be ₹ 11,000 100 = . 110. Value of the equity share after the issue of bonus share will be equal to ₹ 11,000 200 = . 55. If a person was having 10 equity shares of the above company with him, after the bonus shares issue, it would become 20. However value of the ten equity shares (10 x ₹ 110) is the same as value of 20 shares (20 x ₹ 55) after the bonus shares issue. This in other words would mean that there is a prorata decrease in the value of equity shares when there is an issue of bonus shares. Thus when there is an issue of bonus shares there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were referred to as capitalization shares . In other words, there is no receipt of any property by the shareholder, and what stands received by him is the split shares out of his own holding. It would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the share-holder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and, thus, trading, i.e., considered from the holders point of view. We may though add a note of caution. There could be a case of bonus issue coupled with the release of assets (of the issuing company) in favour of the shareholders. The same would fall to be considered as dividend u/s. 2(22)(a) of the Act. 10. Hon ble Apex Court in the case of CIT v. Dalmia Investment Co. Ltd [(1964) 252 ITR 567] had as early as 1964 held that bonus shares if they ranked pari passu with the original shares, had to be valued at average of bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished. Swan Brewery's case**, it may be pointed out, was distinguished here also on the basis of the extended definition. It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares. By the issue of the bonus shares there is a corresponding fall in the dividends actual or expected and the market price moves accordingly. The method of calculation which places the value of bonus shares at nil cannot be correct. This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e face value of the shares. The High Court rejected both these contentions and held that the cost of the shares previously held must be divided between those shares and the bonus shares in the same proportion as their face value and the profit or loss should then be found out by comparing the cost price calculated on this basis with the sale price. In our opinion, there is difficulty in the High Court's decision. The preference shares and the ordinary shares could hardly be valued in the proportion of their face value. The ordinary shares and the preference shares do not rank pari passu. The next case is Emerald Co. Ltd. v. Commissioner of Income-tax*. In that case, the assessee had, at the beginning of the year, 350 shares of which 50 shares were bonus shares and all were of the face value of ₹ 250 each. The assessee sold 300 shares and claimed a loss of ₹ 35,801 by valuing the bonus shares at face value. The department arrived at a loss of ₹ 27,766 by the method of averaging the cost, following the earlier case of the Bombay High Court just referred to. The Tribunal suggested a third method. It ignored the 50 shares and the loss was calculated by consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old shares over the old shares and the new issue taken together, if the shares rank pari passu. When they do not, the price may have to be adjusted either in the proportion of the face value they bear (if there is no other circumstance differentiating them) or on equitable considerations based on the market price before and after the issue. Hon ble Apex Court not only held that bonus shares can never be given nil value but also held that its value has to be worked out by the principle of averaging. In any case, the principle enunciated is simple. It is that for every bonus share issued, there is a corresponding reduction in the actual fair market value of the equity share originally held. This being the situation we are of the opinion that an assessee who received bonus shares could never be considered as receiving something without consideration or for a consideration less than the fair market value of the property. When bonus shares are received, it is not something which has been received free or for a lesser fair market value. A consideration has flown out from the holder of the shares, may be unknown to him, which is reflected in the depression in the intrinsic valu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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